Going long on Africa: Despite the continent’s current economic travails, international investors are still betting on local FMCG brands to deliver

COVID-19’s economic shock has far outweighed its clinical impact in Africa

The clinical impact of COVID-19 in Africa has been relatively mild in comparison to much of the rest of the world (as of today, there had been more deaths from COVID-19 in the UK than in the whole of Africa, according to official data). The fact that the continent has by far the youngest population profile in the world (a median age of less than 20 years) may have played a significant role in this. In contrast, the economic impact has been profound: Curfews, restrictions on movement, declining commodity prices, and the decimation of international tourism have all played a role in this.

Signs of severe economic stress are not hard to find: According to Kenya’s National Bureau of Statistics, around 1.7 million people in that country were made redundant between March and August 2020, with Jacqueline Mugo, executive director of the Federation of Kenyan Employers warning that “The worst is yet to come.” In Nigeria, household consumption expenditure plunged by 16% year-on-year, to NGN21.5 trillion, during the second quarter of 2020, according to that country’s National Bureau of Statistics. In Ghana, a survey conducted during late May and early June by the Ghana Statistical Service found that the wages of 26% of workers had been reduced during the country’s partial lockdown, while a further 23% had seen their working hours reduced.

Pockets of resilience

However, some aspects of economic activity in Africa have proven to be resilient in the face of the pandemic. Just like their counterparts in the rest of the world, Nigerians spent more on staple food items like rice during Q2 2020, according to the Nigerian National Bureau of Statistics. They also spent more on mobile internet data, as they strove to keep up with current events and stay in touch with friends via social media.

In spite of the economic shock, there remains a broad market in Africa for a wide variety of consumer goods among those in the middle class and particularly at the bottom of the pyramid (the poorest, and by far the largest, socioeconomic group). Moreover, this group of consumers is expanding rapidly: The population of Sub-Saharan Africa is growing at an annual rate of 2.7%, which, in absolute terms, is the equivalent of adding the population of France every two years.

The categories that are best positioned to benefit from this growth are those catering to everyday needs, especially fast-moving consumer goods, such as hot and cold beverages, dairy products, bread, stock/bouillon cubes, and cooking sauces (see our past article here). Many of these brands are local. For example, Kenya-based Mini Bakeries claims to deliver its Supa Loaf bread over 10,000 retail outlets in Kenya, Tanzania and Uganda every day. Some, such as Nestlé, which has been selling stock/bouillon cubes in West Africa since the 1950s, are multinational.

Even in the most underdeveloped markets, there is still a market for quality

Even in some of the least developed economies in Africa, many local consumers are prepared to pay a little bit more for quality. For example, Niamey, Niger-based bottled water manufacturer Belvie went from start-up to local market leader in less than seven years by spotting a gap in the market between cheap sachets of water and imported premium products for “a water brand focused on quality and transparency,” according to co-founder and managing director Rohan Garg.

These brands and others like them have been successful because they initially targeted the bottom of the pyramid, attempting to meet the needs of the mass-market consumer. This stands in stark contrast to the approach of many multinational brands, which unsuccessfully try to sell products created for other markets to African consumers without taking into account the needs, preferences, and limited purchasing power of the local mass-market consumer.

Pandemic can’t halt roll-out of premium ice brand

Others are local brands that have been snapped up by multinationals, such as West African dairy products manufacturer FanMilk, which is owned by Danone. Operating in Togo, Benin, Burkina Faso, C?te d'Ivoire, Nigeria, Ghana and Liberia, its brands include FanYogo yoghurt, FanChoco chocolate, FanIce ice cream, FanDango fruit juices, and FanPop carbonated beverages. In late 2019, it launched GoSlo ice cream in four flavours – Peanut Butter, Cookies & Cream, Salted Caramel, and Chocolate Almond – in Nigeria. Positioned as a premium product, the recommended retail price of a 460ml tub is NGN1,550 (USD4.11). In spite of the pandemic, Fan Milk launched GoSlo in Ghana during November 2020 – a vote of confidence in the resilience of middle-class consumers in that country.

Internet retailer’s strategic pivot shows where the true potential of Africa lies

Meanwhile, internet retailer Jumia, which has operations in 11 African markets, has pivoted from selling consumer durables likes computers and mobile phones to mobile phone covers, clothes, and FMCG after coming to the conclusion that cheaper “everyday products” offered it a better path to profitability than consumer durables. In other words, rather than continuing to rely on a strategy that had worked in other parts of the world but was failing in Africa, it opted for a new approach that was based on its experience of local market conditions.

Betting on Africa

Make no mistake, these are generally low-margin businesses. However, they are in pole position to benefit from the strong long-term growth in volume sales that is anticipated in Africa. As a result, local consumer goods manufacturers are increasingly attracting the attention of investment firms like Actis, Amethis, Adenia, AfricInvest, DPI, Catalyst, ECP, Helios,... They know that, in a global economy that is increasingly characterised by low-interest rates and low growth (so-called ‘secular stagnation’), African consumer markets offer potential long-term returns that are difficult to match elsewhere – but only for products that are specifically tailored to the needs of the local mass-market consumer.

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