If you know a woman who is experienced in traveling Africa, ask her what things she always travels with. She will definitely mention two things: soap and toilet paper. If you are an investor and do not understand this, then you are missing the boat on Africa’s emerging fast-moving consumer goods (FMCG) market.
This week’s FMCG coverage in Africa will look at the soaps and detergents market in Africa. Paper and packaging will be the subject of a later week’s article.
When you talk to soap and detergent players, there is one common theme: emerging markets, particularly Africa, is where all the growth opportunities are. As of 2011, Africa and Asia accounted for 20 percent of Colgate-Palmolive’s sales. Soaps and detergents are basic consumer goods that, for many years, have been undersupplied to Africa. As developed markets become saturated, the multinationals have turned their eyes to the continent’s growing markets.
According to sellers of detergent inputs (i.e., surfactants, caustic soda, etc.), sales have risen across Africa due to multinationals increasing their efforts on the continent. Most market analysts divide Africa into four regional markets: north, south, east and west. Market players are predicting double digit growth for the northern, southern, and eastern parts of Africa, with some players predicting as high as 16 percent in East Africa for 2012. Southern Africa, by most estimates, was predicted to grow 6-8 percent in 2012, a number that is smaller but still hard to ignore.
These growth forecasts are largely linked to GDP growth and consumer growth numbers. Africa has had an average GDP growth of 5.6 percent since 2000, and the IMF predicts an average of 5.5 percent going forward compared to a 4.0 percent global average. Sub-Saharan Africa has a population greater than 800 million and is growing at 2.3 percent per year. According to the McKinsey Africa Consumer Insights Center, Africa’s consumer-facing industries are expected to grow by more than $400 million by 2020, accounting for more than 50 percent of total revenue growth expected to be generated by all businesses in Africa in 2020. The statistics tell a great story, but only part of the investment opportunity.
There are many other factors working specifically in favor of this emerging fast-moving consumer goods sector: (1) urbanization, (2) duties and pricing, and (3) local preferences, and (4) branding. First, urbanization is shaping the nature of demand and distribution for soaps and detergents. According to the Frost & Sullivan Africa Progress Report (2010), African cities will increase by 25 percent by 2025 at an average growth rate of 3.4 percent. By 2050, 60 percent of Africa’s population will be urbanized. According to the report, some of the fastest growing cities, including Dar es Salaam, Kinshasa, Luanda, and Addis Ababa, are in some of Africa’s fastest growing countries. Urbanization is vital to this market as most urban consumers are consumers of manufactured soaps and detergents while there are still big rural populations that make their own forms of soap from locally available resources. Accordingly, while this rural population decreases and becomes urbanized, their tastes switch as result of more time dedicated to work and changing lifestyles. Ask a Congolese woman how long she has been in Kinshasa, and do not be surprised to hear only a few months (“I just moved from outside the city and am still adjusting to life here in Kinshasa but I love my new job”). Lastly, with more than 85 percent of raw materials imported across the continent, local prices for needed ingredients in soap and detergent manufacturing can fluctuate up or down more than $250 in a week, leaving many local producers struggling to manage cost.
Secondly, duties and pricing are intricately connected and play a major role in the localization of soap and detergent and the potential for export. Over the past 2 – 3 years, international market players have highlighted the increasing import duties from local governments, undercutting their efforts to enter Africa, and have been actively approaching African governments to drop these duties but have meant stiff resistance. A few producers have referenced duties that are beyond 20 percent. Accordingly, these differing and potentially high import duties have made the market and pricing of soaps and detergents very disintegrated. This situation offers opportunities and challenges. Where there is potential to boost usage of local raw materials and/or achieve lower local import duties for raw materials, input costs can decrease astronomically. Several governments, particularly in East Africa and North Africa, have been receptive to forgiving import duties when the company exports the finished product at a certain level (as local government may need to boost foreign reserves) and/or produces a certain amount for the local market (as local government may want to build local employment and/or combat local inflation). Where low-cost production can be coupled with sales in high price markets, value is unlocked in a company. However, this is consistently challenged when potential export markets still place a hefty duty on other African-made products. As a result, most value in local companies has come from producing for local markets; such local production is estimated to account for around 40 percent of the overall value of the African home and personal care market.
The high percentage produced by the local market share is also a result of the third major factor for this fast-moving consumer good. Local tastes and local needs are crucial for understanding the manufacturing of soaps and detergents in Africa. Sometimes, such local preferences are hindrances to export if the countries differ just a bit culturally. For example, more North Africans use detergent powders, as compared to the rest of the continent, because they have more access to washing machines. Contrarily, washing machines are not the most prevalent in East Africa, such that many East Africans prefer products that are more effective for hand washing. In some countries, sales numbers differ drastically between those laundry detergents advertised as hand-washing, machine washing, and multi-use for hand and machine. In Nigeria, for example, I was told that consumers prefer multipurpose soaps that can be used for both personal and home care. Again, pricing is tied into these trends along with packaging. While soaps and detergents are basic needs, many consumers do not buy in bulk like their western counterparts. When speaking to local market owners in Ethiopia and Tanzania, the strategy is small packaging with cost-effective pricing. What size and price is most effective is always unique. Nigerian manufactures have recognized the need to adapt their exported products to the local preferences of their importing neighbors.
Beyond tastes and local cultures, branding is a huge factor. While in Ethiopia, I once bought my favorite cleaner on the continent—a product that I grew to appreciate while living in Tunisia—and asked my housekeeper to use it. She preferred a local Ethiopian brand that I never heard of. Then, a close friend entered the picture, when staying with me, and suggested a brand popular in South Africa and Mozambique. At the end of this two-month debate over cleaning products, the only thing that was certain was that the African consumer, like their Western and Eastern counterparts, favor certain brands and prefer to take them wherever they go. Stand in a Tanzania market and watch White Dent toothpaste get snagged off the shelf one by one and you will understand why Chemi & Cotex was a big investment for Catalyst Private Equity.
If investors are still not convinced about the soap and detergent investment opportunity, they should also think beyond simple soaps and detergents and look at the potential for hair products, toothpastes and other related home and personal care products. Hair products in Nigeria, and other similar West Africa countries, are a booming business. Predicted growth numbers have hovered around 7-9 percent for the industry.
Yet, challenges will always remain for investors, especially infrastructure constraints on energy and logistics (even within major cities), cost constraints on equipment needs (i.e., storage tanks, filling machines, etc.) and shortages of raw materials. Labor costs come up in discussions as an issue, but African labor is generally calculated as one-third of Asia, with Ethiopia specifically being around one-sixth of Asia. Energy costs are usually a bigger problem, particularly in Tanzania where costs can be around $0.18 to $0.22 cents per kWh. Regardless of the challenges, the potential value to be unlocked by savvy private equity investors and strategic multinational investors is vast.