Africa entry poses challenge to food industry
December 21, 2010
It hardly needs saying that the overture Wal-Mart Stores, Inc. has made to acquire Africa’s largest food retailer provides the strongest signal imaginable of the need for food manufacturers to examine at long last the opportunities of this vast, underdeveloped continent. By launching a study focused on the advisability of acquiring Massmart Holdings, Wal-Mart is alerting food manufacturers to prepare for competing to supply its systems, procedures and food relationships with products suited for Africa. Wal-Mart has not only shaped the food manufacturing industry in the United States to fit its requirements, but it has done much the same in the 14 nations outside America where it operates. As Wal-Mart expands globally to maintain corporate-wide gains, focusing on fast-growing developing nations, the implications for the food business become more complex.
Wal-Mart’s initial target in Africa is a retailer headquartered in Johannesburg, South Africa, the country where its operations are concentrated. But Massmart also has outlets in more than a dozen other countries in sub-Saharan Africa, where it focuses on food, but also offers non-food items. Its annual sales approach $7 billion, which were up 10% from the prior year. Much interest, not surprisingly, focuses on the indication that Wal-Mart has talked of a purchase price of 13 times EBITDA (earnings before interest, taxes, depreciation and amortization). Such a handsome price is interpreted as signifying the buyer’s belief that great opportunities exist for expanding Massmart’s business in countries outside South Africa.
This is affirmed by the Wal-Mart executive who will have responsibility for the new operation. “South Africa presents a compelling growth opportunity for Wal-Mart and offers a platform for growth and expansion in other African countries,” Andy Bond said. Analysts emphasized how important it is for Massmart to serve as a “springboard” for growth in other countries of Africa, particularly those that have stable political systems and fairly sound economies. Just like South Africa is the most developed retail market south of the Sahara Desert, it has a relatively advanced food business. Yet, even in South Africa, stability is far from a given. Only a few months after hosting a hugely successful World Cup competition, which itself defied expectations of chaos and collapse, the
country once again faces much internal turmoil.
In the rest of sub-Saharan Africa, food manufacturing is largely in a primitive stage. This is not all that different from the continent’s shortfalls in agricultural production that is itself an essential for both food manufacturing and food retailing. Thus, Wal-Mart will have to face the task of not just growing its retail operations, but of bringing along a system that will initially fall short of matching the efficient supply chain it has established in America and other developed nations.
A recent study by McKinsey, the consulting firm, indicates that Africa’s agricultural potential, mainly of food crops, is “massively larger” than its actual output. “While more than one-quarter of the world’s arable land lies in this continent, it generates only 10% of global agricultural output,” McKinsey says. Crop output has been growing quite modestly, at a rate of 2% to 5% per year. McKinsey says boosting food output requires four major steps: Increasing efficiency of numerous small farms; reliable access to financing, needed supplies and communication; stepping up investment to at least $50 billion per year; and assuring that infrastructure basics have priority. Even with this huge range of challenges, including the fact that past governmental promises of helping Africa’s food production have not materialized, McKinsey is optimistic. “Our work with food manufacturers and retailers shows that end-to-end supply chains that can effectively source produce from African farmers have great potential,” it says.
No food retailer has devoted greater attention to its relations with food manufacturers, and their sources of basic ingredients than has Wal-Mart. Just how these processes will work in Africa is going to be one of the great stories of the modern-day food industry.