Olam eyes expansion in West African packaged food sector

Olam eyes expansion in West African packaged food sector

Olam International's acquisition of Nigerian dairy group Kayass highlights the growing investment in the country. The move contributes to Olam's increasing presence in the Nigerian packaged food industry and the agribusiness giant intends to expand its food production base in the country further. Katy Askew reports.

When Singapore agribusiness group Olam International unveiled its US$66.5m acquisition of Nigerian dairy firm Kayass Enterprises earlier this month, the firm highlighted the underlying "natural" growth drivers offered by the market that it is entering.

"The changing demographic profile, increasing urbanisation of the population and greater discretionary spending power are driving strong growth in the processed packaged food segments across Africa," management told analysts during a presentation on the deal.

According to figures published by the United Nations, Africa will witness a greater level of population growth than any other region of the world - with the population of the region expected to double to 2bn people by 2050.

Oil-rich Nigeria, in particular, is gaining popularity among investors who are drawn to western Africa's rapidly expanding and urbanizing population and growing middle class.

The size of Nigeria's domestic market is significant, with a population topping 158m people. It is the largest nation in western Africa and accounts for about 50% of the total population of all 15 countries in the region.

Nigeria's economy is underpinned by the country's oil sector and the government has taken steps since 2008 to diversify. GDP rose strongly in 2007-11 because of growth in non-oil sectors as well as robust global crude oil prices, reaching a total of US$414.5bn - or about 60% of GDP in western Africa.

These factors have contributed to strong growth of the FMCG sector in the country. According to data collected by research firm Euromonitor International, Nigeria's FMCG market increased by 15.6% between 2001 and 2010 - ranking only behind Russia internationally in terms of the speed of its expansion. And this rapid growth is expected to continue. The Nigerian FMCG market is expected to grow to by 8.7% between 2011 and 2020, increasing to a total value of around US$125bn.

During its analyst presentation, Olam said Nigeria is the second-largest market for packaged foods in Africa and the group insisted demand is growing.

According to Patrick Yau, an analyst with Citigroup in Singapore, Olam is well-placed to take advantage of this growing opportunity. Yau says Olam's long-standing operations in Nigeria make the country a "comfortable choice" for the group to expand in the food processing category.

"They have a meaningful network there and I'd expect that, over time, they would form a packaged products portfolio," Yau suggests.

Olam has operated in Africa since 1989 and the group's footprint is primarily based in agricultural commodities. Olam's strategy is focused on leveraging its significant sourcing capacity and distribution infrastructure across western Africa, where it already has a presence in the commodities sector, to develop its packaged foods interests.

Due to the high front-end investment costs of establishing a sales and marketing presence and distribution, Olam has indicated it will focus its drive into the packaged food category on the key markets of Nigeria, Ghana, South Africa, Cote d'Ivoire and the MBTN cluster (Mali, Burkina, Faso, Togo and Niger).

To this end, Olam has steadily expanded its interests in Nigeria, where it now sells products including tomato paste, pasta, noodles and seasonings. In February of this year, Olam acquired Titanium Holding Co, the manufacturer of OK branded biscuits and confectionery, and the company is continuing its march with the Kayass acquisition.

Olam has said its investment strategy in Nigeria focuses on the acquisition of local players who are active in high-growth categories and whose branded portfolios would benefit from its financial backing.  

According to DBS Vickers Securities analyst Mervin Song, the competitive environment in Nigeria is favourable for Olam as the landscape is dominated by regional players who lack the Singapore-based firms capacity to invest in their brands.

"Its main competition from our understanding is mainly local players at the moment who do not have the financial muscle to invest in brand building or advertising," Song tells just-food.

According to Olam, it is able to take advantage of this "still favourable" competitive landscape.

"Early entrant advantages are still available," the group insisted during its analyst presentation. "Followers choosing to enter five years from now will find it difficult and expensive to gain share."

Ian Luyt, of strategic advisors NOViROST, a firm that guides companies on investment in emerging markets, concurs that the growing demand propelling the growth of the packaged food sector in Nigeria is attracting growing international investment.

"The country is currently the most favoured one in private equity investment terms," Luyt says, pointing to a recent survey commissioned by fund manager Invest AD and written by the Economist Intelligence Unit.

The survey showed just over half of investors interviewed believe Africa will be the most attractive region for investment over the next decade and, by 2016, all those polled indicated they intend to have some investment there, with a third expecting to allocate at least 5% of their total funds to the continent.

Alongside the pull factors of population growth and economic expansion, Luyt says international investors will be attracted to Nigeria by its favourable regulatory environment.

"Nigeria is in the World Bank's top third of countries in terms of investment policy including investor protections, has liberal exchange controls, allows foreigners ability to own 100% of a local company and also a favourable tax regime," Luyt tells just-food.

However, there do remain some significant barriers to expansion in Nigeria. Not insignificantly, the country is is woefully short of reliable energy supplies. Despite its role as a big exporter of crude oil, a succession of corrupt and ineffective governments have left the local refinery capacity under-invested and unable to keep up with demand.

Transportation oligopolies and an under-invested road and rail network mean freight costs can be high, while communications are similarly lacking due to under-investment.

Since 2008, the Nigerian government has purportedly taken steps to address some of these issues. According to the CIA World Fact Book, Nigeria's government has taken moved to pursue economic improvement and implement market-oriented reforms urged by the International Monetary Fund, such as modernising the banking system and removing market-distorting subsidies.

"The government is working toward developing stronger public-private partnerships for roads, agriculture, and power," the Fact Book reveals.

Olam has indicated it plans to pursue further growth in the market by investing in its brands and production capacity. The group has also indicated it is keen to "actively build" its M&A pipeline.

However, Olam could soon be up against a greater level of international competition as it looks to grow its packaged foods business. In spite of some significant logistical and operational challenges, Nigeria's investment fundamentals remain attractive and we could well see multinational interest in the market increase in the next few years.