Heineken beer is sold in more than 170 countries, but when the world’s third-largest brewer does business in Africa, it knows it needs to play by some different rules. In Africa, Heineken not only operates breweries but also its own power and water treatment plants. That’s how the company overcomes a major African obstacle: the continent’s notoriously weak and undependable infrastructure. Heineken has learned that, while Africa poses substantial operating challenges for consumer products makers, those hurdles are not insurmountable. And finding innovative ways to clear those obstacles can pay off. The company is about to pass the €2 billion milestone for annual beer sales in Africa and the Middle East, and its operating profit margins there were 26% in 2010.[hidepost=9][/hidepost]
Many of the obstacles in Africa are similar to those encountered in other emerging markets, and multi-regional players may already have honed the skills needed to tackle them. Even so, our research shows that five of these challenges are more pronounced in Africa than elsewhere, requiring Africa-specific solutions. The five most significant African challenges are underdeveloped infrastructure, disorganised and fragmented retail landscape, lack of reliable market research, unclear and ever-changing government regulations and a severely limited talent pipeline.
Through our research and experience working with market leaders, we’ve identified a range of effective approaches for companies to navigate this thorny landscape.
1. Consider creative ways to bypass Africa’s poor public infrastructure, reduce operating costs and innovate to compensate.
Throughout Africa, business growth is hampered by frequent power outages. Nigerian companies experience on average 26 power outages in a typical month. In addition to power woes there is unreliable transportation. Outside South Africa, the transportation network is underdeveloped, even compared with other emerging markets – less than 100 metres of road per square kilometre of land area compared with 400 metres in China or 1,500 metres in India.
Successful companies know that they can’t depend on Africa’s infrastructure and dealing with it will add to costs. They develop strategies to invest in their own support systems when necessary and to offset the additional expenses. They buy power generators, build water tanks and even occasionally pave roads. For example, in Ghana, which experiences frequent water shortages, one beverage company bypassed the unreliable municipal service by building huge water tanks, ensuring consistency of water supplies for its factories.
Market leaders remain competitive by balancing the high costs of infrastructure solutions with rigorous cost and cash management. Take Heineken’s local subsidiary in Nigeria, Consolidated Breweries. The company puts cost management at the heart of its business. Salaries are in line with regional and local companies rather than with multinationals. To further curb costs, Consolidated Breweries employs a lot of manual labour in some parts of its operation and substitutes second-hand equipment where possible for expensive new machinery.
Another creative way to overcome some of the challenges posed by the lack of proper infrastructure is to innovate on the product front. One successful example is Cowbell, a milk powder packaged in small sachets, provided by Promasidor, an African dairy, beverage and food enhancement company. This product has enabled the company to overcome some of the root causes behind the low availability of milk across Africa: limited access to refrigeration and to sanitary fresh water to mix with the milk powder. Promasidor replaced the animal fat in milk with vegetable fat to give its product a longer shelf life, thereby diminishing the dependency on a cold supply chain. African children pour the powdered milk directly on their tongues, a way to avoid concerns about finding fresh water. As a result, Promasidor is now a leader in the powdered milk market in Nigeria.
Moreover, the lack of infrastructure contributes to an uncertain supply of raw materials. The market leaders surmount this challenge by building strong supplier relationships or even becoming vertically integrated to stockpile critical materials, better manage costs and mitigate supply unpredictability. Heineken has set the ambitious goal of buying 60% of its raw goods from local suppliers to guarantee product quality and a reliable supply source. It’s a win-win: The brewery avoids disruptions at local operations and the local economy benefits from new jobs, generating income that may spur consumer spending and possibly improve government relationships. The company also provides farmers with agricultural education to increase crop yields – another move that helps establish a more dependable supply chain. Similarly, The Coca-Cola Company, in collaboration with the nonprofit TechnoServe and the Bill & Melinda Gates Foundation, has successfully partnered with local governments and farmer associations in Kenya and Uganda to enhance the quality and quantity of locally produced passion fruit and mangoes. In both countries, growing demand for fruit juices has created a significant market opportunity, but production was stymied by low-quality fruit and inadequate supplies. By partnering with some 50,000 local producers, the beverage company was able to ramp up its fruit juice business – benefiting both the beverage maker and area farmers.