On a recent visit to Rwanda, I made a visit to a few grocery stores and found the milk section lacking, except in Nakumatt, which situates itself within the market as a high end grocery store chain. On the same trip, Uganda provided the same story. This is no surprise when you look at the statistics for milk consumption for East Africa. Kenya leads the pack with 120 liters per capita annually for milk consumption, which is 89 liters below the recommended amount from the World Health Organization (WHO). Uganda, Tanzania, and Rwanda record anemic annual per capita consumption numbers of 53 liters, 42 liters, and 38 liters, respectively. Ethiopia consumes a measly 20 liters per capita, which is 180 liters below the recommended 200 liters.
The dairy industry is garnering the attention of private equity investors who see its growing demand in Africa in the face of insufficient capacity and its cash generative value in conjunction with beef. This week’s Fast-Moving Consumer Goods (FMCG) coverage will be a double article, with the first part about dairy in Africa and the second part about beef in Africa. (Check out last week’s FMCG coverage on chicken consumption in Africa.)
The issue of dairy in Africa involves a plethora of factors that cannot be completely synthesized into one story line. For example, capacity is a mixed bag of facts. According to a recent survey by East Africa Dairy Development (EADD), there is a surplus of 52 million liters of milk in Rwanda, which experts forecast to increase over time. At the same time, this number doesn’t indicate how much of those 52 million liters of milk is of the processed form and how much is unprocessed. According to the Dairy Development Manager for the Dairy Development Authority (DDA), Dr. Robert Wangoola, Uganda produces between 1.5 billion and 1.8 billion liters of milk annually, but only 10 percent to 15 percent of the milk is processed. With consumption levels hovering around 11-15 liters per capita annually in Ghana and Nigeria, capacity has yet to even be tested, particularly for the processed milk, which is a major differentiating factor (as I have gotten sick a few times from unprocessed milk in a couple West African countries).
While country-by-country consumption of Africa is a convoluted story, one uncontested truth is the demand for milk is growing across the continent. A recent survey published by global packaging company Tetra Pak is projecting Africa to see an increase of more than 50 percent in liquid dairy consumption, growing from 15 billion liters in 2010 to almost 25 billion liters in 2020. Milk consumption in Africa is currently the lowest in the world, around 37 liters per capita annually, which is 67 liters below the world average of 104 liters per capita and only accounts for six percent of world consumption. The growth, however, will come at the expense of “loose milk”, which is unpasteurized milk sold in cans and/or bags. Accordingly, this implies more imported pasteurized milk until local production can develop the technology and packing capability to meet demand. West Africa has many examples of high dairy importing, with some countries importing USD 13 million to USD 20 million of pasteurized milk (i.e., Mali, Niger), negatively impacting trade balances.
The second uncontested truth is that cows are in abundance on the continent. However, that truth is coupled with the troubling reality of poor utilization of cows. In some sub-Saharan African countries, cows produce below 200 liters of milk per year, compared to over 12,500 liters per cow in some developed countries. For example, Kenya has9x the cattle population of South Africa, yet it reports milk production numbers that are not even close to what you would expect given its cattle population. The cause of these abysmal results in sub-Saharan Africa is generally low technology via the absence of any credits or subsidies to help investment in such technology. Accordingly, many dairy farmers in sub-Saharan Africa fail to enter the processing aspect of the dairy business where most of the value is added. It is this capital expenditure gap that many private equity investors seek to fill, coupled with assistance on building a dairy farmer’s processing capabilities and the expansion of its dairy product offerings (need I emphasize the potential for flavored milk?).
Still, achieving commercial scale requires overcoming many risks and challenges. First, location is extremely important, especially where infrastructure for transportation is insufficient. This issue is exacerbated in countries where refrigeration and energy is generally lacking. Transportation costs and the fluctuation in fuel prices ultimately test the resilience of most local farmers. Secondly, breeding is a complex process that not all local dairy farmers are adept, usually from the lack of exposure to other dairy farmers across the country and beyond. Mobile phones and the internet will play a role in changing this. Third, disease and parasites always threaten the cow and the milk. Drift from nearby dairy farms could immediately cause loss of livestock, contamination of milk or, most extreme, the end of the farmer’s business. Without the veterinary support afforded dairy farmers in developed countries, dairy farmers face more uncertainty in maintaining the health of their livestock. Fourth, feed stock for the cow is a major counter factor to the growth and health of the cow. Investors can play a major role, generally through the utilization of their network of technical advisers. The utilization of membership in regional organizations offers opportunities for regional export and capitalization on the differing (and higher) prices in certain countries as compared to the local economy.
For private equity investors, there are also huge social impact opportunities. Milk is a strategic factor in the growth of the agriculture sector and the movement of populations out of poverty. The development of the dairy sector will combat malnutrition as well as put money in the pockets of smallholder farmers that account for a large percentage of the industry.
Many readers may argue that milk and accompanying dairy products (i.e., cheese, yogurt, etc.) are not a big part of many African diets. However, this point is muted by the “Got Milk” campaign in the U.S. and similar campaigns in Rwanda and Kenya. The nutritional benefit of dairy consumption is a proven fact. Any investment in a dairy farmer will best be maximized by coupling it with a strategic campaign to build awareness of the benefits of dairy consumption and to build the brand. In the end, dairy consumption will increase as incomes grow and mindsets change. An investor best never limit their focus to solely liquid milk because, as cultures change with exposure and tastes expand with globalization, the African palate will require more milk and related dairy products to satiate its desires.