Kellogg’s Braves the Odds

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Despite the economic slowdown, Crusoe Osagie writes that Kellogg’s recent plan to expand in Nigeria is an unexpected but welcome move

That Nigeria is currently faced with enormous economic challenges is to put it mildly. In the past decade and half, Africa’s largest economy has not been faced with such grim socio-economic conditions as it has now been confronted with in the past six to 10 months.

Crude oil revenue has plummeted by almost 60 per cent, industrial capacity utilisation has been stagnant, unemployment level has risen, inflation has hiked and the disposable income of the average Nigerian is at an all -time low.
The Swiss multinational food and beverage company Nestlé, which recently admitted that it overestimated the size of Africa’s growing middle class was stating clearly a condition that is slowly dawning on both operators and regulators of the Nigerian economy.

Grim as this state of the Nigerian economy may be at the moment, the world’s second largest snack food maker, Kellogg Company (better known as Kellogg’s) has however not been deterred from expanding its presence in Nigeria.

The Nigerian economy expanded 3.96 per cent year on year in the first three months of 2015, the slowest growth since the last quarter of 2012. This marked the third straight quarter of slowdown as lower oil prices and supply constraints dragged the oil sector down. Q1 2015 year on year real GDP growth was lower by 198 basis points and 225 basis points relative to Q4 2014 and Q1 2014 figures, respectively. Drilling into components, year on year non-oil GDP growth was the slowest in ten consecutive quarters at 5.6 per cent–260 basis points lower than growth recorded in corresponding quarter of 2014 and 80 basis points softer than in Q4 2014, whilst oil GDP growth reversed the expansion of Q4 2014, falling 5.1 per cent year on year in Q1 2015.

Such had been the lameness of the nation’s economy, yet in a move bound to please Nigeria’s trade and investment agencies, Kellogg’s last week announced plans for a $450 million joint venture with Singapore’s Tolaram Group to develop breakfast foods and snacks for the West African market, with the focus on Nigeria.
The deal comes as multinational consumer groups including Unilever and Diageo – owner of Guinness – are increasing their investments in their Nigerian units in an effort to capture the country’s price-conscious shoppers and help boost their profits.

According to a report by the UK-based Financial Times (FT) newspaper, McKinsey estimates that Nigerian households with incomes of more than $5,000 a year will increase from 20 per cent of the population to 27 per cent by 2020, putting them within the target customer base of formal retail chains.

“The size of the economy, its growth rate and changing demographics” were the reason Nigeria was the right first move, said Kellogg’s. “And we have found a suitable partner.”

But the slowdown in Nigeria’s economy, fuelled by the collapse in the price of crude oil and the weakening naira, has hurt consumer spending, creating a tough business environment for Kellogg’s and other rivals pushing into the market.

Nestlé, which has invested close to $1 billion in Africa over the past decade, said in June that turnover in the region had failed to deliver in line with initial growth forecasts set out in 2008, when it stepped up its expansion in the region.

As a result, the Swiss-based group is cutting 12 per cent of its workforce in 21 countries across the continent, excluding South Africa.

With much of the population still focused on quantity, rather than quality of staples, much of Kellogg’s success will be in pricing its products correctly.

Close to 13 million Nigerians live on between $1 and $2 a day, according to data from the International Finance Corporation (IFC), the World Bank’s private sector arm, and are used to a traditional breakfast of powdered milk and bread or fried dough and eggs.

A box of Kellogg’s Special K cereal costs the equivalent of $5.50 in a country where the minimum wage of government workers was raised to $90 a month about three years ago.

“Fast-moving products and impulse purchases sold for between 5 and 25 cents are the biggest opportunity,” said Omair Ansari, frontier markets consumer analyst at Renaissance Capital.

Kellogg’s, which also makes Pop-Tarts and Pringles crisps, said that rather than increase its cereal offering, it would aim to push its lower-end products to consumers in open-air markets in Nigerian cities such as Lagos, reported FT.

The effort to move the US food group’s products far and wide should be enabled by Tolaram’s Nigerian distributor Multipro’s 450,000 “touch points”.

The deal also gives Kellogg’s the right to buy into Tolaram African Foods, the company that makes and sells Indomie, the leading instant noodle brand in the country that is a mainstay in the Nigerian diet. A single serving size packet sells for the equivalent of 18 cents.

“Now, with the Nigerian economy under strain, single-use small packets of snacks like biscuits and fruit juice boxes are the best bet as long as the cost of packaging is not passed on to the consumer,” said Ahmed Maswood, Vice-President of Godrej, the Indian company which sells a range of beauty products in Nigeria.

Partnering with a strong, local distribution partner and adapting products to suit its target market, Kellogg’s may be able to avoid the mis-steps that Nestlé made on the continent by focusing on the elite minority rather than the everyday majority.

That has been Unilever’s strategy in the country where it has created several brands of varying affordability, including a low-cost margarine that does not require refrigeration. The Anglo-Dutch group recently offered to increase its equity stake from 50 per cent to 75 per cent in its separately listed subsidiary Unilever Nigeria to capitalise on expected growth in the country. The deal is pending regulatory approval.

“No one can deny the current challenges, but all emerging markets are volatile and our focus is the Nigeria consumer where, if you understand their needs and develop the right brands at the right price, there is huge untapped potential in a fast-changing market,” said Bruno Witvoet, Head of Unilever Africa.

Whether the investment move will turn out to be a smart one or one that would be regretted is too early to predict at the moment but some analysts say it may be one that will return investment.

According to experts, because the products targeted by the investment are food products that will appeal to the consumers at the bottom of the economic pyramid it stands a chance of riding the tide in a Nigeria economy that has left only very little to be desired in recent times.

Culled from: http://www.thisdaylive.com/articles/kellogg-s-braves-the-odds/221418/

Despite the economic slowdown, Crusoe Osagie writes that Kellogg’s recent plan to expand in Nigeria is an unexpected but welcome move

That Nigeria is currently faced with enormous economic challenges is to put it mildly. In the past decade and half, Africa’s largest economy has not been faced with such grim socio-economic conditions as it has now been confronted with in the past six to 10 months.

Crude oil revenue has plummeted by almost 60 per cent, industrial capacity utilisation has been stagnant, unemployment level has risen, inflation has hiked and the disposable income of the average Nigerian is at an all -time low.
The Swiss multinational food and beverage company Nestlé, which recently admitted that it overestimated the size of Africa’s growing middle class was stating clearly a condition that is slowly dawning on both operators and regulators of the Nigerian economy.

Grim as this state of the Nigerian economy may be at the moment, the world’s second largest snack food maker, Kellogg Company (better known as Kellogg’s) has however not been deterred from expanding its presence in Nigeria.

The Nigerian economy expanded 3.96 per cent year on year in the first three months of 2015, the slowest growth since the last quarter of 2012. This marked the third straight quarter of slowdown as lower oil prices and supply constraints dragged the oil sector down. Q1 2015 year on year real GDP growth was lower by 198 basis points and 225 basis points relative to Q4 2014 and Q1 2014 figures, respectively. Drilling into components, year on year non-oil GDP growth was the slowest in ten consecutive quarters at 5.6 per cent–260 basis points lower than growth recorded in corresponding quarter of 2014 and 80 basis points softer than in Q4 2014, whilst oil GDP growth reversed the expansion of Q4 2014, falling 5.1 per cent year on year in Q1 2015.

Such had been the lameness of the nation’s economy, yet in a move bound to please Nigeria’s trade and investment agencies, Kellogg’s last week announced plans for a $450 million joint venture with Singapore’s Tolaram Group to develop breakfast foods and snacks for the West African market, with the focus on Nigeria.
The deal comes as multinational consumer groups including Unilever and Diageo – owner of Guinness – are increasing their investments in their Nigerian units in an effort to capture the country’s price-conscious shoppers and help boost their profits.

According to a report by the UK-based Financial Times (FT) newspaper, McKinsey estimates that Nigerian households with incomes of more than $5,000 a year will increase from 20 per cent of the population to 27 per cent by 2020, putting them within the target customer base of formal retail chains.

“The size of the economy, its growth rate and changing demographics” were the reason Nigeria was the right first move, said Kellogg’s. “And we have found a suitable partner.”

But the slowdown in Nigeria’s economy, fuelled by the collapse in the price of crude oil and the weakening naira, has hurt consumer spending, creating a tough business environment for Kellogg’s and other rivals pushing into the market.

Nestlé, which has invested close to $1 billion in Africa over the past decade, said in June that turnover in the region had failed to deliver in line with initial growth forecasts set out in 2008, when it stepped up its expansion in the region.

As a result, the Swiss-based group is cutting 12 per cent of its workforce in 21 countries across the continent, excluding South Africa.

With much of the population still focused on quantity, rather than quality of staples, much of Kellogg’s success will be in pricing its products correctly.

Close to 13 million Nigerians live on between $1 and $2 a day, according to data from the International Finance Corporation (IFC), the World Bank’s private sector arm, and are used to a traditional breakfast of powdered milk and bread or fried dough and eggs.

A box of Kellogg’s Special K cereal costs the equivalent of $5.50 in a country where the minimum wage of government workers was raised to $90 a month about three years ago.

“Fast-moving products and impulse purchases sold for between 5 and 25 cents are the biggest opportunity,” said Omair Ansari, frontier markets consumer analyst at Renaissance Capital.

Kellogg’s, which also makes Pop-Tarts and Pringles crisps, said that rather than increase its cereal offering, it would aim to push its lower-end products to consumers in open-air markets in Nigerian cities such as Lagos, reported FT.

The effort to move the US food group’s products far and wide should be enabled by Tolaram’s Nigerian distributor Multipro’s 450,000 “touch points”.

The deal also gives Kellogg’s the right to buy into Tolaram African Foods, the company that makes and sells Indomie, the leading instant noodle brand in the country that is a mainstay in the Nigerian diet. A single serving size packet sells for the equivalent of 18 cents.

“Now, with the Nigerian economy under strain, single-use small packets of snacks like biscuits and fruit juice boxes are the best bet as long as the cost of packaging is not passed on to the consumer,” said Ahmed Maswood, Vice-President of Godrej, the Indian company which sells a range of beauty products in Nigeria.

Partnering with a strong, local distribution partner and adapting products to suit its target market, Kellogg’s may be able to avoid the mis-steps that Nestlé made on the continent by focusing on the elite minority rather than the everyday majority.

That has been Unilever’s strategy in the country where it has created several brands of varying affordability, including a low-cost margarine that does not require refrigeration. The Anglo-Dutch group recently offered to increase its equity stake from 50 per cent to 75 per cent in its separately listed subsidiary Unilever Nigeria to capitalise on expected growth in the country. The deal is pending regulatory approval.

“No one can deny the current challenges, but all emerging markets are volatile and our focus is the Nigeria consumer where, if you understand their needs and develop the right brands at the right price, there is huge untapped potential in a fast-changing market,” said Bruno Witvoet, Head of Unilever Africa.

Whether the investment move will turn out to be a smart one or one that would be regretted is too early to predict at the moment but some analysts say it may be one that will return investment.

According to experts, because the products targeted by the investment are food products that will appeal to the consumers at the bottom of the economic pyramid it stands a chance of riding the tide in a Nigeria economy that has left only very little to be desired in recent times.

Culled from: http://www.thisdaylive.com/articles/kellogg-s-braves-the-odds/221418/

 

 

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