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by EOS Intelligence EOS Intelligence 1 Comment

Africa is Ready For You. Are You Ready For Africa?

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For decades, Africa was associated with poverty and helplessness rather than business opportunities and thriving markets. But the reality is evolving, and companies from across industries are increasingly including the African continent in their investment plans. Global FMCG players too have started to set their eyes on this untapped goldmine of opportunities. However, the market is much more complex than its thriving counterparts in Asia and companies must get hold of the market dynamics before entering or they stand the risk of getting their hands burnt.

Some two decades ago, it became apparent to the leading international FMCG companies that many of their core developed markets in the USA and Europe were no longer able to provide sustainable growth, which made them extend their business focus to include developing markets in Asia. While these economies will continue to still generate significant returns for quite some time, many global FMCG giants are already exploring new growth avenues and are turning their eyes towards the African continent. Growing middle class (already accounting for more than one-third of the continent’s total population, it is expected to hit 1 billion people by 2060), paired with accelerating economic growth, large youth population, overall poverty decline, and urbanization trends are the key factors underpinning Africa’s position as the next frontier in the global FMCG arena.

This has already spurred investment activity amongst leading FMCG players. By 2016, Unilever and P&G plan to invest US$113 million and US$175 million, respectively, to expand their manufacturing facilities in the continent. While these facilities are to be developed mostly in South Africa, they are expected to cater to developing markets across eastern and southern regions. Godrej, a relatively smaller India-based company, has taken up the inorganic route to tap this market, by acquiring Darling group, a pan-African hair care company.

Despite luring growth potential offered by the continent, the African markets are much thornier to penetrate than it seems. A shaky political and regulatory environment acts as one of the largest roadblocks. The continent has witnessed 10 coup d’états since 2000 and has been subject to countless changes in business policies resulting from unstable governments. Further, inefficient distribution networks, inadequate business infrastructure, as well as complex and inhomogeneous marketplace housing 53 countries, 2,000 dialects, and countless cultural groups, all cause African consumer markets difficult to navigate through.

Notwithstanding the challenges, the potential offered by the African continent overweighs. Companies, however, must mould their strategies and offerings to the realities of African markets in order to succeed. Here are a few pointers to consider:

  • Bring affordability and quality to the same side of the coin: Contrary to popular perception, the middle-class African consumer attaches much importance to quality and brands. Companies that have long followed the strategy of selling poor-quality products in this market cannot sustain for long. Having said that, affordability still stays as an important factor for the middle-class Africans. To deal with this, companies can look at offering good quality products in smaller packaging, to ensure low unit price. For several years, African consumers have gotten used to buying smaller quantities that could fit their limited budgets.

  • Discard the one-size-fits-all approach: On a continent with 53 nations, companies looking to enter African markets with blanket approach are likely to fail. While South Africa is relatively more developed and has slower growth, markets such as Nigeria and Kenya are developing at a rapid pace, and thus their dynamics differ. Consumer shopping behaviors and patterns also vary. Sub-Saharan nations, in comparison to North African consumers, tend to exhibit more brand loyalty and are more conservative in trying new things. North African countries also present stronger desire for international brands. Thus, it is most critical for international players to identify the characteristics of a particular market that they plan to enter.

  • Locate the right partners: Informal trade dominates African markets making distribution a daunting task. However, this challenge can be turned into an opportunity for companies to improve their competitive edge and bypass the lack of sufficient distribution and retail facilities. In rural areas of Nigeria and Kenya, Unilever has replicated its Indian direct-to-consumer distribution scheme, wherein a host of individuals undertake direct selling to consumers in their communities. Similarly, other companies have posted sales executives with each sub-distributor to manage inventory and brand image. Distribution costs are high in Africa but bearing them is not optional.

  • Move beyond traditional media: TV and print remain a popular and trusted media for advertising to urban consumers. However, owing to their low penetration in rural regions, they have limited impact on rural consumers. This brings forth the need to reach mass consumers through in-store marketing. Over the coming years, companies can also look into mobile advertising as surveys reveal that the number of Africans having access to mobile phones is already higher than those with access to electricity. Mobile penetration in the Sub-Saharan Africa stood at 57.1% in 2012 and is expected to reach 75.4% in 2016. This promises a gamut of mobile marketing opportunities for consumer companies.

  • Deal with infrastructural woes and innovate to compensate: Power outages, poor transportation, and limited access to cold storage facilities make public infrastructure undependable for businesses. Thus, companies must be open to invest in own power generators and water tanks. Innovations at the product end may also help overcome infrastructural limitations. For instance, Promasidor, an African food company, uses vegetable fat instead of animal fat to extend its milk powder’s shelf life when stored without refrigeration. While spending on infrastructure heavily increases costs, it can provide companies with a competitive advantage in the longer run.

  • Invest in personnel management and grow new talent: The fear for personal safety among foreign nationals and lack of skilled professionals within Africa makes recruitment a challenging task, especially for mid- and top-level management. Tapping into African diaspora located throughout the world comes across as a win-win solution. Moreover, providing training and management courses to local graduates allows addressing personnel needs over long term.


The African market can be a goldmine for FMCG players, if entered cautiously. However, the same can become a landmine, if proper investments and planning are not undertaken. Despite the present challenges, increasing number of companies will be looking into Africa, however only few will have the skill set to translate this opportunity into a great success.

by EOS Intelligence EOS Intelligence No Comments

Will Shale Gas Solve Our Fuel Needs for the Future?

At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.


Technically Recoverable Shale Gas Reserves

Continent
Shale Gas Reserves and Development
North America Technically Recoverable Reserves: 1,931 Tcf
Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America Technically Recoverable Reserves: 1,225 Tcf
Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe Technically Recoverable Reserves: 639 Tcf
Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia Technically Recoverable Reserves: 1,389 Tcf
China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa Technically Recoverable Reserves: 1,042 Tcf
South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia Technically Recoverable Reserves: 396 Tcf
Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:


Shale Gas Challenges

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

  • Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.

  • Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.

  • Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.

  • More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.

  • Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company

Acquisition/Partnership

Year

Investment
Sinopec Devon Energy January 2012 USD 2.2 billion
Total Chesapeake Energy January 2012 USD 2.3 billion
Statoil Brigham Exploration October 2011 USD 4.4 billion
BHP Billiton Petrohawk July 2011 USD 12.1 billion
BHP Billiton Chesapeake Energy February 2011 USD 4.75 billion
Shell East Resources May 2010 USD 4.7 billion
Exxon Mobil XTO Energy December 2009 USD 41.0 billion
Source: EOS Intelligence Research


Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.


With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

by EOS Intelligence EOS Intelligence No Comments

Ultimate Convenience Indian Style – Why Do Ready-to-eat Meal Producers Have a Difficult Job in India?

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After a long day at work, a tasty meal is every hard working man and woman’s dream. But, cooking such a meal late in the evening – more of a nightmare. Enter ready-to-eat meals. Throw a packet in the microwave and your main meal of the day is steaming hot in under five minutes. What could be faster, tastier, more convenient and cheaper than that? Many options, Indians respond.

The healthy growth of ready-to-eat (RTE) consumer meals (i.e. microwavable pouches containing ready dishes) has become a success story across many countries, where lifestyles are getting busier, disposable incomes are increasing and women are becoming an integral part of the workforce. The RTE industry is taking several emerging economies in Asia by storm, as dynamic demographic and economic transformations occurring in many of these economies drive increased interest in convenience sought in matters of food by the region’s inhabitants. The trend, though, is of uneven magnitude, with rural communities largely remaining deeply traditional about home-cooked food, besides having very limited financial capacity to afford RTE products or a microwave oven. However, the growing preference for such meals is so strong amongst middle class groups, that, overall, the RTE segment across Asian markets has become an attractive area of opportunity for food companies.

Ready To EatRTE foods sector is one of the most dynamic growth sectors in the packaged foods markets across Asia, and on a global scale, Asian consumers exhibit the highest interest in RTE meals. A 2007 AC Nielsen study revealed that seven out of top ten markets with the highest propensity to purchase RTE meals are Asian countries, with Thai consumers emerging as the world’s biggest fans of RTE products.

Surprisingly though, India does not feature in the list of top 10 RTE markets. Unquestionably, the country does enjoy most of the RTE foods market growth prerequisites – fast developing economy, expanding modern retail channels, dynamically growing middle and upper class, rising nuclear family format, soaring participation of women in workforce, rapidly rising incomes and the growing reality of hectic lifestyles driving the demand for convenience.

So where is India in this picture? Why does its name not appear in the list of attractive RTE meals markets? Why do India-made RTE food products have a bigger market internationally than domestically? What are the challenges that RTE producers such MTR Foods, ITC Foods, Heinz India or Haldiram’s face in their home territory?

The fact is that although there is a market for RTE products in India, its size is modest and its growth is slowing down. AC Nielsen estimates the Indian RTE market growth slowed from 44.9% in 2010 to 28.1% in 2011 (reaching INR 506 crore, or about USD 110 million). In comparison, the Thai RTE market grew by 105% during 2005-2010, with a strong, upwards trend that is set to persist.

The reasons for such differing dynamics are many, largely due to cultural background and the Indian consumer’s mindset. Here are six key reasons why RTE foods producers have a difficult job in the Indian market, reasons, that might make them reconsider RTE expansion plans:

  • Traditionally, Indians are accustomed to hot fresh food served straight from sizzling pots, mainly because of easy and cheap access to domestic help and primary cooking ingredients easily available for purchase. RTE meals, despite their convenience, have a hard job competing with home cooked food.

  • Busy Indian consumers look for speed and convenience, and there’s plenty of options in the food services sector – countless cheap order-in and take-out options, that also offer great advantages over RTE meals, especially as these are freshly cooked, a factor of great importance to Indian consumers.

  • Unlike in many other countries, RTE foods in India are more expensive than most order-in and take-out options. This, paired with the preference for freshness, tends to put RTE products at a disadvantageous position.

  • Despite growth in modern retail format, majority of Indians still do their food shopping in traditional stores, which have limited space and interest in carrying novelties such as RTE foods (organised food retail is estimated to still account for only about 3-5% of the total retail market).

  • Considering the hot climate, Indian consumers tend to be reluctant to trust the safety of a ready meal that has been stored and transported out of temperature-controlled supply chain, especially given the largely inefficient supply chain management.

  • Some RTE meals, which do require cold storage, also fall prey to inefficient supply chain management and frequent power cuts, which lead to rise in production costs, in turn translating into higher RTE product prices resulting in lower demand for such products.

In spite of the many challenges, the Indian RTE market is growing, though at much slower rate than once anticipated. Indian attitude towards meal from a pouch is changing, with growing social acceptability to consume such foods and to prepare meals in the microwave.

Producers are optimistic, as the mere size of the potential customer base offer vast opportunities, even with slower y-o-y growth. But they also remain cautious, citing improvements in supply chain and distribution management, growth in modern retail format, continuous growth in consumers’ disposable incomes as the main changes needed to occur for the Indian RTE market to actually take off. However, given that many of these transformations have been occurring over the past years, perhaps these form just a secondary problem. Perhaps the key prerequisite for RTE market growth is the change in the Indian consumer’s mindset – change that is the slowest to occur and hardest to influence by producers.

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