Cat on a hot tin roof
Tiger Brands feels some pain in Africa
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.
Peter Matlare … a determined drive into Africa.