Recently, there have been a number of funding announcements for investments along the FMCG value chain in Sub-Saharan Africa. These include investments in ecommerce and accompanying investments in distribution channels which are expected to improve the business prognosis for existing and new manufacturers, improve efficiency and reduce revenue leakages. Consumer goods analyst at Vetiva Capital Management, Chinma Ukadike in an interview with Kayode Tokede speaks on these trends in the Fast Moving Consumer Goods industry in Sub-Saharan Africa.
With the global uncertainties that have persisted in the last few years, would you say that the FMCG industry in Sub-Saharan Africa has experienced growth?
I would say yes, within the context of revenue growth when looking at our coverage companies. For major players in the space, we can also see bottom-line resilience, and this is important to note especially given the significant headwinds these companies have faced during the period. Apart from this, there has also been evidence of expansion – I mean a drive towards achieving scale – across market sub-segments within the region.
What do you think has been driving this growth across the SSA region?
I believe that a key driver for the growth we have seen in the SSA FMCG industry has really been the increase in consumer spending across various countries within the region, which has itself been driven by rapid population growth in recent years. Also, we have seen increased industry capex spend across SSA countries on the back of significant incentive for investments in the region and this continues to impact various segments of the FMCG value chain positively. That being said, another growth driver we cannot ignore is technology, both on the demand and supply sides of the spectrum. As with many other sectors, technology is a vital catalyst for growth in the FMCG industry and we see this reflected in the increase in e-commerce activity and in respect of the general efficiency gains from digitization initiatives. One example is the brewery industry where players have attested to the impact of e-commerce on sales, and this is because the use of technology has sort of streamlined the sales process, fast tracked and eased payments as well as reduced restocking/communication lags for retailers.
Obviously, there have been challenges to this growth. Yes, infrastructure remains a big deal and this cuts across the entire region. Currently, Africa is still playing catch up from an infrastructure perspective even though the region averages around $80 billion yearly in infrastructure investments. To put this in perspective, in 2018, the AfDB, (the African Development Bank) had estimated that Africa needed a range of $130-170 billion yearly to plug the infrastructure deficit. Moreso, when we consider the fact that for technology to drive growth, there is a need to have the enabling infrastructure in place, this factor is definitely a headwind to growth in the sector.
Another challenge would really be bottom-line preservation. While turnover has largely been in line with expectations, and revenue is stable and growing, maintaining historical margins has been a real challenge. A major reason for this is that operational expenses have increased astronomically, and you would agree with me that this is not news. Energy prices have skyrocketed for example, and food prices have behaved in a similar manner and so on. Also, beyond operational expenses, financing costs have also been a burden for companies operating within this space, with interest rates rising globally at a historic pace. The implication of this is that critical capex spend will likely stay below required levels to drive growth, at least in the near term.
Amid these challenges, what would you say are tailwinds that FMCG players have enjoyed, nonetheless?
The FMCG industry thrives on quick and regular substitution where consumers can easily switch from one product to another based on a number of factors ranging from trends to lifestyle choices to affordability. Affordability is especially important, as data has shown, over the years, that household income distribution in Africa and especially in the Sub-Saharan Africa region is skewed towards lower income households, with little or no brand loyalty. For this segment of the population, a large portion of household income – averaging 70per cent across SSA – is spent on Food and other necessities. Another interesting point is that despite the low-income per capita scenario in the region, the fast-growing population in Africa has supported increased consumer spending in the region in absolute terms and this is a huge positive for the FMCG sector. This is also why the investment spend I spoke about earlier has come at a good time. With so many choices and low substitution costs, players who can hack the route to market strategy and deploy efficient distribution infrastructure would win today’s consumer.
Another thing to note, is that the uneven distribution of the population towards low-income households in the region has capped manufacturers’ pricing power. This is because these consumers can only afford necessities and would typically favour lower priced items. As such, across Sub-Saharan Africa, the theme has really been value (save for the brewery segment, which has largely thrived on premiumization in recent times). Added to this, with inflationary pressure ravaging consumer wallets, manufacturers in the space have had to be very creative in adapting their products to suit the purchasing power of the consumer.
How has the pricing dynamic affected margins and growth?
Not positively. While the pricing strategy I mentioned earlier has been good for volumes, the low price point synonymous with mass market products is not as favourable for margins and consequently, bottom-line especially when we consider that costs have not slowed down. This has made some companies focus on achieving scale to maintain absolute profits and is another factor that has been driving the significant investments observable in the region.
Would you say that governments have a role in driving the sector to the next frontier/level of growth?
That’s a good question and my answer would be yes, from an infrastructure perspective. Apart from actual investments in building infrastructure, governments in the region need to be a lot more intentional in driving and implementing policies that would also promote private-led infrastructure investments. For example, in July 2022, the African Development Bank, concluded the first PPP road project in Kenya, a public-private partnership transport infrastructure project with invested funds of $150 million. These sorts of combined efforts in addition to favourable policies could set a precedence for other successful ventures with the private sector.
What is your outlook for the SSA region as a whole?
I think that the AfCFTA potentially is a key growth driver for the region. This is because it opens up markets in Africa, with the expectation that the agreement could boost trade within Africa by as much as 33%. Beyond this, the growth in population is expected to be a plus for the region, boosting labour force within the region and household incomes as well as increasing spending power and consumption.