The T L Blog is delighted to introduce a new contributor – Tielman Nieuwoudt. Based in Johannesburg and for several years working out of Vietnam, Tielman brings a huge level of experience in frontier markets to the TL table. This and other posts to follow have featured on the Supply Chain Lab Blog previously. And so to Africa …
With low projected growth in the US and EU, and the realization that the BRIC countries won’t be able to do it all on their own, there is renewed interested in Africa. It is a continent with enormous potential with some of the fastest growing economies on the planet. However, for any company new to the African continent, there are a number of challenges to consider.
Infrastructure – Anybody that has tried to move goods from point A to point B in Sub-Saharan Africa (bar South Africa) has realized the challenges associated with transportation and infrastructure. However, in many African countries (e.g. Tanzania & Ethiopia) there have been great improvements in infrastructure. However, reaching lower tier cities (not to mention rural markets) remains a challenge.
Distances – African commercial centers are often far apart, increasing cost and making economies of scale difficult to achieve. For example, many low cost distribution models piloted in Asia (e.g. India) and Latin America (e.g. Mexico) will likely fail, as distances are greater and the numbers of commercial clusters are not comparable with these continents.
Fragmented markets – Modern trade (e.g. Shoprite supermarkets) in African countries (with the exception of South Africa and Kenya) is still in the very early stages of development and the contribution is in the low single digits. Reaching large numbers of traditional outlets (e.g. Mom & Pop, Dukas, Sooks) is difficult and costly business.
Distributors – Finding the right distributors to reach the vast numbers of traditional outlets is difficult (if not impossible) and it requires enormous development and training. As with many emerging markets, the outlet base keeps evolving as outlets open and close. Keeping the outlet list up to date can be a difficult undertaking.
Access to capital – Finding a good distributor is just a start as sources of capital are limited. Many organizations need to support their distributors and partners during the start up phase and in many cases also provide loans or bridge capital to support their cash flows.
Risks – As recent events in Nigeria have demonstrated, there is still significant political risk in a number of African countries. Some of these countries, including Nigeria, hold significant potential in a number of sectors. However, companies need to have a good understanding of the political risk and potential impact on their business.
Technology – When navigating the business landscape in Africa, you realize that most companies operate on a combination of software (e.g. ERP), Excel, pen and paper. Mobile technology holds great potential, but few companies have viable commercial models. Finding the right solution for your company will take time, money and innovation.
Electricity challenges – In many countries electricity is in short supply and power cuts are common during peak periods. Even more advance economies such as South Africa are experiencing major challenges. In some countries (e.g. Guinea) the generator remains a major source of energy and energy cost can be a major consideration.
Lack of visibility – Poor information technology also leads to a lack of visibility in the supply chain with increased out of stocks (OOS). Increasing visibility can take time and might include a combination of technology and manual processes.
Lack of an organized Third party logistics (3PLs) and skills gaps – In many countries organized 3PLs revolve around independent transporters with limited number of vehicles. Many 3PLs might also lack the required skills and professionalism. Normally, ongoing training and support are required. Due to poor remuneration, staff turnover is high, and this will also have a negative impact on cost.
Incentives – Many distributors and 3PLs also lack the required incentives schemes to motivate workers. Companies sometimes need to play an active part in setting incentives and rewarding partners.
Warehouse – Many warehouses for rent are also poorly designed, with poor yard management, ventilation and equipment. Finding a professional warehouse operator can be a daunting experience.
Counterfeit and parallel imports – For many organizations, counterfeit and parallel imports remain a major concern. African markets remain a dumping ground for many importers and exporters that buy expired (or close to expired products) from European retailers. Large trading groups, operating out of the Middle East (e.g. Dubai), are normally a great source for importers. Pharmaceutical companies are also fighting an uphill battle against counterfeit products on the continent.
However, even with all these challenges, Africa holds great potential and companies ignore the continent at their own (and shareholders) peril. A number of multinationals and large numbers of SMEs have overcome or mitigated these challenges. And as the saying goes, if it is easy to do business, it is probably too late for entry.