Cat on a hot tin roof

Tiger Brands feels some pain in Africa

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Con­sumer goods group Tiger Brands’ ex­pan­sion into the rest of Africa has very much been a case of a “cat on a hot tin roof”. Its ex­pe­ri­ences in Nige­ria and now Kenya have ex­posed some bad or rather rushed de­ci­sions by CEO Peter Mat­lare and his ex­ec­u­tives.

This has pushed the group into a quandary. While it wants to con­tinue with its march to con­quer sub-Sa­ha­ran Africa, it’s had to be­come so cir­cum­spect that it is un­likely to take ma­jor risk in the near fu­ture, while it is still try­ing to fix some of its floun­der­ing African oper­a­tions.

The dan­ger is that its ri­vals, no­tably Pi­o­neer Foods, is not wait­ing, set­ting its sights on the same African mar­kets that Tiger Brands iden­ti­fied a decade ago. The Paarl-based group has the ben­e­fit of learn­ing from its com­peti­tor’s mis­takes.

The scram­ble for Africa has be­come a dom­i­nant fac­tor in the plans of many lo­cal com­pa­nies, es­pe­cially re­tail­ers and con­sumer goods groups. Gone are the days when Africa was viewed as a war-torn re­gion. Its for­tunes are im­prov­ing con­sid­er­ably, with many coun­tries democratis­ing.

The con­ti­nent’s pop­u­la­tion is ex­pected to dou­ble to 2bn by 2050, an op­por­tu­nity any SA con­sumer goods com­pany would ig­nore at its own peril.

Multi­na­tion­als also want a piece of this pie. Al­ready Bri­tish-Dutch multi­na­tional Unilever and its Swiss coun­ter­part Nestlé are en­trenched in Africa, hav­ing set up oper­a­tions a while ago, when the SA groups were still con­cerned about dom­i­nat­ing their do­mes­tic mar­ket.

Now, with the SA busi­nesses seem­ingly on au­topi­lot and low growth, ex­pan­sion into Africa is per­haps the most im­por­tant man­date for Mat­lare when it comes to deal-mak­ing. And, judg­ing by their out­rage at the losses from the Nige­rian busi­ness, in­vestors have high ex­pec­ta­tions of the group’s prospects in Africa.

Mat­lare, CEO since 2008, has spent most of the past seven years try­ing to make Tiger Brands a prom­i­nent multi­na­tional. While progress is en­cour­ag­ing, his ef­forts have thus far only amounted to pay­ing school fees. More than 70% of the group’s rev­enue is still gen­er­ated in SA.

It has ex­panded mainly into East and West Africa. Be­cause size­able ac­qui­si­tions are hard to come by in most coun­tries north of the Lim­popo, it has adopted a strat­egy of buy­ing ail­ing firms with a view to turn­ing them around, best ar­tic­u­lated in its motto: “fix, op­ti­mise and grow”.

The coun­tries it is get­ting into not only of­fer it the diver­si­fi­ca­tion of rev­enue streams, but are also grow­ing mar­kets. In 2008, the group ven­tured into East Africa through the ac­qui­si­tion of a con­trol­ling in­ter­est in a Kenyan group, Haco In­dus­tries, which at the time was con­trolled by renowned en­tre­pre­neur Chris Kirubi. In the same year it ac­quired Cameroo­nian cho­co­late man­u­fac­turer Cho­co­cam.

It ex­panded into Ethiopia through a joint ven­ture with East African Group to es­tab­lish a new

De­spite its al­lur­ing op­por­tu­ni­ties, Africa poses many chal­lenges that com­pa­nies should be aware of

food, house­hold, per­sonal care and cos­met­ics group in 2011. The same year, it en­tered Nige­ria — the most sought-af­ter mar­ket in West Africa — via the ac­qui­si­tion of a bis­cuit man­u­fac­tur­ing busi­ness, Deli Foods Nige­ria. In ad­di­tion, it signed a deal with UAC of Nige­ria to buy a 49% stake in the Nige­rian food and bev­er­age in­ter­ests of UAC.

In 2012, Tiger Brands bought a 63% stake in Dan­gote Flour Mills from Nige­rian en­tre­pre­neur Aliko Dan­gote. This deal was lauded as a ma­jor mile­stone. Mat­lare would later ex­tol, as an op­por­tu­nity for the maker of Albany bread, the fact that in Nige­ria flour is still sold in 50 kg units and that sliced bread re­mains largely un­known. For the SA group, the next step was to set up bak­eries in Nige­ria.

Alas, the Dan­gote Flour Mills deal has been a pain. It has had to write down nearly R1bn on re­al­is­ing that the busi­ness needs a great deal of work and that the mar­ket is over­sup­plied with flour. Though Dan­gote Flour Mills has been steadily re­duc­ing its losses, Mat­lare and his team con­tinue to field tough ques­tions over the group’s due dili­gence pro­cesses and the ex­e­cu­tion of its ex­pan­sion strat­egy in Africa’s most pop­u­lous coun­try.

The re­cent dis­cov­ery that the group’s Kenyan man­age­ment tried to in­flate sales fig­ures to get per­for­mance bonuses will only add fuel to the fire.

One an­a­lyst puts it: “I hon­estly think they (man­age­ment) have dropped the ball with re­gard to the ex­e­cu­tion of their African ex­pan­sion . . . the big bang the­ory clearly has not worked for Tiger Brands in Nige­ria. Due dili­gence was not thor­oughly car­ried out, in my view.”

De­spite its al­lur­ing op­por­tu­ni­ties, Africa poses many chal­lenges that com­pa­nies should be aware of, says Cratos Wealth an­a­lyst Ron Klipin. With a grow­ing mid­dle class and bur­geon­ing youth, Africa is poised for growth but should not be viewed as a sin­gle en­tity.

“There are op­por­tu­ni­ties, but Africa is not for sissies. One should not get caught up in the hype of ex­pand­ing into Africa. There are a lot of chal­lenges, lo­gis­ti­cally and reg­u­la­tory, as well as cor­rup­tion,” he says.

He is in cho­rus with those who think Tiger Brands was slack when do­ing due dili­gence be­fore con­clud­ing the Dan­gote Flour Mills trans­ac­tion.

“Per­haps it was rushed,” says Klipin. “They (Tiger Brands) didn’t fully un­der­stand the Nige­rian mar­ket.

“The mar­ket ap­pears to be over­sup­plied with flour in cer­tain re­gions, with qual­ity chal­lenges, as well as con­straints, in sup­ply­ing larger seg­ments of the Nige­rian mar­kets.”

In view of the im­pair­ment charge and on­go­ing losses at Dan­gote Flour Mills, Vic­tor Seanie, in­vest­ment an­a­lyst at Kag­iso As­set Man­age­ment, says Tiger Brands should have paid less for the busi­ness.

As a re­sult of the over­sight on the Dan­gote Flour Mills deal, Tiger Brands man­age­ment has be­come more cau­tious in the ex­e­cu­tion of its Africa ex­pan­sion. Last year it aban­doned a planned ac­qui­si­tion in Kenya be­cause the tar­get com­pa­nies did not meet per­for­mance con­di­tions.

Tiger Brands says it has ro­bust due dili­gence pro­ce­dures in place but is cog­nisant of the need to be ex­tra vig­i­lant and that there is al­ways room for im­prove­ment and lessons to be learned from ev­ery sit­u­a­tion. It is still com­mit­ted to its long-term growth in emerg­ing mar­kets.

“I be­lieve we are po­si­tioned to make progress,” says Mat­lare. “But yes, there are al­ways things you may have done dif­fer­ently with the per­fect view of hind­sight. The con­tri­bu­tion that these trans­ac­tions of­fer — from the per­spec­tive of mar­ket po­ten­tial, prod­uct port­fo­lio and cat­e­gory con­tri­bu­tion — re­main im­por­tant com­po­nents of the group’s strat­egy for fu­ture growth and sus­tain­abil­ity.”

Africa ex­pan­sion is a pil­lar of its in­ter­na­tional growth strat­egy. The group says it will con­tinue to de­velop in these mar­kets and

Pi­o­neer Foods has set its sights on the same African mar­kets Tiger Brands iden­ti­fied a decade ago

It is vi­tal to have a part­ner from the par­tic­u­lar coun­try who un­der­stands the busi­ness cul­ture

in­vest ap­pro­pri­ately to drive pen­e­tra­tion. Con­tri­bu­tion by its ex­ports and the Davita busi­ness — which ex­ports pow­dered sea­son­ing and bev­er­ages out of SA — re­flects the mag­ni­tude of the group’s in­ter­na­tional busi­ness.

In ad­di­tion, it has fixed as­sets in Zim­babwe, Ethiopia, Cameroon, Kenya and Nige­ria. The Mozam­bi­can and Malaw­ian mar­kets are served out of SA.

How­ever, the fo­cus at the mo­ment, says Mat­lare, is “to ad­dress chal­lenges, op­ti­mise on ef­fi­cien­cies and lever­age off core com­pe­ten­cies and to sig­nif­i­cantly grow our mar­ket pres­ence”.

That means in­vestors should not ex­pect the 70/30 ra­tio in Tiger Brands’ rev­enue stream to change in the fore­see­able fu­ture un­less the group achieves sig­nif­i­cant in­creases in rev­enue from its ex­port busi­ness.

“De­spite the chal­lenges as­so­ci­ated with pen­e­trat­ing and suc­ceed­ing in emerg­ing mar­kets, we are en­cour­aged by the per­for­mance of our busi­nesses,” says Mat­lare.

“In East Africa, the Kenyan busi­ness has con­sis­tently de­liv­ered strong growth — not just vol­ume share but value share growth in that mar­ket.

“It’s a small busi­ness, but im­por­tant as a gate­way into the sur­round­ing coun­tries.

“The busi­ness in Cameroon is a suc­cess story. For the past five years it has grown prof­itabil­ity.”

De­spite some chal­lenges in the Nige­rian mar­ket, he says, this is a long-term growth mar­ket for Tiger Brands. The group has made progress in turn­ing around Dan­gote Flour Mills, but got hit by the de­val­u­a­tion of the naira in the six months to March.

Though it ex­pects the Nige­rian di­vi­sion to make a profit next year, an­a­lysts are less op­ti­mistic and ex­pect it to break even only in 2017 as these goal­posts have moved back sev­eral times. The lower oil prices will also have an im­pact, over and above cur­rency de­val­u­a­tion.

What seems to be do­ing ex­cep­tion­ally well is the Davita busi­ness. It has grown so strongly that some pro­duc­tion has been out­sourced while ad­di­tional ca­pac­ity is be­ing in­stalled.

“So, with re­spect to our African growth strat­egy, ex­pan­sion into the bal­ance of the con­ti­nent will be a sig­nif­i­cant growth vec­tor in the medium to long term,” says Mat­lare.

“We need to de­cide on tim­ing and cost and eval­u­ate the re­turn. It is im­por­tant for me to say that this work has been done. We will al­ways re­assess pe­ri­od­i­cally how well we are do­ing and if we are giv­ing share­hold­ers the right re­turns.”

Tiger Brands is not the only com­pany bat­tling to find a for­mula that works in its ex­pan­sion into the rest of sub-Sa­ha­ran Africa. Mat­lare has been coura­geous while many oth­ers have adopted a wait-and-see ap­proach.

Opin­ions vary on the best way for a goods com­pany to ex­pand into the rest of the con­ti­nent. How­ever, com­mon threads in­clude un­der­stand­ing the mar­ket you’re get­ting into — the lo­cal taste and the route to mar­ket.

A num­ber of SA com­pa­nies have adopted a con­ser­va­tive ap­proach in the face of the chal­lenges as­so­ci­ated with do­ing busi­ness in land-locked coun­tries with poor in­fra­struc­ture.

The lim­ited avail­abil­ity of size­able ac­qui­si­tions means SA com­pa­nies have to grow from the ground up in many of the coun­tries to which they wish to ex­pand.

The chal­lenge is that in some of those coun­tries there are no clear rules on land own­er­ship by for­eign­ers, which makes it dif­fi­culty for com­pa­nies that want to set up fac­to­ries.

Re­tail­ers such as Shoprite, with more than 200 stores out­side SA, are in an ad­van­ta­geous po­si­tion only be­cause they started ex­pand­ing into Africa in the early 1990s. De­spite hav­ing a strong par­ent, Mass­mart has equally been con­ser­va­tive in its Africa ex­pan­sion. Up-mar­ket food and cloth­ing re­tailer Wool­worths aban­doned its Nige­rian op­er­a­tion in Fe­bru­ary, cit­ing sev­eral chal­lenges, in­clud­ing high rent and du­ties.

The in­fancy of for­mal re­tail­ing means the likes of Tiger Brands and Pi­o­neer Foods need to un­der­stand how in­for­mal trad­ing works in Africa and how to build a sup­ply chain to cater for those mar­kets. Hav­ing learnt from Tiger Brands, Pi­o­neer is tak­ing a pedes­trian ap­proach.

Tiger Brands says its ex­ec­u­tives have been trav­el­ling in these coun­tries, as­sess­ing op­por­tu­ni­ties, for many years. In ad­di­tion, it has good re­la­tion­ships with lo­cal part­ners.

Kag­iso’s Seanie says the key is to en­ter new coun­tries with trust­wor­thy part­ners who know the lo­cal mar­ket well.

He says it is im­por­tant, once a com­pany has de­cided to make an ac­qui­si­tion, to buy a busi­ness that comes with a wide dis­tri­bu­tion foot­print and to quickly gain the abil­ity to dis­trib­ute its own goods as well as those of the com­pany that has been ac­quired.

“Do­ing a thor­ough due dili­gence of a tar­get com­pany as well as the new mar­ket is very im­por­tant.”

Seanie says the ex­pan­sion strat­egy is the right one for Tiger Brands, given its size in the SA mar­ket. But its suc­cess will de­pend on how well the man­age­ment ex­e­cutes this strat­egy.

When ex­pand­ing into Africa, says Klipin, a con­ser­va­tive ap­proach should be taken, with bite-size in­vest­ments, un­til a bet­ter un­der­stand­ing of mar­ket dy­nam­ics is ob­tained.

Mat­lare says cur­rency and po­lit­i­cal in­sta­bil­ity re­main ma­jor chal­lenges in Africa.

In ad­di­tion, it is vi­tal to have a part­ner from the par­tic­u­lar coun­try who un­der­stands the busi­ness cul­ture. Low dis­pos­able in­come lev­els also place lim­i­ta­tions on con­sumer spend­ing.

“This is def­i­nitely a growth area, but one must ap­pre­ci­ate that Africa is a ta­pes­try of dif­fer­ent coun­tries and cul­tures, with dif­fer­ent ways of work­ing,” says Mat­lare.

Pic­ture: MARTIN RHODES

Peter Mat­lare … a de­ter­mined drive into Africa.

Source: TIGER BRANDS AN­NUAL RE­PORT 2014

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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