A recent FDE dinner was the setting for a group of finance directors to debate and share their experiences of working in emerging markets. CFO Robin Brown from United Biscuits delivered the keynote, which was followed by a presentation from Zamo Gwala, CEO of Trade and Investment KwaZulu-Natal.
Robin Brown has been CFO of United Biscuits (UB) since June 2013, having spent the previous six years as FD of the UK biscuit business. One of the responsibilities he has added in his new role is identifying and managing the company's emerging market strategy. As such, that means, in particular, focusing on how investments are structured, how oversight is managed, and how opportunities are identified and taken forward.
"We concentrate our international strategy on emerging hubs that count for about 60% of our overseas business outside Western Europe," he said, during his keynote address on operating in emerging markets. "The hubs are the Middle East, India, China and now Africa. We manufacture locally in Nigeria, in Saudi Arabia and also in India, and we've got a co-manufacturing agreement in China. Our organic growth rate in this part of the business is around 13% compared with a UK biscuit market that is at a flat 12% growth."
Main engine for growth
A central plank of UB's emerging markets strategy is Africa. In fact, it's the main engine for growth, and there's room for further growth, as Brown pointed out: "You can happily fit the US, China and Europe inside the world's second-largest continent and still have some space left over."
Indeed, Africa is expected to contribute more than half of the world's population growth by 2050, and Nigeria - already home to 175 million people - is expected to overtake the US and become the world's third-most populous nation by the same year.
Simply put, more people and more development means Africa is set for real growth. The size of the sub-Saharan economy has more than quadrupled since 2000, according to IMF estimates, which is set to continue, and 24 of the sub-Sahara economies are projected to grow by more than 5% in the coming five years. The signs are encouraging, but accessing and harnessing this growth is no simple task.
"We have aimed to really push into Africa and other markets," said one FD at the event. "But the big challenge we faced was finding sufficient local talent and the right partners to work with. Get that right and you've got a real chance of developing a successful approach."
"It can be hard to move products around," Brown admitted. "The infrastructure requirement is still high and there's definitely a challenge around producing the energy needed for the growing economies. Growth isn't necessarily a straight line, so the oil price decline has a big effect on the oil producers, and currency devaluations are quite common."
But is it really possible to have an 'African strategy' for such a diverse continent? After all, it contains 54 countries speaking more than 1,000 languages. Understanding the variances is critical to growing an African presence, Brown stated.
"The consumer taste preferences vary widely, so if you think about trying to run a food business in the region then you've got hundreds of different cuisines and they're based on a range of different staples," he explained.
"In the UK, we might be used to a wheat-based staple, but in Africa you've got cassava, maize, sorghum, millet and yams. We like to think of biscuits as a snack form that travels very well - and, actually, we say McVitie's Digestives do - but even in biscuits there are still many variations on a theme that we have to take into account."
In addition, Brown was clear that while the growth in the middle class in Africa is a pronounced trend of recent years - leading many consumer goods producers to focus investment on the region - it's a concentrated phenomenon, mostly centred around the two big players on the continent: South Africa and Nigeria.
"We have to recognise Africa doesn't score well in the World Bank 'Ease of doing business survey'," said Brown. "The majority of the large economies are in the bottom half of the league table and a number of them are going backwards rather than going forwards."
The challenge for governments in these countries is twofold: design a system of regulation that removes barriers to much-needed foreign direct investment, but also ensure that the economic benefits are shared equitably with the indigenous population, both through employment and by developing the local supply chain through targeted procurement.
"The big problem many of our clients have is that they don't understand opportunities in Africa," said moderator Raphael Ani, head of Africa business practice at KPMG, who believes that governments on the continent need to step up to help. "What is the government doing to communicate more with businesses? There's a big breakdown there," he said.
"We've been frustrated by the time it can take to get government and regulatory approvals and we are very much looking to play by the rules and according to UB ethical guidelines in this market. We're finding that's now introducing some delays in dealing with some of the authorities," Brown agreed.
Zamo Gwala, CEO of Trade and Investment KwaZulu-Natal (TIKZN) admitted that in the past there was a problem, but it was now being addressed. "We are trying our level best to communicate through all channels," he said. "That means talking to businesses at all levels and in all industries to help them understand where the opportunities are. But, of course, there are challenges these companies will face: understanding the regulations they must work under, the lead times involved and so on. Certainly, the time it takes to get things done can be a major surprise, and it's up to agencies like ours to push our colleagues in government to work faster."
All that said, KwaZulu-Natal is leading a genuine renaissance not just within South Africa but the continent as a whole. As the country's second-largest economy, the province contributes around 16.0% to its GDP.
Strategically positioned by being home to two of Africa's busiest and largest ports, Durban and Richards Bay, it also boasts the third-highest export propensity and the second-highest level of industrialisation in the country.
"We are very confined that the levels of investment in the province, which have been encouraging recently, will continue," says Gwala. "As part of that, we are seeing real improvements in local skill levels, infrastructure and development."
UB's success in Africa and specifically Nigeria illustrates the enormous gains to be had from investing fully in emerging markets generally, with Africa in particular offering a genuinely vibrant environment for FDI, and indeed the story for many multinationals in Africa so far is an encouraging one.
So what does Brown look for when deciding which market to target next?
"First of all, we look at the market - it's got to be attractive. So we'd screen for biscuit market size and biscuit market growth," he said.
"Then we look for a reasonable consumer pricing framework because it does vary a lot by country - we don't want to be in a 100% commoditised market. We assess the opportunity for new entrants, so ideally there would still be some fragmentation and a relatively low share of the big international players. We'd also look at how the modern retail trade was developing and the macro factors of political stability and lower trade barriers."
Brown, however, also spoke of affordability. "At McVitie's, the CFO insists on what they call the 'ten-minute rule', which means that in order to reach a mass market, the company's snack packs shouldn't require any more than ten minutes of labour to buy.
"So if you think about the UK market, we might have a £6 an hour minimum wage, and a £1 packet of biscuits fits into that really well. In India, it's more like 10 rupees (10p); in Nigeria it's 10 Naira, so it's 3p or 4p, so again it works well."
Lastly, but perhaps most importantly, Brown echoes the earlier comment about local talent. To a business committed to a long-term investment strategy in an emerging market, there's really no more important thing. "We really try to recognise and use the important local knowledge on the ground by working with partners," he concluded. "So we want to work with partners who are well established and have a well-developed route to market. So that's our general approach to emerging markets."