Understudying the Nigerian opportunity for foreign Investors, we help you answer four basic questions: Does the opportunity exist for your Business? How big is the opportunity for your Business? What are the challenges for accessing this opportunity? And how great is the risk?
DOES THE OPPORTUNITY EXIST FOR YOUR BUSINESS?
A test for assessing the existence and depth of opportunity in the Nigerian market is to perform a per capita consumption analysis in Nigeria versus other parts of the world.
Take the case of Procter & Gamble (P&G) Group President Laurent Philippe overseeing Africa, the Middle East and Eastern Europe—announced the company’s intention to invest significantly in Nigeria through 2015, executives around the world sat up and took notice. Though P&G entered Nigeria in the early 1990s and maintains a factory in the bustling southern university town of Ibadan, its Nigeria involvement prior to the announcement could best be described as exploratory, with a portfolio of only four brands in Nigeria. Now, however, P&G appears more committed to mounting a meaningful challenge to Unilever, whose brands are ubiquitous in Nigeria.
The U.S. consumer packaged goods giant is not alone in its interest in Nigeria. The Nigerian market is a top-level issue among multinational corporations. From India’s Godrej CPL to South Africa’s Sanlam and Tiger Brands to GE, CEOs and boards are asking management teams to draw up plans to enter or upgrade their Nigeria operations. Whether in the business lounge in Dar es Salaam Airport or smart restaurants in Paris, executives are huddling about how to invest in Nigeria—a remarkable shift from the perspective in board rooms in the 1990s and early 2000s.
To develop a true picture of a market opportunity, management teams will need to refine any initial per-capita analyses with deeper looks into factors such as customer purchasing power or ease of access. The table below describes three markets worth noting—electricity generation, housing and retail development.
HOW BIG IS THE OPPORTUNITY YOUR BUSINESS?
A back-of-the-envelope calculation can provide a quick sense of how sizeable a number of Nigerian markets can be. Here are three examples:
Mobile phones: Today, Nigeria has about 79 million mobile subscribers, which, if adjusted for users with multiple phones, suggests a 56 percent penetration rate. Using MTN Group’s US$12 monthly average revenue per user as a proxy, the market is worth US$540 million per month, or US$6.5 billion per annum.
Should penetration rise to 60 percent (assuming a 150M population) and ARPUs nudge slightly to US$15 per user, factoring in income growth and an increase in data-rich applications, the market could reach US$675 million per month or more than US$8 billion per year.
Cement: Analysis conducted by Lafarge shows that Nigeria’s per capita cement usage resides at the bottom of the curve versus other emerging markets. In the cement industry, volumes begin to exhibit the growth patterns of a developing country once significant infrastructure needs are tackled. Today, a majority of market participants, such as Ibeto Cement and Lafarge/West Africa Portland Cement, are betting that core demand in this sector is between 15 million to 20 million metric tons. The leading Nigerian competitor, Dangote Cement, is betting on a market that is closer to 30 million. Each party is placing a bet and adding capacity based on its view of the market. Fascinatingly enough, if one weighs a number of other considerations—such as a backlog of about 15 million to 20 million residential housing units, experimental use of cement in road construction, and planned expansion of Class A office space and malls—the actual volume of demand may be closer to 50 million tons per annum, or effectively double the current size of the market.
WHAT ARE THE CHALLENGES FOR ACCESSING THE OPPORTUNITY?
Access to opportunities in Nigeria will vary, as they do in any market. Common issues include startup capital needs, investment payback timelines, logistics requirements, and the availability of skilled local workers. For example, in wireless voice services, where convenience from the customer’s view at the moment of purchase is crucial, new entrants will need to build a network of street retailers to extend the more formal channels for selling prepaid recharge cards. Existing mobile players have also developed a supply chain of independent service providers and vendors to reduce the risk of sole sourcing. MTN, for example, contracts with Huawei Telecom for equipment testing and base station setup—which in turn has subcontracted with several third-party providers controlled by Nigerian entrepreneurs.
For participants in the fast-moving consumer goods market, the key barrier between new entrants and 30 million Nigerian households is distribution. Owning the last mile and distribution network—regardless of whether a company is selling shampoo or fresh fruit—is at the heart of commercial success in Nigeria. Local vendors such as FMCL Limited are filling this void for new entrants with turnkey supply chain solutions.
As in many emerging markets, skilled labor is a key challenge in Nigeria. Today, many Nigerian students emerge from the country’s public university system with significant theoretical insight but limited field experience. Students with any combination of skill and field experience are snapped up quickly at a premium.
New entrants will likely need to build their talent bases using a mix of high-potential local hires, expatriate staff (including other Africans), and returning Nigerians, as well as clustering together with other industry participants to create “finishing schools” that reduce the cost and inefficiencies of skilled labor.
HOW GREAT IS THE RISK?
In Nigeria, political and economic stability more or less serves as a proxy for overall risk. Despite occasional flare-ups, Nigeria’s umbrella risk profile is shifting downwards, with concerns becoming more event-specific and localized. For executives considering business investments, this is the pattern to look for. Nonetheless, a key risk-related issue for many executive teams remains the 2011 election process; which turned out to be relatively a success. While some companies postponed entry discussions until after the elections, others decided the risk is low enough to continue their investment activities as planned.
In either case, we help companies focus on managing known factors while improving their capacity to respond quickly to unanticipated issues. If, for example, Nigeria suddenly announced a revaluation of its currency upwards by 50 percent, we would help executive teams be in a position to respond in a way that minimizes the impact on their business?
Acting on the Opportunity: Nigeria Entry Options Executive teams that have identified an opportunity in the Nigerian market must then determine the right entry path. As with any new market, there are three main options: organic/greenfield entry, joint venture/partnership, or M&A.
In picking the entry path, we help each entrant needs to balance a range of internal considerations—for example, the speed to market that an acquisition affords versus the culture of the company being acquired. For severely under-served markets, an M&A or a joint venture may provide the faster path to profits than building a business from scratch. For instance, Nigeria plans to spend more than $3.5 billion on transmission and distribution equipment by 2012; that represents an opportunity that can quickly provide the basis for an entry, prior to the market’s evolution to more maintenance-related spending.