M&D Associates have been involved in a number of projects which had the aim to expand into new markets in sub-Saharan Africa (SSA) or to improve traction in SSA. This article summarises some practical insights to assist those considering entry to, or building growth strategies for, SSA countries (excluding South Africa which has little similarity with the others).

The article covers four topics:

The article covers four topics:
1. Creating a convincing business case
2. The mechanisms of entry (Greenfield, Brownfield, Acquisition)
3. The approach to the market
4. The investment journey and stakeholder management.

Let’s start with a brief summary of the commonly known information with regard to issues of investing in the region:

  • Not only do business language and legislative frameworks differ, but business leaders still tend to treat SSA as a kind of homogeneous zone. Yet SSA is a diverse, complex group of markets, each with its own opportunities and dynamics. Hence, successful expansion into the continent requires an understanding of each country and regions within the countries. In addition the understanding of the country’s market dynamics – history, beliefs, target segments, their behaviour, and their living circumstances is important and needs to be understood with proper depth. We discuss the approach to the market in some further detail later in this article.
  • Growth prospects make SSA attractive for investment even through the risks that have plagued the region for decades persist (for a short summary click here).
  • The region has a young, growing population and the fastest urbanization rate in the world. Education has improved with growing numbers of tertiary students gaining access to Western Europe or US universities.
  • The region’s so-called biggest asset ‘abundant labour’ remains however largely untapped and much of the new growth is coming from consumption growth and not increased productivity.
  • Technology and technology driven innovations are factors in the growth of many SSA countries, yet power, financial and telecoms infrastructure is thin outside of urban centres.

Interest in the sub-continent has resulted in the writing of a lot of country-specific research. The quality of insights however remains sketchy and sometimes misleading particularly when pertaining to industry specific metrics – example “insurance premium as % of GDP” may be useful for country comparison but gives little insight to the actual market opportunity of insurance in the country.

Following from these general observations the following specific pitfalls need to be considered.

1. Creating a convincing business case for investment and treating this investment with the respect that it deserves

The South African experience has been a mixed bag with poorly thought through strategies (such as Old Mutual, Pick n’ Pay, Vodafone, Truworths) and strategies that created sustainable platforms for growth (e.g. Sanlam, Shoprite Checkers, SAB, MTN). The common success factors can be summarised in four main categories considering also successful international companies such as Beiersdorf:

Although these factors might seem obvious we have encountered the reverse in many cases as this is when we are brought in to try and remedy failures. Failure in getting the above factors right is much easier to spot than success stories.

Financial oversight is often too weak and companies don’t perform thorough due diligence. The logic is that small investments don’t justify the cost of more detailed due diligence. The process therefore skips over the post acquisition realities of applying accounting policies and audit standards, the cost of new systems and head office oversight costs, and the true appetite for initial losses are often not appropriately considered in the business case.

‘Me-too’ market strategies, market irrelevant offerings, or a lack of investment to connect with the market are the most common mistakes that investors make. There are striking examples of South African retailers and financial services businesses creating retail outlets in places like Lagos that were “show rooms” of western retail perfection but void of customers because they had nothing that catered to local needs or local tastes. This is not just a matter of unattractive offerings but these spaces were so foreign that they were intimidating. Few customers even dared to enter.

A deep understanding of the required strategy for market success is often linked to the investor’s attitude to it’s required parenting role. South African owners have developed a fear of over-extending or meddling. As a consequence they leave poor, and in some cases corrupt, management unsupervised. The South African head office lives for a while in “ignorant bliss” of the true local financial situation (because it is “too small to give it more attention”) until the situation is beyond repair. Investment in SSA is never a passive affair and even where investors take minority stakes an active market strategy must be part of the plan.

Whilst for manufacturing concerns, the easy answer is mostly Greenfields, many regulated industries don’t have the option as new unencumbered licenses are not available. The decision how to follow the Brownfield approach hinges on:

  1. The corporate view on global or local branding (Brownfields don’t cling to their local brand);
  2. Internal ability and availability of skills to build a business from the ground up. We have seldom encountered South African businesses with the entrepreneurial skills required to do this well;
  3. Time horizons to profitability (shareholder patience); and most importantly
  4. The chosen market approach. Brownfields entry points work better than large acquisitions for first-to-market innovation or the unlocking of a specific target group, as they come with little organisational change need that is normally a major impediment to rapid execution.

The acquisition of large or substantial players is preferred where there is a strong need for local product, buying market share and scale in competitive or largely undifferentiated markets, or where the buyer lacks resources to support the local operations from head office.

In all the cases we have been involved in, the buyers overpaid for the assets acquired and did so knowingly and willingly. However, the full extent of “premium” paid for the acquisition almost always only became clear after a year or two of on-the-ground experience. The role of thorough due diligence cannot be stressed enough and should include good detail on current shareholder background, at least three years of full banking and cash reconciliations to the day of take-over, as well as legal standing. We would advise that larger acquisitions in SSA are approached almost from a forensic audit perspective. Claw-back clauses might form part of the terms of acquisition, but the effort required to follow through on them is not worth the cost. If at all possible consider writing off the premium paid for the asset immediately and book it at realistic fair value. These investments should be treated as high risk investments.

The investment case required to grow the business to the desired end state is frequently too optimistic. In our experience a good rule of thumb is to double or triple the estimate of the business case unless it is based on true and comparable experience in similar countries and with the same market approach. Some common issues encountered include:

Inconsistency of how laws and regulations are applied especially with regard to labour laws and industry regulations. Foreign owned businesses are often monitored more stringently than local competitors.
Overestimating supply and alignment of key skills in country. Investors make assumptions of basic alignment of culture and expertise that prove wrong. As a consequence training budgets and travel budgets for support are underestimated. ‘Ready to stand alone’ local skills and technical resources are more expensive than investors think and often not available. Actuaries in Kenya and Nigeria present a good example. Although they are plentiful, qualifications and experience vary and actual availability to the insurance industry is few.
‘Club fees’ associated with belonging to a multi-country group of businesses are often only considered post investment. These include the cost of head office services and governance, and travel of functional teams to the country to support but also to develop head office understanding of the local business conditions.
Systems are often a key part of head office and home country efficiency and effectiveness but the business case frequently ignores the implications of applying these in the acquired business. They are however costly given legal, purchasing power differences, local functionality and language requirements, as well as requiring foreign resources for local implementation and maintenance (we have not seen any truly ‘vanilla’ implementations of group systems in country). The long-term capital charge associated with these deployments can be millstones that small local businesses never overcome.
Many buyers make assumptions about shared assets which prove impossible to implement. A common assumption is data management outside of the country where local data laws prohibiting this.
Assumptions about marketing costs and application of global marketing strategies in country. Advertising space is often scarce and expensive. Digital is growing but its usefulness is dependent on your target market’s access to online media. Local digital agencies are immature, but expensive, in many markets. Sponsorships and donations are vital tools in building the societal bonds required for traction especially in financial services. They are expected by stakeholders, yet often not budgeted for or seen as optional when in truth they are key to keeping a positive relationship with stakeholders and influencers.
Productivity varies globally across cultures and also in SSA. Recognising the differences in productivity as a consequence of skill differences, experience differences and even cultural difference is important. Process and management philosophies can not be “dropped into country” but also form part of expectation setting at the business case stage.
SSA is catching up with the rest of the world and much of this catch-up is a copying of what has worked elsewhere. Competitors may at first appear docile but will respond quickly when new actors invest in their markets. They are quick to copy and operate with a depth of market understanding that is in itself a high barrier. This depth of local knowledge extends beyond pure customer understanding into the “mechanics” of how the total system works in their country. Foreign investors are often blind to these mechanics and find little support in legal processes which are slow in evolution.
Payment collection and debt collection cycles can create rapid local cash flow issues. In many countries both corporates and individuals alike have slow payment cycles and debt is difficult to collect. If your business relies on regular payments give your payment enforcement mechanisms and enforcement power considerations a lot of thought.

There are generally very few large acquisitions available and they come with a hefty price tag. The promised returns in SSA and the shortage of easy opportunities require focus and deep commitment. Building a business from the ground up locally in SSA requires extensive investment, local knowledge, entrenchment in the market, determination to overcome setbacks and long term commitment from shareholders.

2. The entry point – Greenfield, Brownfield, Acquisition?

Whilst for manufacturing concerns, the easy answer is mostly Greenfields, many regulated industries don’t have the option as new unencumbered licenses are not available. The decision how to follow the Brownfield approach hinges on:

  1. The corporate view on global or local branding (Brownfields don’t cling to their local brand);
  2. Internal ability and availability of skills to build a business from the ground up. We have seldom encountered South African businesses with the entrepreneurial skills required to do this well;
  3. Time horizons to profitability (shareholder patience); and most importantly
  4. The chosen market approach. Brownfields entry points work better than large acquisitions for first-to-market innovation or the unlocking of a specific target group, as they come with little organisational change need that is normally a major impediment to rapid execution.

The acquisition of large or substantial players is preferred where there is a strong need for local product, buying market share and scale in competitive or largely undifferentiated markets, or where the buyer lacks resources to support the local operations from head office.

In all the cases we have been involved in, the buyers overpaid for the assets acquired and did so knowingly and willingly. However, the full extent of “premium” paid for the acquisition almost always only became clear after a year or two of on-the-ground experience. The role of thorough due diligence cannot be stressed enough and should include good detail on current shareholder background, at least three years of full banking and cash reconciliations to the day of take-over, as well as legal standing. We would advise that larger acquisitions in SSA are approached almost from a forensic audit perspective. Claw-back clauses might form part of the terms of acquisition, but the effort required to follow through on them is not worth the cost. If at all possible consider writing off the premium paid for the asset immediately and book it at realistic fair value. These investments should be treated as high risk investments.

The investment case required to grow the business to the desired end state is frequently too optimistic. In our experience a good rule of thumb is to double or triple the estimate of the business case unless it is based on true and comparable experience in similar countries and with the same market approach. Some common issues encountered include:

  • Inconsistency of how laws and regulations are applied especially with regard to labour laws and industry regulations. Foreign owned businesses are often monitored more stringently than local competitors.
  • Overestimating supply and alignment of key skills in country. Investors make assumptions of basic alignment of culture and expertise that prove wrong. As a consequence training budgets and travel budgets for support are underestimated. ‘Ready to stand alone’ local skills and technical resources are more expensive than investors think and often not available. Actuaries in Kenya and Nigeria present a good example. Although they are plentiful, qualifications and experience vary and actual availability to the insurance industry is few.
  • ‘Club fees’ associated with belonging to a multi-country group of businesses are often only considered post investment. These include the cost of head office services and governance, and travel of functional teams to the country to support but also to develop head office understanding of the local business conditions.
  • Systems are often a key part of head office and home country efficiency and effectiveness but the business case frequently ignores the implications of applying these in the acquired business. They are however costly given legal, purchasing power differences, local functionality and language requirements, as well as requiring foreign resources for local implementation and maintenance (we have not seen any truly ‘vanilla’ implementations of group systems in country). The long-term capital charge associated with these deployments can be millstones that small local businesses never overcome.
  • Many buyers make assumptions about shared assets which prove impossible to implement. A common assumption is data management outside of the country where local data laws prohibiting this.
  • Assumptions about marketing costs and application of global marketing strategies in country. Advertising space is often scarce and expensive. Digital is growing but its usefulness is dependent on your target market’s access to online media. Local digital agencies are immature, but expensive, in many markets. Sponsorships and donations are vital tools in building the societal bonds required for traction especially in financial services. They are expected by stakeholders, yet often not budgeted for or seen as optional when in truth they are key to keeping a positive relationship with stakeholders and influencers.
  • Productivity varies globally across cultures and also in SSA. Recognising the differences in productivity as a consequence of skill differences, experience differences and even cultural difference is important. Process and management philosophies can not be “dropped into country” but also form part of expectation setting at the business case stage.
  • SSA is catching up with the rest of the world and much of this catch-up is a copying of what has worked elsewhere. Competitors may at first appear docile but will respond quickly when new actors invest in their markets. They are quick to copy and operate with a depth of market understanding that is in itself a high barrier. This depth of local knowledge extends beyond pure customer understanding into the “mechanics” of how the total system works in their country. Foreign investors are often blind to these mechanics and find little support in legal processes which are slow in evolution.
  • Payment collection and debt collection cycles can create rapid local cash flow issues. In many countries both corporates and individuals alike have slow payment cycles and debt is difficult to collect. If your business relies on regular payments give your payment enforcement mechanisms and enforcement power considerations a lot of thought.

There are generally very few large acquisitions available and they come with a hefty price tag. The promised returns in SSA and the shortage of easy opportunities require focus and deep commitment. Building a business from the ground up locally in SSA requires extensive investment, local knowledge, entrenchment in the market, determination to overcome setbacks and long term commitment from shareholders.

3. Market approach

A. Adopt a strategy that fits the local consumer and market and is designed to take advantage of some key market drivers

In our experience, the competitive landscape for almost all products, including sophisticated financial services and online offerings, is strong in most SSA countries and finding a unique competitive space is as difficult here as it is in the most sophisticated markets, including the countries of origin of the International investor companies.

SSA Markets are young and digitally savvy:

Connecting with the young consumers is vital in SSA given the population age distribution. These Millennial’s, like their peers in other countries, are mobile savvy but they also have a distinct African’ness. The growth in digital across the region has been a major factor in how the SSA Millennial’s view work. Today’s young urban African’s (especially in Kenya and Nigeria) are all about empowerment, social enterprise and social networking.

“They don’t want to become engineers but UX Designers. Doctors? No, they’re creating health apps. Lawyers? They founded platforms where you can contact a legal consultant. And they are doing all these from their homes, co-creation labs or their office-in-a-box. In Nigeria, the incursion of Elance, Freelancer and ODesk and similar platforms serves as avenues for this generation to explore their passion and creativity.” Franklin Ozekhome, Tink, Nigerian Market Consultant

Online shopping sites have grown in stature and popularity in the last few years. Mobile money platforms like Mpesa in Kenya and MyPaga in Nigeria are becoming de facto payment mechanisms and super malls are becoming shopping entertainment hotspots. The marriage of social shopping and mobile connectivity brings about a market for brands that have a story to tell and sell. Decoding the average social shopper to understand their mentality is as important as any other market where rapid growth is driving change in consumer patterns and consumer behaviour.

B. Each country has it’s own culture and sub-cultures – culture matters for business success

Local cultures are very different and deserve the respect that companies would pay to the diversity of segments in their home markets. This is demonstrated in the following Nigerian examples (which apply to Nigeria but not necessarily to other countries):

  • Women are strong in Nigeria and take many of the leadership roles and decision-making roles.
  • The business environment is led by highly educated leaders and the assumption otherwise has been the undoing of many South African executives we have worked with in Nigeria.
  • The country’s history and ongoing turmoil has brought about a resilience in people unlike many other regions. The Nigerian Spirit is “we never back down”.
  • Personal aspiration is a key motivator in Nigeria and the reason why they take on endeavours that seem impossible to some. Where affordable, children are sent to England or to the US to be educated. Even so, local private schools have long waiting lists (an important factor to consider with expatriate appointments). It is also very common for Nigerian’s to work for themselves. Most own a business or two and are involved in other business activities (even if employed full time).
  • Family is the Nigerian heart. “Even with all the chaos and conflicts, we still bond within ourselves… One for all.” Alhaji Aliko Dangote; Business Magnate, Africa’s Richest Man, Owner, Dangote Group
  • The youth market (18 to 27 years) are venturing into creating successful tech businesses, dropping out of tertiary institutions to pursue their passions. They have been fired up by the digital revolution and they are not going to back down. They are becoming young CEOs and Product Developers with a passion for investing in enterprises that address critical issues in their own country. This is an important asset that could distinguish Nigeria.
  • Nigerians are very particular about their culture and traditions, even though they adapt and adopt other cultures to create a unique hybrid. Brands that know how to connect with the culture will definitely be on the rise.
  • In Nigeria (and in Ghana to an extent) the Afro-Cosmos and Afro Pop Culture is strong (much more so than we experienced in Kenya). Everything African from fashion, hairstyles, tattoos, music and local musicians is influencing today’s pop speak. Nigerians love their own – Olamide, Phyno, Dbanj, Tuface etc. They have found creative ways of incorporating this into every facet of fashion: from Ankara patterned denims to Adire casual jackets, and commercialising these. International brands entering the market that perform best are those that tap into this local awareness and pride. Examples include Etisalat (a mobile Telkom provider) and the Guinness’ campaign #MADEOFBLACK that used this to their advantage when they launched, “building a culture of Nigerianess”, using colours, language and music that linked to cultural pride.

C. Partnering for success

Almost all successful ventures of international companies in SSA are built on local partnerships. We use the term partnership loosely here and don’t mean joint ventures but strong, often proprietary, partnerships in the value chain. SAB has strong local sourcing and distribution partnerships, Sasol builds unique community partnerships for economic development, MTN partners in the infrastructure development chain and for product additions, some insurance companies have forged successful partnerships for distribution, banks partner with local developers, and Sanlam’s minority share entry strategy can be seen as a partnership philosophy rather than ownership concept.

Partnerships are vital in successful African expansion not just for reasons of capability acquisition but also for it’s significance in the African culture, something that is often undervalued in the business case.

Yet, many corporates shy away from partnerships, citing the need for control (and a majority share philosophy), lack of skills, investment requirements for managing these relationships, margin erosion in an already small market, trust issues, and a general lack of appetite for creating win-win shared investments. Investors see partnerships as complicating the investment whereas the partnering route seems to bear better fruit than alternatives in SSA.

In your growth strategy, consider how much more successful you could be if you could focus on your core competency and not have to create added benefit in all parts of the value chain, e.g. product manufacturing instead of distribution, offering a multitude of products instead of just one, using channels and insights competitors don’t have, and leveraging systems and infrastructures others have already built. In business cases it is typically viewed that one will leverage capabilities from internal sources, but tends to ignore what we can leveraged from potential partners. An insurance example of this is given below, where developing exclusive partnerships with complimentary risk services creates differentiation and focus for the insurance business.

4. Every investment is a journey with a number of stakeholders whose own perspective is continually evolving

Building common ground needs to be a continual activity while the business case is being built and not once it is done. Management are generally keenly aware of the need for change management when it comes to implementing strategy with lower levels of the organisation but tend to be less aware of this need with their Boards and their executive peers. Take it step by step and be prepared to go through phases of change management. If the investment is right, be prepared for cycles of great enthusiasm followed by great doubt, resetting of strategy and starting all over again.
In our view the following sequence of steps are vital to creating buy-in:

1. Agreement on investment philosophy and corporate strategy:
At this stage it is firstly important to understand where this opportunity ranks and fits in the overall corporate strategy. It is also important to understand what the corporate competency set is and is not. Example short term profitability needs with high ROI or ROE typically don’t go hand in hand with African expansion through start-up businesses or brownfield turn-around investments. Options are then limited to large acquisitions, which come at a premium. If your corporate cost base is high and leverage a key objective, you need to think harder about how that can be achieved within the local innovation approach.

2. Agreement on market opportunity:
Not just the country economics but the target market, the competitive space, the trends and unfulfilled needs. Is your executive team excited about the opportunity and do they understand it? Engage the nay-sayers individually by addressing their concerns directly. Bring key influencers to the country of expansion and set them up in meetings with local business people, expats working in the country, market research companies, local innovators, regulators and economists. Let them have a first-hand experience. One of the biggest errors we have witnessed is a tendency of the “investment team” or the “Africa team” to want to keep it to themselves because it is their turf. This works well when things are going well but just as badly when help is needed.

3. Agree the corporate approach to new market expansion:
Who will lead this and take accountability for it – from an executive perspective and divisional perspective. Who will be involved or has a stake in this (key players will include technology, innovation functions in product, service and other customer value centres, digital pursuits, marketing etc.). If it is not you and you alone, ensure weekly updates and personal conversations at least bi-weekly. Achieve alignment on the minimum level of leverage and resourcing required, as well as where the cost will be carried. Align also on product development priorities and sign-off procedures, flexibility within marketing practices and branding. Agree on all parameters and communicate these over and over and over again (meeting notes, presentations, status summaries and updates, and verbal communication). Most of these stakeholders have very powerful home market priorities and incentives competing for attention and so the effort to embed the Africa priorities in their minds must be ongoing and consistent.

4. Agree the target market very clearly:
The selected target market is relative to all other options not being targeted. Each market presents it’s own set of “opportunities” (e.g. community based offerings, agriculture / farming linked products, corporate opportunities, entrepreneurial target markets, digital advanced groups, women, youth, the social development minded, rural and urban populations, etc.) but to keep strategic direction you need to focus on one or few. The distraction associated with inclusion of a broad range of stakeholders is that everyone will have a different opinion on where best to focus. You need to have properly understood the facts about each opportunity (size, affordability, cultural leaning, accessibility, price sensitivity, brand affinity, successful and unsuccessful brands etc.) leading to the reasons why you chose the specific focus. Unless you have understood each opportunity, stakeholder opinions will introduce a lot of unnecessary and expensive digging of ‘rabbit holes’ instead of executing while the opportunity is still ripe. It is important to consider options broadly and not just focus on your industry (while investigating Tanzania’s rural household behaviour we found a study about cooking ovens that provided more insights to living circumstances and preferences than the field research conducted).

5. Agree your LOCAL customer value proposition:
The key question is how to build market dominance within a reasonable time period. New investors, like new competitive entrants, need to know how they will extract value better than local competitors. If you are a retailer of any kind, how do you create a retail entertainment experience that fits the culture? If you are an insurer, what are the perceived risks people think about every day (not the same as in your country of origin) and how do they experience claims? If you are a bank, does the branch network really still add value or has it ever added value given the low levels of penetration? Technology will play a big role but it doesn’t have to have all the bells and whistles if you truly understand and focus on the pain points, nor does it have to be extremely expensive if you leverage partners already in the market.

6. Define a market approach that broadly addresses each stakeholder:
Taking all of the above into account it is important to have defined a broader market approach. Your market approach needs to address all stakeholder groups – the target market, investors, partners, industry associations, social and political influencers, at times the neighbouring community, regulators where legacy structures often make these more complex than the home market, and government per se. Failures in market expansions often stem from a pure focus on ROI and target market in the business case and not the cost of broader stakeholder management. See them all as key partners in finding the right acquisition, the right partners and also the right employees. As a foreign investor you also need to consider the perception that modern investors are similar to old colonialists, out for their gain at the expense of the local people. You should be clear on the role you plan to play to realistically enhance the local economy, what new opportunities will you create, sustainable conveniences or benefits you will offer to the public, and how do you add to industry development? This last benefit is of key importance to regulators who often lack the teeth to force changes in how local players behave.

7. Agree on your value chain operating model:
Think about the practicalities of investment and where it would be most effective. What do you need to own versus outsource, partner to develop, partner to leverage or eliminate all together? The more integrated your strategy with local businesses and stakeholders, the quicker execution can gain traction and the higher your chances of success.

8. Finally, agree on your implementation approach, timeline, metrics and potential exit strategies:
As discussed earlier, appetite for investments outside of ‘the core’ business in the home market are in continuous flux. Phase the implementation and link ‘go/no go’ decision points to clear metrics to keep everyone comfortable. Committing to small steps and limited investments is easier than large and permanent commitments. Be clear about exit options at each of the identified decision points and also plan scenario driven exit strategies far into the future. Geographic exits are as complex as the initial investment decision for all the points discussed earlier in this paper. Be clear on responsibilities within the group and and on milestones. Use an integrated, collaborative planning tool to keep all up-to-date and honest.
We have placed a lot of emphasis on depth and and thoroughness throughout this article. Our bias is in part a consequence of our role as advisors and as consultants brought in to try and address omissions made previously. The investment cycle is however a continuous process requiring rigour and constant feedback and measurement. SSA is a growing and dynamic region with the potential to generate strong returns for investors who treat the countries that they enter with the deep respect that they deserve.

For more information and insights contact us at M&D Associates – karola@madassociates.co.za or stephen@madassociates.co.za