Expanding the Starbucks footprint in Africa

by Johan Burger

Some investors are multinationals seeking a first-time presence, while many others are growing existing footprints. They represent a wide range of diverse industries, ranging from hospitality providers to motor vehicle manufacturers, chemical companies and digital services firms. This report addresses some recent developments in this field.

EXPANDING THE STARBUCKS FOOTPRINT IN AFRICA

Taste Holdings owned the Starbucks franchise until it sold its South African master franchise licence to Rand Capital Coffee for R7 million (±US$490,000) in late 2019. A year later, Rand Capital announced its plan to open eight new Starbucks outlets by mid-December 2020. These new outlets in Cape Town, Stellenbosch, Johannesburg and Pretoria would promote 21 employees and increase headcount by 69 full-time employees. The total number of Starbucks permanent employees would increase to 300.

According to the owner and chief executive of Rand Capital Coffee Adrian Maizey, the move not only creates dozens of jobs during harsh economic conditions but also generates new business for the contractors and sub-contractors who were fitting out and equipping the eight stores. He noted that “Starbucks operated on a licensing model as opposed to a franchise, which was an honour to him to be awarded the licence for South Africa as it seldom went to an individual.”

He saw the challenge for newcomers to the increasingly discerning coffee market in South Africa as making the public more knowledgeable about the value that Starbucks has to offer.^[1]

BAYER SUPPORTING AGRICULTURE IN AFRICA

The Bayer company has a long-term commitment to support African farmers. The life-science multinational will run its new "Better Farms, Better Lives" initiative programme again in 2021. This process will see 100,600 smallholder farmers in Tanzania receiving grain and vegetable seed grants worth US$493,500 to assist them in sustainable food production.

Bayer provides more than 700,000 smallholder farmers in Africa with free hybrid corn and vegetable seeds. The programme also aims to assist growers by providing market access. This assistance is in line with Bayer's overall aspiration to build a world where there is “Health for All, Hunger for None.”

Bayer views smallholder farmers as essential in providing food security to billions of people. However, the Covid-19 pandemic is placing extra challenges on their ability to produce food for their communities and beyond. According to Bayer Tanzania Manager Frank Wenga, the Bayer initiative in Tanzania will assist the smallholder farmers in combating the effects of the global Covid-19 pandemic.

Although the programme launched in Tanzania, Bayer will eventually implement it in several other countries across Africa, including Kenya, Malawi, Nigeria, South Africa, Zambia, and Zimbabwe.

The initiative focuses on providing smallholder farmers with the assistance needed to address the additional challenges they may be facing as a result of the coronavirus pandemic.

Bayer will collaborate with governments, NGOs and local organisations to provide accelerated access to agronomy services and knowledge to scale up existing and new value chain partnerships and further expand value chain partnerships across Africa. According to Laurent Perrier, the MD of Bayer East Africa, Bayer intends to utilise its partnerships “to multiply the social and economic impacts of smallholder farmers in tackling poverty and hunger, improving health and livelihoods and, ultimately, spurring economic development for their families, communities and nations."^[2]

 

AUTO MANUFACTURERS BOOST CAPACITY IN AFRICA

Ford Is betting on the future of the African vehicle market. The company announced in February 2021 its plan to invest heavily in its South African manufacturing operations. Ford intends to use the funds mainly to expand the production of its Ranger pickup truck. The carmaker plans to increase its annual production capacity in the country from 168,000 to 200,000 vehicles. Of the US$1.05 billion new funding, US$683 million goes towards technology upgrades and new facilities at its plant in Pretoria, with US$365 million going to upgrade tooling for major suppliers.

The expanded production will create 1,200 new jobs with Ford in South Africa, increasing the local workforce to 5,500 employees. The move will add an estimated 10,000 new jobs across the carmaker’s supplier network. The plant will also manufacture Volkswagen pickup trucks as part of the Ford-VW alliance. Ford targets making the plant entirely energy self-sufficient and carbon neutral by 2024.

This commitment represents Ford’s most significant investment in its 97-year history in South Africa and one of the largest ever in South Africa’s automotive industry. About 33% of Ford’s local production goes to South Africa and other sub-Saharan African countries, with the rest exported elsewhere.

According to South African President Cyril Ramaphosa, Ford helped bring twelve automotive component suppliers to the country. The South African government wants to double the industry’s annual production to 1.4 million vehicles by 2035 and raise the proportion of auto components made locally to 60% from 39% by offering investment and tax incentives.

Ford is not the only global vehicle manufacturer to boost its production capacity in Africa, as others, such as Volkswagen, Toyota and Nissan, have done so already. They all seemingly view Africa “as a large, untapped market for new car sales.”^[3]

TWITTER PICKS GHANA AS ITS AFRICAN BASE

Twitter announced its plan on 12 April 2021 to set up its first Africa base in Ghana. Twitter described Ghana "as a champion for democracy, a supporter of free speech, online freedom, and the Open Internet." It also referred to Ghana's hosting of the secretariat of the AfCFTA as another reason for moving there, as they believed it aligns with Twitter’s ambition to “establish a presence in the region that will support our efforts to improve and tailor our service across Africa." Ghana’s President Nana Akufo-Addo described Twitter’s selection of Ghana as a "beautiful partnership between Ghana and Twitter”, a critical link for the development of Ghana's technology sector.

Twitter’s decision led to strong reactions among Nigerian Twitter users. Many Nigerians saw Twitter's decision as a snub to Nigeria, which is Africa’s largest economy and experiencing rapid growth and investment in its technology sector. There are reportedly more Nigerians with a Twitter account (39.6 million) than people in Ghana.

However, other Nigerians referred to the poor conditions in Nigeria as the motive for Twitter’s strategy. One is the suspension of new phone lines registration because of a federal government policy to link all active SIM cards in Nigeria to a national identity number for security reasons, a very time-consuming process. Also, in 2019, Ghana was 13 places higher than Nigeria in the World Bank's Ease of Doing Business Index and viewed even by some Nigerians as a more productive market. Ghana also ranked as the 43rd most peaceful country in the 2020 Global Peace Index, 104 spots ahead of Nigeria.

According to some tech investors, Nigerians had to learn from why Twitter chose Ghana to understand what it would take for Nigeria to remain a competitive destination for investors. Factors to be considered include “enhancing democracy and the rule of law, freedom of speech, and Nigeria’s role in enabling the AfCFTA”. Being a huge market was no longer sufficient to attract investments.

Other international technology giants that have expanded their operations in Ghana, where they targeted software developers and young creatives in Africa, include Google, Microsoft and Huawei.

In contrast to Twitter, Facebook opened its first community hub space in Africa in Lagos in 2018 while announcing plans last year to open an operational office, also in Lagos.^[4]

 

WESTERN ONLINE DELIVERY SERVICES TARGETING AFRICA

Online delivery services companies such as Bolt (Estonia), Glovo (Spain) and Uber Eats (USA) have invested in Africa over the past four years. Due to the fierce competition within the online delivery sector, they seek to offer their wide range of delivery services in many markets and as quickly as possible.

While their traditional markets in Europe and the USA experience shrinking profits, Africa appears to promise higher margins. According to William Benthall, who heads up Glovo in Africa, while revenues are lower in Africa, so is the required capital investment.

Glovo employs 150 direct employees in Africa. The company reportedly also created more than 300 indirect jobs (notably via call centres). It also employs 2,500 independent delivery staff. Glovo operates in Morocco, Côte d’Ivoire, Ghana, Kenya and Uganda. Growing urbanization boosts the growth of Glovo on the continent.

Bolt began operations in Nigeria and South Africa. It now operates in seven African countries (Ghana, Kenya, Nigeria, South Africa, Tanzania, Tunisia and Uganda).

These delivery companies must deal with several risks. These include administrative delays, inaccurate addresses, unforeseen weather conditions, and high order cancellation rates. The cost of delivery, depreciation of vehicles, cost of breakdowns and accidents, and time spent managing cash are other issues that require good management and integration into the economic model.

Helpful risk mitigation strategies include a dynamic pricing system for delivery fees depending on the market. Glovo charges a higher surcharge in Kenya during bad weather. Its users are usually understanding and accept the extra charge. In Côte d’Ivoire, however, they do not charge any surcharge as marketing research shows that Ivoirians value certainty more than potential economies.^[5]

POINTS OF INTEREST

• Starbucks launched in South Africa in April 2016 with great fanfare. In those early days, people would join long queues to buy a cup of Starbucks coffee. All initially went well. The challenge the brand later faced was that its products are more expensive than many available options. Mug & Bean, another branded coffee franchise in South Africa, offers bottomless coffee at close to half the price of that of Starbucks. Even though the Starbucks product in South Africa is priced well below the equivalent Starbucks product in overseas markets, consumers see it as expensive in local rand terms. Unsurprisingly, Starbucks put its initial expansion plans on hold, and the franchise was eventually sold. The new franchise owner plans to expand to cities with huge populations, especially those with large student populations. The new owner feels that South Africans must be made fully aware of the value Starbucks has to offer. It is not clear why that would alter perceptions of it as an expensive product with cheaper alternatives. It will be interesting to see whether the brand can achieve success under its new owner.
• Bayer’s presence in Africa and its commitment to supporting smallholder farmers in various ways indicates a strategy of over-delivery at the price point. Bayer is moving from its role as the supplier of insecticides and other products to becoming a partner to smallholder farmers. This makes a lot of sense. There are many competitors in the market, and companies are struggling to differentiate themselves. Also, the market segment of smallholder farmers is vast, with few manufacturers targeting this segment. However, by increasing their production capacity and yields, these farmers can become an attractive segment. With Bayer positioning itself as a partner overdelivering at the price point, it will become a viable option as the supplier of choice.
• Ford and other motor manufacturers are increasing their investments in Africa. This is surely welcome from Africa’s perspective. The US$1 billion investment by Ford in its South African plant is a brave step and a vote of confidence in the country’s future. Despite the general decline of the South African economy, the rampant corruption in politics and government departments and the aggressive and militant labour unions with their frequent unrealistic wage demands, Ford committed. Therefore, Ford management must believe that the political future of the country is rosier than indicated by current signs and that the economy will pick up again in future. While it is clear that their investment is despite and not aligned to current conditions, investing this amount of money should always be aligned to views of the future. Ordinary South Africans can take this to heart and be less pessimistic about their country in its present state.
• Twitter’s choice of Ghana as the site of its head office in Africa was always going to be contentious. Nigeria has a much larger population and a vastly more extensive economy. However, it does have more challenges than Ghana in certain areas, including the scale of its endemic corruption and challenges to security. Ghana is seen as a much safer country. It also outperforms Nigeria on many other indices. Ghana came in at 63, with Nigeria ranked at 124 in the 2019 Global Finance ranking of country safety, which scores countries on three factors: war and peace, personal security, and natural disaster risk. In Transparency International’s 2020 corruption index, Ghana was ranked at 75, with Nigeria ranked at 149. In the World Bank’s 2020 Ease of Doing Business ranking, Ghana was ranked at 118, with Nigeria ranked at 131. On the WEF’s 2019 Global Competitiveness Rankings, Ghana was ranked at 111, with Nigeria at 116. Given that Twitter delivers a digital service that is not tied to a specific geographic location, its decision to pick Ghana as the location for its regional head office comes as no surprise.
• Online delivery services in Africa are in great demand. One issue is the many problems with addresses faced by the continent. The lack of a common geocode or another standard way to describe a given location increases both cost and uncertainty. However, as a result of the vast market in Africa, the sector is attractive. Foreign players investing in Africa may be better off, given their currency strength. We can expect more competitors to try to tap into the lucrative.