Africa’s promise gets Nestle on expansion drive

The world’s biggest food group Nestle is investing Sh11.5 billion in the Equatorial Africa region over the next three years, with Sh2.3 billion earmarked for the expansion of production capacity at its Nairobi factory.

While sales from Africa reached Sh240 billion in 2009, representing three per cent of global sales, the firm is keen on riding on the wave of the global economic recovery, which looks more certain in emerging markets than in the developed world that is in the eye of the Euro zone storm.

The firm’s 6.7 per cent, growth in sales in Asia, Oceania, and Africa was the highest, followed by Americas and Europe at 6.5 per cent and 0.3 per cent respectively.

With its divestiture from eye-care manufacturer Alcon expected to fetch Sh2.3 trillion this year, the food maker is searching for investment opportunities to stave off competition from its two European arch-rivals – Unilever and Danone.

The investments also come as analysts predict growth of the packaged foods market. Global Industry Analysts (GIA), for instance, projects the global baby foods and infant formula market to reach an estimated $23.8 billion by 2015, driven by changing lifestyles and increasing number of women in the workforce with disposable incomes. Some of the company’s products in the East Africa region include coffee brand Nescafe, baby food Cerelac, food additive Maggi and milk powder Nido.

Victor Juma spoke to Nestle’s global CEO, Paul Bulcke, on the investments and the company’s strategy in Africa.

What prompts this expansion drive?

This is not Nestle all of a sudden discovering Africa. We have been here for many years. We are deepening and accelerating our investment in the continent where we had around Sh3 billion in sales in 2009 and we are projecting that to grow by Sh1 billion in the next one year. Coincidentally, we also have the East African Community integrating and I would say this is beneficial to us. I’m visiting to familiarize myself with the region and to explore opportunities which have met our expectations. There are good opportunities here .

What is the breakdown of the investment?

We are investing about Sh4.2 billion to expand production capacities in the Nairobi and Harare factories so that they can serve both internal and external demand from neighbouring countries.

The remaining Sh7.3 billion will be used to build new factories in the Democratic Republic of Congo, Mozambique, and Angola. In addition, we will create 13 new distribution chains to add to the eight we have today. By scaling up our distribution capability we can increase our product presence in the Equatorial African region.

What impact will this investment have on Nestle?

As a result of this investment, we will be more than doubling our workforce, creating 750 new jobs. If more companies make similar investments, we will empower consumers to spend more, boosting demand for goods.

The recession impacted household spending abilities, leading to consumer price sensitivity. What is Nestle’s strategy to ensure consumers keep buying?

We have what we call popularly positioned products – PPP. Sometimes large companies have the tendency of bringing in products from the developed market which end up appealing to a small fraction of the population.

What we do is to manufacture products that appeal to the biggest segment of the local population. We revisit the whole marketing mix, meeting the different nutritional needs of consumers.

We package our products so that people can buy them in small, affordable sachets. We set the distribution network to make the products widely available. We have also changed our communication. Most of the customers who buy small sachets don’t watch television, so we reach them through radio.

Is the Sh11.5 billion input the beginning of increased investment by Nestle in Africa?

This investment over the next three years will create room for further growth. It sets a good foot print. We will invest as required by the nature of our business. We are not like an oil company that puts up a major operation and pulls out after some 15 years. We keep investing.

As a multinational, what opportunities do you see in the growing economic integrations like the EAC, Southern Africa Development Co-ordination Conference (SADDC), and the Common Market for Eastern and Southern Africa (Comesa)?

We see a lot of opportunities in the integrations. They will ease movement of goods and labour across the borders. Our Equatorial Africa region is created to take full advantage of the business incentives offered by the different regional integration groups.

And 18 of the 20 countries which make up our presence in the region belong to one or more of these trading blocs, with the exception of Angola and the DRC.

Do the ongoing regional integrations offer opportunities for consolidating operations like manufacturing?

Our factory foot print is informed by three factors. One is the consumer, where we ensure a factory serves the needs of the local market.

Second is the corridor. The DRC for example is a huge country but accessing it is difficult, so setting up a factory there will ease the supply problems. The third factor is the regional bloc where for instance we have the factory in Kenya serving the EAC market. So we believe the current spread of factories fits within this overall strategy.

What are your thoughts on the regulatory environment in the region?

We feel the cost of regulation the most from the fact that our operations are headquartered here in Nairobi.

We have a multinational team which needs to travel and live in different countries. It is difficult to get residency, work permits, and visa to travel outside, especially with regard to Angola.

This is a challenging aspect of our business but we are glad that Kenya is scrapping work permits for EAC nationals. In general, Africa is not known for light regulation and I believe there is room for further reduction of red tape.

What importance do you attach to Africa and other emerging markets compared to developed countries?

It is not only about growth but also value. The developed market has an ageing population and we can create products to meet their needs. We project the share of revenues from emerging markets with a younger population to grow from the 35 per cent seen last year. We are investing in both categories.

Nestle is investing in countries that are still considered to have high political risks, what is your risk assessment of the current investment?

Africa has seen general economic growth and this usually goes hand in hand with political stability. Is there a risk? Yes, there are risks everywhere, a good example but a different one being the economic recession. We are looking at the long term, which is why we are making these investments.