Navigating Africa: 17 lessons from the ground
Eliot Pence, from the Whitaker Group, a sub-Saharan Africa-focused corporate strategy consultancy, shares insights on operating and investing on the continent.
Africa’s strong growth over the past 10 years has renewed investor interest in the continent, but competition, difficulties finding the right deals and closing transactions continue to pose real challenges for investors. Eliot Pence, from the Whitaker Group, a sub-Saharan Africa-focused corporate strategy consultancy, shares insights on operating and investing on the continent. 1. Beware of pan-African business models – Businesses are often over-optimistic on the ease of expansion across markets in Africa. There remain significant formal and infrastructural barriers. For example, a truck driving between Abidjan and Lagos will experience on average 46 checkpoints. In addition, there are significant trade barriers in Africa; the International Monetary Fund has noted that average tariffs in Africa are still significantly higher than in the rest of the world. Despite clear economic benefits – a World Bank study estimated that a 20% reduction in border crossing time alone would generate 15% savings in transport prices – regional economic communities have not gone as far as expected in easing cross-border business linkages.
2. Get the “small” picture – Understanding the “the big picture” data points like GDP growth is necessary, but not sufficient in assessing an investment’s potential. Investment portfolios can easily become dependent on a single city or state, such as Lagos, which has a GDP of US$34 billion – bigger in itself than most other African countries. Controlling the risks implied by this kind of dependence requires understanding the situation on the ground, such as parliamentary and state politics, in addition to the forces driving the regional markets’ growth.
3. Understand the street-corner competition – The biggest competitor of an international retail company is most likely a collective of small, informal enterprises. These small firms might not show up in a regular desk analysis, but they often make up the lion’s share of the retail sector. Some estimates suggest the market share of mom-and-pop stores in retail in Africa might be as high as 85%. But those numbers differ substantially across countries – Nigeria has six shopping malls, whereas South Africa has over 200. Cross referencing retail space with population density, as Avon and Mary Kay do when entering new markets, can provide a rough estimate of the dominance of the local informal consumer goods market.
4. Toe-dipping – Companies entering Africa should do so gradually. Pilot projects can help refine the business case and entry strategy while limiting expenditure and exposure. Pilots also provide an opportunity to “stress test” risks, policies, partners and local competition. They can uncover unique opportunities, such as local sourcing options and public-private partnerships.
5. Find partners that fit – Partners are integral to success in sub-Saharan Africa. Apart from being required for foreign firms to operate in some markets, partners bring local knowledge and understanding. Companies often look to work with a local company that is part of a bigger domestic group, seeing the presence of a larger business as a confidence measure. But partnering with holding companies or large domestic conglomerates can be problematic, especially if the parent company competes with the foreign investor for clients. Looking at companies listed by local chambers of commerce or firms vetted by development finance institutions can help narrow the field. Companies that interact strategically with these entities may also find opportunities for public-private or donor-private partnerships.
6. Customise investment structures – Equity can be difficult to structure in Africa because of the underdeveloped legal and regulatory environment and the relative lack of familiarity with financing models. Mezzanine financing is often easier to structure. For example, quasi-equity (e.g. royalties based on revenue) is, by being closer to the heart of most businesses, easier to monitor and structure, and can be useful across a range of industries that produce tangible outputs. The SME fund Business Partners has successfully applied this model throughout sub-Saharan Africa.
7. Expect a lengthy due diligence and deal-making process – Differences in reporting requirements and accounting standards, the absence of credit bureaus as well as the general inaccessibility of public information, can complicate deal-making. The process of finding a potential acquisition candidate, conducting due diligence, and preparing the purchase can easily take more than a year. With the introduction of the UK Bribery Act and renewed focus on prosecuting FCPA violators, companies need to take an even finer comb through their partner’s books (if they have them).
8. Global brands vs. local business models – Surveys tend to inflate consumer knowledge of global brands and can give false confidence to companies playing on global brand equity when entering African markets. More important is how a company can leverage its global research capacity and best practices by applying them locally. SABMiller has grown from its African roots to become one of the world’s largest brewing companies through careful examination of local conditions. Their success lies in a business model that emphasises local products and brands. Eagle Lager, the company’s Uganda brew, is made exclusively with locally produced raw ingredients, qualifying it for lower excise tax rates and allowing the company to sell its product for one-third less than the competition.
9. ODA and your business – Despite renewed interest in borrowing on the international debt markets, governments in sub-Saharan Africa remain dependent on donor funding. Gross official development assistance (ODA) to Africa is roughly US$32 billion per annum, so knowing where, why and what donor money is being allocated can affect investments. Distinguishing signal from noise out of policy circles in Washington, Brussels, Beijing, Geneva, and Addis Ababa, can help reduce risk and help insure an asset. A good recent example of how much this can affect your portfolio is what happened in Rwanda. Responding to a controversial UN report implicating Rwanda in violence in the DRC, donors cancelled funding to Rwanda, which then prompted a downgrading of the country’s sovereign bonds by ratings agencies.
10. Labour myths – Two persistent myths about Africa’s labour force dog investment decisions: that skilled labour is hard to find and that all labour is expensive. In a recent poll by McKinsey on Africa’s labour force, finding skilled labour wasn't mentioned as a major impediment to firms and the actual average wage costs on the continent are a third of what they are in Asia (in Ethiopia it’s one-sixth).
11. Beware the “Grey Swan” – Investors often focus on risk factors and large-scale negative events, such as conflict or political instability. However, more subtle issue such as a drift in import regulations or taxation structures, can strongly impact the value of investments. When developing a market entry strategy, companies should include scenario planning that budgets for extensive stakeholder engagement and government relations.
12. The guy behind the guy – Companies often focus on engagement at the ministerial level, but knowing whose responsibility it is to actually carry out a given policy is at least as important as knowing the formal decision-makers.
13. Don’t buy a return ticket – Simply having eyes and ears on the ground often doesn’t cut it. Deals fall apart because different parties to a transaction know who is flying in and out and who is staying for the long haul. Impermanence of one party undermines all deals by diluting trust and commitment among the parties.
14. Know your stakeholders – With 36,000 registered NGOs in Africa, knowing who your stakeholders are has never been more important. Companies can be cavalier with their stakeholder strategies and throw money and lavish galas that at best miscommunicate the company’s commitment to the country’s development and at worst attracts the wrong kind of attention.
15. Be “negatively capable” – First coined by John Keats to describe the ability to “flourish in uncertainty,” the theory of negative capability has broad application to doing business in Africa today. Most business innovation in Africa happens because entrepreneurs work constructively in unstructured environments and do not let the inability to measure, quantify or assess their progress perfectly get in the way of moving things forward imperfectly.
16. Find “work for now” solutions – The urge to revert to “best practices” based on World Bank analyses should be avoided. Every situation is different and time and resources should be dedicated to finding best fit solutions to business problems. Often this will entail ‘working with the grain’ of existing institutions and then adapting and correcting as you go along.
17. Avoid risk compensating – Once settled on an investment, companies tend to put too much stock in traditional risk tools, such as political risk insurance or forex hedging. The complacency that buying these tools sometimes leads to can itself increase the risk profile of an investment: companies tend to demonstrate less caution where they feel more protected and more caution where they feel a higher level of risk. Knowing the right balance between protecting against, and being continually aware of risks is critical.