10 November 2011 | Sian Browne
Africa has a population of one billion potential new consumers set to more than double by 2050, and consumer spending is expected to hit US$1.4 trillion (£872 billion) by 2020. However, Africa attracts only 5 per cent of the world’s foreign direct investment.
Companies are attracted by the potential lower costs in areas such as land, equipment and labour, and many international brands are already established in southern Africa, with some using these operations as springboards.
South African companies are spreading into Africa in search of more consumers. The view of existing retailers is that the growth in disposable incomes across many African countries offers great opportunity for growth. There are, nonetheless, still issues with regard to insufficient insight into rapidly changing customer/consumer trends, which makes understanding requirements, service-level expectations and ordering patterns difficult to ascertain.
Additionally, there remains considerable disparity across the continent with regard to the ease of doing business, in particular for companies entering Africa.
Many African countries are making tremendous strides in terms of implementing business-friendly policies. This progress is translating into steadily improving performance by many in the World Bank’s Ease of Doing Business rankings. In fact, eight African countries (Mauritius, South Africa, Botswana, Tunisia, Rwanda, Ghana, Namibia and Zambia) are ahead of the highest-ranked BRIC country (China), and a total of 19 African countries (including Ethiopia, Uganda, Mozambique, Tanzania and Malawi) rank ahead of India.
At the same time, though, there are also a number of African countries that perform very poorly on these rankings – nine of the bottom 10 ranked economies are African (including, perhaps most significantly, the DRC). Key economies like Nigeria and Angola also fall towards the lower end of the scale.
However, companies entering the African market confront major supply chain challenges unlike any they may have experienced in more developed markets.
The variety and complexity of routes to market across continents calls for innovation in getting goods to market at the right cost.
Many companies, in particular those with perishable goods that have time-sensitive supply chains have difficulty understanding some of the issues with border crossings in Africa, both in respect of infrastructure, and bureaucracy.
Establishing partnerships with third-party distribution and logistics companies and leveraging off their existing capacity and experience is important.
All these issues need to be built into the operational blueprint so organisations can determine their inventory levels and adjust their pricing accordingly.
Road, rail and sea
Logistics across Africa is a major issue in terms of distance and infrastructure. Roads, trains and ports are poorly maintained, disconnected and unreliable.
Most of Africa’s transport is by road. Border crossing times and bureaucracy, together with corruption at crossings cause significant delays. For example, a round trip from Tanzania to South Africa can take a minimum of 18 days.
Rail is sometimes used for bulk transport, in particular for oil and gas and mining, but most railways were built relatively lightly and few have invested in rehabilitating and renewing infrastructure and rolling stock in the past 15 years. Railways are mostly government operated and bureaucratic constraints and lack of commercial incentives prevent them from competing successfully.
Sea freight is a problem, particularly up the east coast of Africa, due to the major increase in piracy over the past few years with attacks peaking in 2009, with more than 400 incidents around the African coasts. Some decline is being seen in 2010 and 2011, but it is still seen as major deterrent to companies trading across the continent.
The North-South Corridor is part of a set of initiatives to reduce the costs of doing business in the eastern and southern Africa region so as to make it more competitive globally. It is a flagship programme of the COMESA-EAC-SADC Tripartite and is chaired by President Jacob Zuma. The goal is to ultimately link Durban to Lubumbashi in the DRC, with a spur to Dar es Salaam in Tanzania. Other key corridors that could be considered include the Beira and Maputo corridors into Mozambique, the Northern and Central Corridors in East Africa, and the GILA corridor in West Africa.
Further, tax and regulatory frameworks in Africa tend to be very different from one jurisdiction to another; unlike for companies operating in markets such as the European Union where there is greater uniformity.
However, there are significant plans to reduce some of these issues through trading agreements across different countries.
Three African trading blocs – the Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa) – are moving ahead with plans to form a free trade area that will include 26 countries, between 500 million and 700 million consumers and a GDP of $853 billion (£531 billion). The bloc would only be rivalled by China and India in terms of market size and would be the 15th largest economy in the world.
A recent agreement in East Africa now means suppliers can move goods though Kenya, Tanzania, Burundi, Rwanda and Uganda with just one set of documents.
Unfortunately corruption and theft are still facts of life in many African countries and time and effort is required to set up supply chain processes and systems that are both effective and legal. Officially, corruption is not the way of doing business, but it is another market reality. Companies must set out clear anti-corruption policies and establish governance structures so they can monitor, detect and stamp out any such activities within their organisations as well as their supplier base. Companies also need to consider making the best use of local suppliers as organisations that use domestic suppliers are viewed in a positive light.
A number of supermarket retailers are focusing on utilising local producers, which supports economic growth in these countries. In addition to taking more care when selecting suppliers, a further sign of the growing maturity of the market is that there is more emphasis on managing suppliers instead of being managed by them.
Environmental and sustainability issues also need to be at the forefront of supply chain planning. The supply chain’s ability to reduce its environmental impact is an important consideration and means putting in place robust recycling programmes and including external suppliers within these structures.
Within South Africa, bodies such as the Provincial Government of the Western Cape are leading by example to minimise the environmental impacts of their activities and encourage change by including green considerations into their procurement practices.
One of the major lessons existing operators have learned is the extent of the skills challenge in Africa In the supply chain context, while a number of local universities and tertiary institutions provide supply chain and logistics training, companies are competing for a limited pool of qualified and experienced personnel. Therefore, it is necessary to have a real commitment to employee development to create a sustainable skills base.
Companies are also moving beyond picking the low-hanging fruit in Africa and working to open up new revenue streams. Those established in Africa have a massive opportunity to extend their market share and utilise local market knowledge to open up new opportunities.
☛Sian Browne is Africa supply chain lead,
Ernst & Young