Surging Food Demand: Where Are The Opportunities?
BMI View : A growing African middle class is boosting demand for food products across the continent, and several countries are well-placed to tap into this market. We identify producers and retailers in South Africa and Kenya as having strong potential. While production of processed foods will gradually increase, retailers and exporters in countries like Brazil are also set to profit from growing African consumption.
African countries spend over US$60bn annually importing food for their growing populations, but the continent has the potential to become a major food exporter. Huge tracts of unused arable land, low fertilis er use, and poor irrigation offer immense scope for improving yields, which are among the lowest in the world. Even small improvements could significantly boost production, creating export industries and, potentially, millions of new jobs in a labour-intensive sector.
Interest in this untapped potential is growing as a rising middle class boosts African demand for food products (especially for processed and packaged food), creating a continental food market that the World Bank estimates could be worth US$1trn in 2030. While exporters in Asia and Brazil stand to gain the most in the short term, BMI believes that food producers, processors, and shippers in Kenya and South Africa and retailers Nigeria are all well-placed to serve the growing African consumer market.
|A Growing Consumer Class|
|Africa - Middle Class By US$ Daily Expenditure, Millions|
|South Africa - Agricultural Production, US$mn|
South Africa: A Cut Above
Among Sub-Saharan African (SSA) countries, South Africa is distinguished by the scale, development, and global reach of its agribusiness sector. The country is home to major food producers and, almost unique in its region, exports high value-added food products, notably wine. As food demand across Africa rises, South Africa's transport connections with neighbouring countries should help boost exports.
On the commercial side of the equation, BMI believes that South African companies such as Shoprite and Massmart (the latter owned by Wal-Mart), which already have operations across Southern Africa, are well-placed to benefit from rising consumer spending power. Shoprite's Freshmark division, which sources and distributes food for the company, is expanding its capabilities just as the growth of the formal retail sector will make food logistics a booming business across the region.
While business conditions vary across Africa, BMI believes that South African firms combine the scale necessary to expand across borders with an understanding of local conditions that provides an advantage over other foreign competitors.
Kenya: Emerging Agribusiness Hub?
One of the key obstacles to the growth of the agribusiness sector is the difficulty of trading across national borders; small domestic markets prevent the development of economies of scale and keep input costs high. In Kenya, however, close trade links with both Uganda and Tanzania and with large markets in Europe have seen the country develop a major food export industry. While still based on tea, Kenya now has a thriving vegetable export sector and the country's well-developed dairy industry is looking to expand.
BMI believes that Kenyan firms' ability to manage complex supply chains and experience dealing with European import and health requirements will help them to expand across Africa's often trade-distorting borders. Sugar producer Mumias is boosting production to meet the country's domestic demand while agricultural firms like Kakuzi are increasing their exports of higher-value products such as packaged avocados and, through a joint venture with Del Monte, pineapples. Kenya is also developing a domestic packaging and processing industry, based around firms like meat producer Farmers' Choice, a value-added sector which is vital for creating jobs and which the government is keen to support through its ambitious Vision 2030 plan.
Kenya's position as the economic hub of the East African Community (EAC) encourages local firms to expand into a growing market of over 130mn pepole; Nairobi-based Nakumatt Holdings proudly boasts of being the leading retail player in Uganda and Rwanda while competitor Uchumi has announced its vision of being the 'supermarket of choice' across the EAC. While troublesome bureaucracy continues to pose barriers to a true common market, no similar level of cross-border expansion exists in other regional blocs, giving Kenyan firms (as well as Ugandan ones, like meat producer Fresh Cuts) an advantage over many rivals.
Nigeria: Retail Growth, Production Potential Unlikely To Be Realised
In Nigeria, however, a huge domestic market makes the difficulty of trading across borders a minor concern. Even so, BMI believes that the country's massive agribusiness potential is unlikely to be realised soon, and we expect weak logistics and a difficult business environment to mean that foreign food exporters will profit most from the rising spending power of Nigeria's 160mn people.
|The Great Tomato Conundrum|
|Nigeria - Unmanufactured Tomato Production, 1000s of Tonnes (LHS) & Tomato Product Imports, US$mn (RHS)|
Nigerian imports of tomato products, which increased by a factor of 42 between 2003 and 2010, have become an issue of serious national debate, with the head of the central bank asking why a country that is one of the world's top tomato producers is almost totally dependent on imported Chinese tomato paste. Despite attempts by local conglomerates such as Dangote and Transcorp to develop processed food industries, the country imports almost all of its packaged and prepared food, a bill which is growing as the country's population increases.
While Nigeria's huge domestic market gives it great potential, BMI believes that t he same infrastructure, labour, and business environment issues that have discouraged the development of other light manufacturing will harm attempts to boost Nigeria's local production of processed and added-value foods in the short term .
Domestic winners from Nigeria's growing food consumption are more likely to be retailers such as Artee Group 's Park'n'Shop rather than food producers. South Africa's Shoprite is also expanding in the country.
|Imports On The Rise|
|Africa - Chicken Meat Production & Imports|
Brazil: Tapping Into The African Growth Story
The challenges facing domestic producers are even graver in other smaller African countries, as poor trade connections and bureaucratic barriers prevent regional trade. It is often cheaper to source food products from Latin America or Asia rather than produce them domestically or buy them from neighbouring countries. Poor infrastructure means that spoilage rates are high; it is easier to ship frozen food from China to Nigeria than from Benin to neighbouring Mali.
The growing role of foreign suppliers in meeting African food needs is shown by the state of the continent's chicken industry. In 1990 Africa bought a fifth as much chicken abroad as it produced at home, but by 2010 the continent was importing almost a quarter as much as it produced domestically.
Brazilian firms control 60% of the imported chicken market in many countries, and BMI believes that the country's well-developed meat industry and low feed costs leave it well-positioned to profit from rising meat consumption in many African countries. Rising incomes are also boosting Africa's imports of Chinese frozen fish, and of packaged and processed food of all kinds.
Bringing Production Home
In the medium term, African transportation, shipping, and retail firms should profit as middle class consumers from Luanda to Kampala begin to buy more foreign products. Over the longer term, we believe that domestic production is likely to grow through joint ventures between African and foreign firms along the lines of the investments made by SABMiller and Diageo in West Africa's growing beer market.