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Analysis

Can food companies kick-start profitable farming in Africa?

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Food companies are expanding in Africa where the food sector is poised to be one of the biggest opportunities.

Large_fast_food

 

If Vimal Shah could get farmers to grow soya beans with 200 pods on each plant, he would. As CEO of East Africa’s biggest edible oils company, Vimal knows his goal to become Africa’s biggest supplier of edible oils largely hinges on his ability to get more farmers to grow quality soya beans and sunflower seeds.

Bidco Oil Refineries, which currently gets oil seeds from 10,000 contract farmers in Kenya, is now seeking the services of 10,000 more farmers. The company (annual revenues exceed $500m, according to Forbes) buys more than 30 million kilogrammes of oil seeds every year and hopes to develop a new supply source that would help it to manufacture enough products to service markets beyond the 14 countries it currently operates.

Established in Kenya over 20 years ago, Bidco systematically nurtured an outgrowers programme that has helped it to develop a secure and efficient supply chain system. “Our integrated business model works very well for our type of business in Africa where supply chain systems are not well developed. We are involved throughout the value chain, from farming and processing to distribution,” says Vimal.

Bidco’s struggle to attract more oilseed farmers and the reasons that prompted it to adopt an integrated business model serves as a cautionary note to international fast food and agribusiness companies that are seeking to expand in Africa.

The region’s food sector is poised to be the biggest area of focus for investors in the next 10 or 20 years, as they seek to capture the opportunity of an emerging middle class on a continent where the economy could grow at least 5% a year until 2017, according to the International Monetary Fund.

Even though agriculture is Africa’s largest economic sector, the food industry is underdeveloped.  The sector represents 15% of the continent’s total GDP, or more than US$100-million. “Food companies in Africa should be looking at how best to harness the potential of local raw materials, from staples like cassava and millet to fruits and vegetables,” says independent supply chain consultant, Michael Okoti.

Multi-national corporations like Unilever, Nestle and SABMiller and fast food franchises Yum! Brands, McDonalds and Subway have already moved in. The challenge for these companies is to offer products that consumers like and can afford.

“One way of achieving this is to minimise production costs by sourcing for raw materials locally either from small-scale suppliers or the commercial outfits,” says Michael.

For instance, South African brewer SAB Miller collaborates with about 2,000 smallholder cassava farmers in South Sudan in an innovative local sourcing model that provides the ingredient for its cassava beer that it developed to cater for local tastes. In Nigeria, Kentucky Fried Chicken (KFC) is finding ways of developing a sustainable supply of chicken by training local farmers to meet the chain’s global standards.

Supply challenges

Africa’s inadequate farming capacity is one of the things that could slow the expansion of food companies.

KFC’s franchise holder in Ghana, the Mohinani Group, has said it wants to have close to twenty stores in Ghana in the next few years. “But, there is a big challenge that could impact Mohinani’s goals. The company has to import chicken because there isn’t a poultry farmer that can supply its requirements,” says Kendi Nana, a research executive at Accra-based research company, Market Support Consultancy.

The dilemma of finding suppliers who can meet the fast food chain’s global quality standards is replicated in neighbouring Nigeria where importing chicken is illegal, and across the continent. 

“The supplier approval process of brands like KFC is gruelling. There is an auditing process that one must undergo. And this is important because the chain needs to meet specific weight and quality, which helps factors such as cooking periods. Few potential suppliers pass the vetting process,” says Kendi.

Small farmers who drive agriculture in Africa face challenges and barriers along the value chain such as limited access to markets and financing, availability of inputs and lack of education on effective farming techniques and soil management. This has put the sector on the spotlight, with many governments hard-pressed to say if there will be enough supply to meet the demand over the next decade.

Paul Brenton, a lead economist at the World Bank wrote in January that the growing demand for food in Africa is increasingly being met by imports. “Clearly something has to change. Business as usual with regard to food in Africa is not sustainable,” said Paul.

Something is changing. Private capital is increasingly flowing into agriculture assets, attracted by macroeconomic growth, availability of large domestic consumer markets, fertile land, and affordable labour.

2012 brought a few large private equity deals in agriculture. The Carlyle Group, one of the world’s largest private equity groups, formed part of a consortium that invested US$210-million in the Export Trading Group (ETG). ETG, an agribusiness based in Tanzania, will use the investment to connect smallholder farmers with consumer markets globally and to build processing infrastructure in East Africa. The same year, private equity fund manager Phatisa signed its first deal, backing West End Farms in Cameroon.

Opportunities for farmers

While many companies such as Woolworths in South Africa invest heavily on development of supply chains systems that bolster small suppliers, the panacea will come from strong commercial units that can give offtakers security of supply.

“Security of supply is important in the value chains of food companies,” says Omri van Zyl, associate director and head of Deloitte Africa Agribusiness Unit at Deloitte Consulting. Small-scale farmers would need to organise themselves into co-operatives to benefit from the clear supply opportunities that food companies are presenting on the continent, he says.

“Suppose McCain (food processing company) needs a ton of potatoes that it needs to supply to McDonalds or KFC every month. What happens when small-scale farmers can’t give it that?  The big commercial unit is central,” says Omri.

Zinzi Mgolodela, who heads Enterprise Development at Woolworths says sometimes its suppliers are not always able to meet all the requirements set out. “In many instances, we have linked smaller prospective supplier with larger ones and this is important as it bolsters smaller companies,” she says.

In 2011, Woolworths avocado supplier, Westfalia, could only supply the retailer for nine months of the year due to bad weather. To maintain supply for the remaining three months, Woolworths imported avocados from Spain.“Westafalia identified three avocado suppliers in the Tzaneen and Hoesdspruit areas that were able to deliver the product two weeks earlier than they could. We provided loans to combat the fungal infection that was affecting the farmers Westfalia recruited,” says Zinzi.

“This was a win-win situation. Woolworths saved on the cost of importing and Westafalia was able to take back their share of the market that it had lost to Spanish exporters and also create a guaranteed market for three small farmers,” she says.

The smallholder farmer is an important part of the equation for success. “It’s a push and pull scenario - McDonalds and McCain can set up shop, but if they don’t have the farmers to produce the potatoes, then the businesses are not going to work. On the other side is if the small farmers are there and they are not producing consistently, then there is a problem. If I am a small farmer in Africa and I plant wheat, I wouldn’t know what to do with it. So you must have synergy - a bunch of smaller guys and then the big guys,” says Omri.

However, there are various problems with farming cooperatives or outgrowers programmes. The capacity for the smallholder to expand production could be limited to the collateral of the agro-processors, writes U.K-based independent consultant Sue Drummond Haley on Business Fights Poverty online forum. Smallholders (specifically in Zimbabwe) are reluctant to enter into any grouping that may leave them exposed to joint liability. “So, you find agro-processors having to enter into a myriad of individual contracts with related additional costs,” says Sue.

Many small farmers do not understand the basic business model between processors and themselves, especially as a range of services (such as extension), which had previously been provided free are now provided by agro-processors, the cost of which is netted off in the final price paid to them.

Omri says the way forward in sustaining the momentum of fast food companies is to have strong commercial units that can buy produce from smallholders. “There must be a strong guy with money in the middle who can afford to buy inputs and access markets because the small farmer will likely lack these key things,” he says.

 

 

Summary

EXECUTIVE SUMMARY

International food companies are expanding in Africa, presenting opportunities for suppliers.

REGIONS
Africa
SECTORS
Food and beverages, Food and beverages, and Food crops

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