Ben Longman, managing director of African market intelligence firm Trendtype, looks at the main risks exporters need to be aware of.
Mistake #1: One size fits all
“We did well in country X, so we should do well in country Y.”
Sometimes it does. But different consumer preferences, behaviours, purchasing power, existing players in the market, retail dynamics, regulations, and duty rates can frustrate expansion plans. Markets in Africa demand respect and research if you want exports to succeed, like any other market.
A version of this mistake is when head office decides to take product from, for example, the South African factory and send it to a growing market in West Africa.
They’re both Africa, right? Well, yes. In the same way that Azerbaijan and Vietnam are both Asia. There are fourteen countries between South Africa and Sierra Leone. Freetown is 3,156 nautical miles from Cape Town. Freetown is closer to Bilbao than Cape Town.
Mistake #2: The size of the prize
In the majority of the 54 countries in Africa, the traditional trade (markets, vendors, small unmodernised stores, general stores) is much larger than the modern trade (supermarkets, hypermarkets, modern convenience stores) – even in Kenya, considered as one of the most sophisticated markets in Africa.
How much of the country can you actually reach? In a country of 50 million consumers, 40 million of them may never enter supermarkets where a product is sold, and couldn’t afford it even if they did see it. They’re future customers. You can’t reach them today.
For products that require significant quality control – premium chocolate or frozen foods, for example – the number of stores capable of successfully retailing the product with minimal spoilage may be quite limited.
Additionally, many distributors promise they cover the traditional trade effectively. Some deliver it better than others. Some deliver it in certain cities only. The key question is how large is a distributor’s store universe and how often its reps touch each outlet.
Mistake #3: Red tape is boring and expensive
Compliance is boring and expensive. There, we said it.
“But do I really, really need to spend all that money to register my product?”
No, not always. You can trade on the fringes of the law, possibly for some time until you’re caught. But yes, if you’re serious about developing a product in a market you need to register it, get the labelling right and comply with the law.
Generally, a leading distributor won’t touch your product if it’s not compliant, which will limit your growth opportunities. Also, if you do eventually make your product compliant and engage a leading distributor your product will jump in price because your costs will go up.
We also know of several examples of companies who chose not to trademark their key brands, or who ended up assigning the trademark to a business partner. The result can be that they end up in a trademark dispute.
Export directors don’t tend to think of themselves as trademark experts, and that’s okay. But it’s a costly and time consuming mistake to treat trademarking as a low priority.
Mistake #4: Overpricing
Overpricing is very, very easy. The obvious problem is that overpricing products aimed at price-sensitive consumers – and that means most consumers in Africa – kills demand.
We get there when exporters insist on a fixed price for a product leaving a factory that assures the company a certain margin. Okay. Let’s add in haulage, freight, import duty, surcharges, clearing agent, registration fee, haulage in the destination market, distributor margin, wholesaler margin, retailer margin.
Does your product compete effectively on price?
A second problem is killer price sensitivity. It’s all going well. Your mass market product is selling well at 20 shillings. But inflation kicks in and you put the product up to 24 shillings because of the foreign exchange rate.
However, consumers like paying with a 20 shilling note. They don’t want to pay 24 shillings because its more expensive and it’s awkward. So they switch.
Mistake #5: Ignoring parallel trade
Parallel trade isn’t so bad. At least you’re still selling product, right? Wrong. Parallel traders will always find the cheapest source for products.
Imagine this scenario: Your official distributor gets the product at ex-factory price in France. A parallel importer can get the product cheaper from a source in Romania.
Your sales director in Romania is ecstatic. Your export director is unhappy because his export strategy isn’t working and is being undermined internally. Your official distributor is unhappy, and quietly diverting resources to a brand they can actually sell.
It gets worse.
Your official distributor has paid all the right duties, fees and taxes. The parallel trader may not pay the same taxes. Unless your export price comes down, your parallel trader will continue to be substantially cheaper.
Also, if you do manage to limit parallel sales – if your parallel importer switches brands, for example – then many of your customers will see prices go up for no reason and they may switch.
Read How we made it in Africa tomorrow (Friday 15 December) for part two of this article.