Through its African Food Fund, specialist investment manager Silk Invest has invested in a Nigerian restaurant business, a confectionery producer operating out of Cairo and an Ethiopia-based biscuit manufacturer. Betsy G. Henderson speaks to Silk Invest founder and CEO Zin Bekkali about opportunities in Africa’s food industry.
Silk Invest backs consumer goods companies through its African Food Fund. Tell us more about the fund’s investment focus.
We wanted to have a focused strategy for our first private equity fund (the African Food Fund) and looked for one sector that would allow us to have maximum impact and economies of scale and scope with a pan-African strategy. This led us to fast-moving consumer goods (FMCG). We selected six focus countries across Africa: Kenya and Ethiopia in East Africa; Nigeria and Ghana in West Africa; and Morocco and Egypt in North Africa. We chose these countries because we had team members who knew those markets well and also because these countries represent close to 40% of Africa’s population.
For us, the consumer goods story – or the food story – in Africa is extremely exciting and made up of many layers. We did the final close for the African Food Fund in 2013 and made three investments in Nigeria, Egypt and Ethiopia. The fund is now in its final year and we are planning to launch a second fund in 2021 that will have a broader focus but still include FMCG.
Identify your most successful investment.
Sundry Foods in Nigeria is by far our most successful investment. I believe it’s one of the most successful private equity investments in consumer goods across Africa. The company runs the Kilimanjaro restaurant chain as well as a bakery and corporate catering business. We did a partial exit and are now co-owners of a minority stake with Norfund. Within the quick service restaurant arena, Sundry Foods has a fascinating story. When we first invested, the company had seven restaurants and a revenue base of about 1.3 billion naira ($3.4 million at the current exchange rate); now it has 10 times that revenue and close to 40 restaurants across Nigeria. The founder, Ebele Enunwa, is an incredible entrepreneur and his business approach is a big part of what drew us to this investment. [Read more about the story of Sundry Foods founder Ebele Enunwa in HOW WE MADE IT IN AFRICA: THE BOOK]
It is a local brand focused on local foods, led by a local entrepreneur with local management and a strong focus on a local supply chain. These four ‘local’ building blocks are important to us and a critical focus of our investment strategy in Africa. Sundry Foods did a great job of figuring out what the average Nigerian expected from a restaurant menu and provided this by serving varieties of Nigerian food. Ebele shrewdly built his restaurant network in urban hubs beyond the major cities of Lagos and Abuja, where there is more competition. Instead of having its headquarters in the commercial capital Lagos, Sundry Foods operates out of Port Harcourt. If you want to serve the tastes of the average person, the big cities may not be the best place to start. For instance, KFC didn’t start in New York but rather in Kentucky.
From the beginning, Ebele has been a champion of locally sourced raw materials – from chicken to rice – and focused on keeping its value chain local. This gives Sundry Foods a huge advantage over other companies that are reliant on imports as it can be more volatile and costly due to currency fluctuations. Sundry Foods has been an incredibly profitable business from day one. I believe this focus on building a truly local product offering and local consumer focus has been key to its success.
Sundry Foods has also had a tremendous impact. It has created close to 2,000 jobs over the past 10 years and we’re glad our €2 million investment could serve as a catalyst for this.
What factors determine the success of food companies in Africa?
First, it’s important to highlight that the chances of being successful are lower than a lot of people think. The consumer goods opportunity in Africa is huge but there are comparatively few winners. I always compare it to a marathon; thousands of people start, but only a few make it to the end. Only around 2% of participants complete it within three hours while the top runs it in around two hours.
I don’t think there’s any one factor that determines success. What I’ve learnt is to get the fundamental building blocks right: local consumer, local entrepreneur, local product and local value chain. Focusing on these things doesn’t guarantee success but it does determine a big part of the potential to succeed.
The second element is financial management. Making money sounds straightforward, but a lot of entrepreneurs are not good at it and it’s easy to lose a lot of money in the food sector. If you walk down any street in the world, you will always find food companies, whether they are restaurants, bakeries or supermarkets. There is a lot of competition and many businesses make the mistake of confusing revenue with cash flow.
Entrepreneurs also often focus more on capex instead of profitability. They would have beautiful factories but not very profitable businesses. In truth, slower growth is frequently better for the company than expanding too fast. Pushing too much growth can be asking for trouble.
Name an African country that offers untapped investment opportunities.
I think every African country potentially has a story to tell. With the structure of our fund, we feel most comfortable in our six focus countries (Nigeria, Ghana, Kenya, Ethiopia, Egypt and Morocco) and are excited about the FMCG opportunities they offer as leading consumer hubs.
One country we would possibly like to add to our focus is the Democratic Republic of Congo (DRC). We feel the DRC is under highlighted in many ways, but offers strong prospects. It is a huge country with relatively good physical infrastructure in some areas compared to other African countries. International remittances have contributed to the country’s improved economic stability in recent years. To give an example, the high-end French bakery Eric Kayser has opened several locations in Kinshasa. If Eric Kayser is in the DRC, that tells you something, right? I’ve been there and it is an interesting place to look at for our second fund.
Describe some of the trends you see in the consumer goods industry.
One of the most interesting things we’re seeing is a big change in terms of consumer behaviour and demand. When we began investing, the focus was on formalisation: making packaged products and moving these items into modern supermarkets. I think we are currently in the second leg of development and seeing consumer goods mature into more customised, innovative and sophisticated offerings.
Africa’s population dynamics are a big driver of this. Today, 75% of African consumers are below the age of 35, which means products need to meet the demands of a young population vastly different to the older consumer population. Younger African consumers get their information via the internet and broadly engage with the outside world; as a result, they know what a good product looks like. Consumer goods companies in Africa cannot get away with a simple product and must upgrade their offerings for these knowledgeable, young consumers.
Within the consumer goods industry, are there any areas you would be hesitant to invest in?
Water is one category we looked at extensively but ultimately chose not to pursue. The problem with water – mineral water, specifically – is that what you are selling is largely the plastic bottle. The cost is driven by the packaging and that didn’t make sense for us.
We also tend to avoid commoditised products, like tomato paste or many categories of pasta, because these are basic and don’t allow for customisation. We prefer to invest in products that have a true local consumer or local brand and can be customised and differentiated.
Tell us about some of the investment lessons you’ve learnt over the years.
There are many lessons every day; one is that investing in Africa requires a focus on the long-term game. You must be incredibly patient and keep trying. Sometimes things move quickly but usually, you have to wait. From economic to political upheaval, there is never a constant environment and you will always be tested; accept this and be ready for those issues.
It’s seldom highlighted but distribution is extremely important for FMCG companies. They should be able to service thousands of sales points, which are mostly mom-and-pop shops rather than large supermarkets. As a result, you need to find a way to reach those sales points, and that can be a very difficult hurdle.
Once you have figured out how to reach customers, then you have to ensure your distribution coverage is efficient and commercially viable. How you structure distribution then becomes crucial as distribution costs can eat up over 40% of sales costs. It is impossible to make money this way. You have to bring distribution costs down to 10% to maintain a viable business. It’s a major challenge but there are ways to do it.