Bagged milk, foil-wrapped cashews, and paper-wrapped take-away of an oily African dish are the headaches of daily life in Africa. Such packaging no-no’s are not a problem if you are selling the product on the street to a passersby and anyone else who does not have an extra few minutes to decipher between a good product and a bad product.
There are numerous variables that make a good product. But ultimately packaging is the one variable that can always make a good product look like a bad product. This week’s article looks at packaging in Africa and its intricate role in the development of Africa’s fast-moving consumer goods (FMCG) sector.
When you talk fast-moving consumer goods in Africa, the opportunity is generally built around consolidating the value chain onshore within the country. Africa’s growing consumer class pays higher prices for imported products and partially imported products (i.e. those products that largely include imported raw materials). While manufacturing in Africa cannot be categorically described, there are general concerns, including energy costs and raw materials, which cross country boundaries. For example, Tanzania’s import taxes and energy costs burden manufacturing certain products onshore while Senegal (like many francophone West African countries) have more lax tax regimes on imports such that finished products flood out many locally made products. Regardless, even when the input costs are low, the only buyers often are locals buying solely on price and what is available as quality, particularly around packaging, is still very low.
Capturing the burgeoning middle-class market and the starving export market is a big challenge for local African producers. The old adage that poor packaging is the same as a poor product best characterizes Africa’s export challenges. Exports increasingly have to comply with international standards and requirements. These requirements coupled with the expectations of consumers are constantly changing at a rapid rate such that low-technology and less connected producers struggle to keep pace. In Africa, the importance of good packaging is often underestimated and relegated to functional purpose of transport. Accordingly, many African producers focus on reducing costs, such that the resulting efforts simply reduce packaging to the bare minimal, often to a sub-optimal level. The United Nation’s Food and Agriculture Organization (FAO) has been at the forefront of the argument that a large percentage of Africa’s food loss and waste is due simply to poor packaging and care. Thus, packaging is more than an economically viable investment opportunity but also imperative for food security and poverty alleviation.
Packaging must provide some basic functions: (1) simplified and easy to handle transportation, (2) protection against external wear and tear, (3) the necessary and legal information on usage and content, (4) facilitation of the consumer’s use (i.e., microwaveable packaging), and (5) preservation of the environment. Cardboard and paper packaging has long been common practice in numerous African countries but globally, based on total value paid, plastic has been capturing more market share year after year because its costs have steadily decreased and it is more flexible and adaptable for packaging of differing colors, textures, and sizes. Yet, there is an ongoing debate within the East African community countries over whether plastic packaging is appropriate going forward for very justifiable environmental reasons. Accordingly, it is these differing views on environment and functionality that will challenge cross border trade in Africa but also create the bottleneck opportunities for investment in packaging industry as localization becomes vital.
Investors should see the packaging industry as a strategic investment opportunity as it serves to meet the basic needs of emerging FMCG companies and middle class consumers. On a smaller scale, packaging is an opportunity for building value in company via its product offerings. African consumers are very diverse with a wide range of expectations for package sizes, labeling, and ease of use. It should be no surprise that the simplest changes in the size of the washing powder packages provided across many West African countries can make a difference in volume of sales and top line revenue.
Importing raw materials and finished packaging can be reduced if (1) large quantities are used, (2) investors can access manufacturing technologies at a quicker and cheaper rate for their investee companies, and (3) volume can be achieved such that fixed costs (i.e., logistics and transport, energy, etc.) per finished product are minimized. The local African packaging markets currently are chaotic and fragmented as companies try to orient themselves toward either the domestic or export consumer. The investor who can build a supply chain around aligned demands of the domestic and exporting producer can obviously capture significant market share. Aligning such interests is not as hard as some investors may imagine. For example, agricultural packaging has some standard requirements even if not written into law. The middle class consumer is surely more prone to buying properly packaged vegetables and related products from the store than from the all-too-common vendor carrying the same product around in old grocery bags from one ‘matatu’ (minivan) to the next to sell on the street corner. Effectively, companies that can both serve as conglomerates and specialists to the tastes of local markets will capture the largest share of the market.
If you think packaging is not a big business, then it may be worth the trip to Somalia. The Coca-Cola Company has opened a $15 million bottling plant in Somalia’s breakaway enclave of Somalialand. Coca-Cola representatives have said this is part of the $12 billion it plans to invest in continent by 2020. Africa’s first beverage carton recycling plant, a partnership between the global food packaging solutions company Tetra Pak and South Africa’s Gayatri Paper Mills, was recently launched in Germiston. The dynamics and diversity of what is Africa make packaging an attractive investment opportunity. Opportunities for scaling are there. So far, only South Africa, Nigeria, Kenya and Tanzania have seen major scaling by companies. Investors willing to bring better technology, technical expertise, and patience will find local partners on the ground anxious to move to the forefront on conquering the continent’s packaging needs.
Kurt Davis Jr. is a Senior Associate with Schulze Global Investments in its Ethiopia office. He is a private equity professional and early business/start-up consultant with experience in Sub-Saharan Africa and North Africa, Asia, Europe and United States. He is an avid traveler who has been to 60+ countries throughout the world in search of new investment opportunities, new people, and better understanding of the world. His international professional career also includes positions with Kukula Capital, African Development Bank, Swicorp S.A., Bear Stearns, Citigroup Smith Barney, and Skadden, Arps, Meagher, Slate & Flom. His experience covers the agri-processing/food processing, construction, fast-consumer moving goods (FMCG), energy & infrastructure, manufacturing, natural resources and real estate sectors. Mr. Davis holds a Master in Business Administration (M.B.A.) degree from the University of Chicago Booth School of Business, Juris Doctor (J.D.) degree from the University of Virginia School of Law, and Bachelor of Arts (B.A.) degree from University of Virginia, having also taken classes and/or studied in Ghana, Nicaragua, France, and Brazil. He is a registered lawyer with the New York State Bar and the Massachusetts State Bar. He has also passed CFA Level I and II and speaks English, French, Portuguese and Spanish. He can be reached at firstname.lastname@example.org.