December 17, 2012
Interviewed by: David Snow
Video Clip
Login to view full video

The African Consumer

The private equity opportunity in Africa is directly tied to the rise of the African consumer, an incredible story that includes 200 million people across the continent rapidly moving out of poverty. In this Privcap thought-leadership session, three veterans of the African private equity market analyze these trends and share case studies of consumer-facing deals.

“The African Consumer” is the second of a three-part series on private equity in Africa with Hurley Doddy of Emerging Capital PartnersFash Sawyerr of Actis, and Graham Stokoe of EY.

The private equity opportunity in Africa is directly tied to the rise of the African consumer, an incredible story that includes 200 million people across the continent rapidly moving out of poverty. In this Privcap thought-leadership session, three veterans of the African private equity market analyze these trends and share case studies of consumer-facing deals.

“The African Consumer” is the second of a three-part series on private equity in Africa with Hurley Doddy of Emerging Capital PartnersFash Sawyerr of Actis, and Graham Stokoe of EY.

The African Consumer

 David Snow, Privcap: Today we are joined by Graham Stokoe of EY, Hurley Doddy of Emerging Capital Partners, and Fash Sawyerr of Actis. Gentlemen, welcome to Privcap today. Thanks for being here.

We’re talking about a big topic, private equity in Africa. And I think when people say “private equity in Africa,” those—like all of you who are very active in the region—first think of a huge trend, which is the rise of the African consumer, the growing prosperity at all levels across Africa. That is driving private equity opportunities.

I’m fascinated to hear from all of you your perspectives on this opportunity, maybe starting with Graham. You work on a lot of different deals in a lot of different sectors. Can you talk specifically about the most important trend you’re seeing among consumers, and how this is leading to private equity investment?

Graham Stokoe, EY: Well, I think firstly in consumers, it’s really about the population, and a young population in Africa, now being able to afford branded products, that rise in ability to buy those products: branded FMCG products. An increase in, I guess, the middle-market sector and really exponential growth—a lot smaller market, but exponential growth. And that mid-market, I think, has also been very interesting. And then also, the drive of organization and being able to tap into those markets.

 

Snow: Fash, can you talk about some of the most important trends that you’re seeing? And also, your firm recently did a textile or rather a fashion deal, and maybe you can kind of weave that into your analysis.

 

Fash Sawyerr, Actis: The African consumers story is just absolutely fascinating. I mean, for those that have observed the emerging markets over a period of time, Africa is poised to go through the sort of explosive consumer growth that markets like Brazil, India, China have gone through and are still going through, but in the really exponential phase of its growth. When you look at the statistics, I mean, it’s staggering, right?

In the next 10 years, over 200 million people on the continent are going to emerge from poverty into sort of a lower middle class where, for the first time, they will have the disposable income to actually consume beyond just the absolute bare basics of life. And as Graham said, that throws up a fantastic opportunity in terms of branded consumer products. The projections are that the growth in consumer spending in Africa will be something like $500 billion between the difference between consumer spending now and consumer spending in 2022. So again, there’s just a wall of extraordinary expenditure that is coming the way of African consumer.

Just to quickly talk about our investment, we in 2010 invested in a business called Vlisco Group, which is a manufacturer of African wax textiles. And what’s interesting about this business is it’s actually been around for 160 years. It’s a Dutch-headquartered business and produces this product, which is an incredibly aspirational product in Africa. And it’s called Dutch wax, and it’s been producing this for 160 years.

The owners of the business prior to Actis’s acquisition were in distress, and this is the one profitable business in their portfolio. And so we were able to buy this business at a very good price. We bought it at 4.6 EBITDA. And the potential we saw was to take this brand, iconic brand that had been around for 160 years, that commands a price premium relative to the imported Chinese fabric of four times and has sustained that price premium over decades. We saw the kernels of a fantastic kind of branded business in Africa. And because of the previous parentage of this business, it was underinvested in, both in terms of manufacturing capacity, but also in terms of the brand and product innovation and so on.

So what we’re busy doing is investing both in the production side, in product innovation, expanding this product into new markets in Africa. And also, we’re growing as quickly as we can a retail proposition. Those that know Africa will know that formal retail is in its infancy in Africa. So for example, in Nigeria, the top six clothing apparel retailers account for only 3% of the entire clothing market in Nigeria. The vast majority is informal markets. But African consumers want a better retail experience, and so we see this as a great opportunity and a great shop window for our brand. So we’re investing quite heavily in retail.

 

Snow: Very briefly, what region of Africa is best—or rather, in what region is Vlisco best known?

 

Sawyerr: West Africa. So Ghana, Nigeria, Côte d’Ivoire, and then further south in the DRC. But as I say, we sell into 20 different markets in sub-Saharan Africa today.

Stokoe: How do you think of expanding into those new markets, maybe those cities, where maybe the brand is less known in those cities? I mean, do you see people moving between cities and growing new cities, second cities, in the various countries?

Sawyerr: It’s interesting. Because what we’ve discovered in the two years that we’ve had the investment is, where the brand is not known, you can’t just turn up and start selling stuff, because people don’t know the brand. So the strategy that we’re using is to use what we call points of influence, right? Either a completely standout retail proposition… So for example, in Kinshasa, we’ve recently put in place a wonderful retail store that’s built a huge amount of hype.

And the other thing we do is we use influential individuals in those markets, either clothing designers or celebrities or eminent people that we think fit the brand profile of the Vlisco Group. And they become our ambassadors, and we sort of build organically through what we call that point of influence. But you’re right, you can’t just expect to sort of sell millions and millions of yards of fabric when the brand doesn’t have the history that it has in Nigeria and Ghana. So you have to get creative about how you do it.

But what’s interesting is—what we find is—when you do it well, when you have an African product that’s of high quality, that’s marketed well in a great proposition, other African consumers respond to that. And we are seeing that.

 

Snow: Hurley, your firm ECP is very active in the consumer space. Can you talk about what the biggest trends are in the way that you invest in the consumer space? And you also have invested in a chain of coffee houses called Java House, and maybe you could again weave that into your analysis.

 

Hurley Doddy, Emerging Capital Partners: If you look 10 years from now, there’s going to be more formal retail. There’s going to be more restaurants. There’s going to be many businesses that are going to benefit from this. And finding the right business is the challenge.

Some of it is just a question of scale. We were very interested in the quick -service restaurant business. If you look at the average city in America, in two blocks you could probably find 15 different stores and burgers and pizza chains and all these type of things. When we look in Africa, you just don’t have nearly that type of scale. So we kind of did a top-down search looking for a good quick-service chain.

We did end up with a company called Nairobi Java House. It is based in Kenya. It has 14 quick-service restaurants. That makes it the largest one in the country with that type of scale. But for us, there’s a huge amount of room to expand those businesses, both within Nairobi, but also move out to other cities in Kenya itself, and then moving the brand into East Africa.

And it is something where you want to have a good product. You want to have an aspirational product that the consumers are getting more sophisticated about. But that’s something, I think, we’ve been able to deliver in Nairobi Java House.

Sawyerr: Hurley, what are you finding is the biggest challenge to rapid rollout of new stores? Because the thesis of rolling out new stores is absolutely spot on. I mean, we looked into that as well. In East Africa, Kenya specifically, what are the challenges that you find in actually achieving the kind of pace of rollout and growth that you’d ideally want to have?

Doddy: One thing is just being able to maintain the quality, and that’s going to be key. You were talking about the importance of the brand name. It’s also important not to screw up the brand name by giving people a lousy product. When you open it, it needs to be the same. It needs to look the same. You gotta get a new commissary going. That would be the main one.

Of course, management is always a question. You really need to get a good training program going. Now, it has a benefit, too. You get good people that way, because they know they’ve got a shot, relatively rapidly, in moving up in the organization. They can be an assistant manager in one store; we’re going to send them out to someplace else. But I’d say those are the two ones.

Another interesting thing: It’s all a little bit interrelated—just the real estate, the malls…and that’s still a very new concept in Africa. And it drives, I’m sure, the apparel sales. You need the appropriate mall. The mall guys need us to put our stores in there. But it’s all kind of growing together, and I think it’s something that’s going to be accelerating, given the success of it.

 

Stokoe: Hurley, how do you overcome that mall scenario? I mean, do you have to actually go out of the sort of U.S. or South African framework and actually get a good store? It sounds like you had a great store in Kinshasa to market apparel. Do you need to think of that dynamic rather than a typical South African or U.S. mall-type dynamic, in waiting for other investors to make that real estate investment?

Sawyerr: I think you have to do both. You have to seize on the mall opportunities when they present themselves. And fortunately for us, Actis, we have a real estate fund, and malls is a big part of what we do. So we’ve done the Ikeja Mall in Nigeria, we’ve done the Accra Mall, and we’ve got various other mall projects. So that’s good. So we kind of have a little bit of a window in terms of what’s happening in some of the major cities in terms of malls.

But you also have to look at high-street opportunities. So the Vlisco store I talked about in Kinshasa is a classic sort of high street. And that’s more expensive, right? Because you’re kind of taking something that was probably used for something completely different—it might have been an office or whatever—and you’re having to completely repurpose it. And it’s more expensive than if you were just to occupy mall space. But our ambitions are such that we can’t just wait for malls to happen, and you kind of have to do both.

Doddy: The flip side, too, is it’s more visible than it would be. It’s not London, where there’s stores on both sides that are having nice, shiny products.

You get it going there, people are going to notice.

 

Sawyerr: For us in the Vlisco Group, it’s probably the single most powerful piece of advertising that we can do for our brand is our retail stores. That’s sort of the beacon of the brand. So you’re right, and the high-street format works very well in that regard.

 Snow: I’d like to ask a final question, and it has to do with a term that’s often used in emerging markets: the pyramid. So in any society, there’s very many levels of consumers by wealth, with the base of the pyramid being people who, as Fash mentioned, may be coming out of poverty for the first time. And then there’s the wealthier consumers at the top. Are there attractive plays to be had up and down the pyramid? And where are you most focused?

 

Sawyerr: Yeah, I think there are. I think your business model needs to be slightly different. So I would say that the starting point, I think, for attractive consumer spaces in Africa probably starts with products that more wealthy people would consume. And so that’s probably where the industry’s been focused, I’d say, over the last decade or so.

I think that the opportunities in the bottom of the pyramid are absolutely there. But you need platforms of scale to be able to really tap into that, because you’re talking about individual tickets that are very small. So I think to actually build a business of scale and profitability, I think you need to have scale. And I think some of the areas where we’re going to see those opportunities come up, I’d say, are in the food and beverage space, where folks are moving from unbranded foods, when they’re at a certain income level, to aspiring to consume branded foods. And you can be lower middle class, I would say, you can be bottom of the pyramid, and still be able to afford, from time to time, branded foods.

So businesses that can create brands in that space—in fact, there are businesses that have brands in that space and are big—could be very popular and very successful. So I think there’s opportunities to play across the different socioeconomic levels. But you have to have the right business model to be able to do it profitably.

Doddy: I would just add, too, it’s a big pyramid. There’s just a lot of Africans. There’s a billion of them. If you look at a country like Nigeria, it’s the seventh-biggest in the world, 160 million people. Every slice of the pyramid is a lot of people.

It’s also, you can find them now because of the levels of urbanization that we’re talking about. It is more urbanized than India. It’s about 40% urban, so very close to what you have in China. There’s 50 cities that have a million people in them across Africa, so it means that you can find your slice of the pyramid.

And we were talking about people entering the consumer class. That’s really where they’ve got money to spend, a disposable income to spend. So those are the people we’re looking at. But even that is now maybe 350 million people. So there’s certainly room for many of these models to not just cater to the wealthiest people, but to really get that growing middle class.

Stokoe: I guess, Fash, what I wanted to see or ask is really: Do you take a branded product—maybe you’ve got multibrands—and has Vlisco at all considered the sort of branded levels which are at different consumer levels? And do you try and sort of target a wider—or diversify your product brands to target a wider—a consumer spending level or target market?

Sawyerr: Yeah. No, that’s a great question. And in the case of Vlisco Group, that’s exactly what we’ve done. So the flagship Vlisco brand, as I said, costs something like four times per yard a Chinese imported fabric. And so that is sort of an upper-middle-class product, if you’re being totally honest.

What we’ve done, though, is as part of the group, there are three other brands that we have. There’s the Woodin brand, which is mainly focused in Ghana and Côte d’Ivoire. We’ve got the Uniwax brand, which is in Côte d’Ivoire and does some export into other parts of West Africa. And then there’s GTP, which is a Ghanaian brand. And those brands all operate at a lower price point than the Vlisco Group, and that enables us to serve a much broader population. So that’s exactly the strategy that we’re adopting with the Vlisco Group.

And what’s interesting is, our Vlisco brand is growing at about 20% per annum, but what we call our domestic brands are growing even faster, because there’s just so many more people that can afford those products. And again, when you provide people great quality products and a differentiated consumer shopping experience, people respond well to that.

 

Expert Q&A with Graham Stokoe, Associate Director, Transaction Advisory Services, EY

Privcap: In addition to the audit and other services you provide private equity clients in Africa, are you also helping them source investments?

 

Stokoe: The key thing we’re focusing on, particularly in the last two years or so, is really being more proactive in the origination of opportunities. I think one of the key things for private equity to be successful is really finding these businesses. We may not have transaction specialists, but we’ve got experienced audit partners, tax partners, that are in these businesses, that are serving other good, growing businesses and really leveraging our network to be able to potentially source investments.

Privcap: Please talk about the EY network across Africa.

Stokoe: We’ve got offices in 34 countries across Africa. In the odd countries where we don’t have offices, I guess we would serve that from a neighboring country. However, in all the main centers that we’re serving, that’s where private equity is, from a transactions perspective.

We operate on a sort of hub-and-spoke model. So we have a fairly sizable team in Johannesburg, a growing sizable team in Nigeria in Lagos, and then in Kenya. But then also the spoke teams—a very, very strong team in Ethiopia. And then also, in the funding and structuring side, we’ve got a very strong team in Mauritius—and Mauritius is often key, not in the origination, but really in the support element from a private equity perspective. And we’ve got a really strong team there.

Register now to watch this video and access all content.

It's FREE!

  • CHOOSE YOUR NEWSLETTERS:
  • I agree to the Privcap terms of use and privacy policy
  • Already a subscriber? Sign In

  • This field is for validation purposes and should be left unchanged.