Comment - Soft Drinks & Water - Into Africa
The Coca-Cola Co is upping its investment spend in Africa
This month, Richard Corbett turns his attention to the potential offered to soft drinks companies by the markets of Africa.
On the face of it, Africa would seem to be a turbulent place to do business. The world’s poorest continent seems to be constantly delivering negative headlines, whether it is civil war, corruption or Ebola.
Africa is a big place, though, and it could be argued that there has always been conflict or crisis going on in some part of the region; we live in a digital age and it just gets reported more. These headlines conceal an economy that last year expanded by 4%, ahead of the 3% global average, and that is what is attracting investors from all quarters.
One of those bigger investors is The Coca-Cola Co, which announced last week that it plans to spend more money on its operations in the region. A glance at beverage researcher Canadean’s figures would indicate that Africans do not drink many commercial soft drinks. If you discount North Africa, African’s drink less than 30 litres of soft drinks a year, which is barely half that of Asians and around 13 times less than North Americans. Coca-Cola would anticipate that, as the region's economies expand, so will the demand for commercial refreshment. The sweltering climate should ensure that the thirsts will need more quenching in this part of the world, and current per-capita levels should stretch further than in other markets.
The results suggest that this process is already happening; Canadean estimates that, by the end of 2013, the African soft drink market will have expanded by nearly 8%. The low per-capita and healthy growth rates represent opportunity.
To realise that opportunity will undoubtedly be expensive and it will take the resources of a major player like Coca-Cola to put in place the right infrastructure and bottling facilities to facilitate the expansion of the market. Today, much of Africa is served by imports and this keeps prices artificially high and out of reach of ordinary Africans. More domestic production will mean lower prices. Existing bottling facilities will need to be brought up to scratch and that won’t be cheap.
The need to spend big on upgrading bottling facilities is reflected by the fact that a fifth of all soft drinks in Africa are still sold in refillable glass bottles. That figure contrasts sharply with the total global figure of less than 6%.
To release the potential of Africa, Coca-Cola will need to widen the availability of its products throughout the whole region and not just the affluent hotspots. Today, there remains a significant consumption bias towards Nigeria and South Africa. These two markets hold a quarter of the African population (not including North Africa) but account for 60% of the soft drinks consumption. Per-capita in South Africa is more than 140 litres and, in the longer term, this hints at the long-term potential that exists. If everyone in Africa drank at the same rate as the South Africans, then the market size would balloon to 130bn litres. Instead, the Germans drink more soft drinks than the whole of Africa.
Africa is attractive because it represents more of a blank canvas for soft drinks operators compared to, say, Asia. It does not have the consumer quirks that have shaped the Asian soft drinks market, where distinctive tastes, habits and trends have meant that consumption patterns are less conventional. Carbonates make up just a fifth of sales volumes in Asia, while they account for 46% of Africa's sales. That will appeal to Coca-Cola, as will the fact that there will not be such stiff competition from localised still drink products.
In terms of local companies too, Coca-Cola and other international players will not have to compete with strong local rivals. There will not be the local foibles that come with doing business in China, and their investments will not be subject to the political issues that have often plagued the big player’s spends in India.
It would be naïve to not acknowledge the risks in Africa but, in reality, they are not as pronounced as might be perceived, based on the media coverage. Of course, there are no-go zones but, in fairness, there are places all over the world which are no less dangerous. I wouldn’t want to be selling soft drinks in East Ukraine at the moment.
As the economy expands, Africans will have more to spend on their soft drink refreshment and now is the time to be putting in place the structure to reach nearly 1bn consumers. Canadean believes that, between now and the end of 2019, the African soft drinks market will have jumped by nearly a third.
That is not explosive growth when compared to Asia and the Middle East, but then, Africa will be seen as long-term bet by those putting the money in.
The Coca-Cola Co has said smaller pack sizes are driving "a tremendous amount of positive growth" in the US as it looks to drive performance through improving price/mix....
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