Investors believe Nigeria is a difficult place to do business, but demographically they also believe the country is where to be; the huge population and its status as the second-biggest economy in Africa make sure they flock to the country, despite the challenges, reports Financial Times
Twenty years ago few Nigerians had heard of instant noodles. “People thought we were trying to get them to eat worms,” says Deepak Singhal, managing director of Dufil Prima Foods, the first company to manufacture the cheap snack locally, in 1996. Today, noodles are a $600m-a-year business in Nigeria and are among the country’s most popular foods. Children eat them for breakfast, roadside vendors serve them with fried eggs or sardines and after a long day at work an adult can tuck into Dufil’s 210g Hungry Man pack, the largest block of instant noodles produced commercially anywhere in the world.
The company, which has a 70 per cent share of the local market, estimates that one in two Nigerians have tasted its Indomie brand of noodles and that up to 15m people eat them regularly. In 2012 alone, Dufil sold 1.6bn packets of noodles for between 35 naira ($0.22) and 95 naira ($0.59). That is more than was consumed in any country outside Asia bar, the US, Brazil and Russia.
Dufil’s success is a prime example of why investors are becoming increasingly excited about Nigeria, especially with regards to consumer goods. Not only has it demonstrated that it is possible to overcome the many challenges of manufacturing in the West African country but also how to take advantage of fast-changing demographics.
Already by far the most populous country on the continent, with close to 170m people, Nigeria continues to grow at an astonishing rate. According to the UN’s latest forecast, by mid-century there will be more Nigerians – 440m – than Americans, and by 2100 the west African state could be the second most populous country on earth. The economy is also expanding quickly, and should grow at 7 per cent this year, as it has done for most of the past decade.
“This is a difficult place to do business, no doubt about it, and you need someone to hold your hand,” says Mr Singhal in his office in Lagos, the commercial capital. “But demographically you cannot go wrong: a huge population and the second-biggest economy in Africa.”
It is not only noodle manufacturers that have thrived. Makers of everything from beer to chocolate milk and cement have seen sales soar in recent years, and forced investors who have long shunned Nigeria to take note. With the global recession cutting returns in the developed world and in big emerging economies such as China and Brazil, fund managers have poured money into the Nigerian Stock Exchange. The All Share Index as a whole is up more than 70 per cent over the past year but consumer stocks have surged even more. The share prices of the local arms of Nestlé and Unilever have doubled, while Cadbury Nigeria is up nearly 300 per cent. Local listed companies have not missed out; Dangote Sugar, owned by Aliko Dangote, Africa’s richest man, has tripled in price.
“There’s a lot more interest in Nigeria now from frontier specialists and emerging market funds,” says Graham Stock, chief strategist at Insparo Asset Management, which focuses on Africa and the Middle East. “[There are] not many places in the world that are growing at 7 per cent and can be reasonably expected to maintain that for some years.”
That, of course, is assuming all goes well. Nigeria still has many challenges and risks. An Islamist insurgency in the North has claimed thousands of lives and hit the economy there. Corruption remains endemic, and the politics divisive and poisonous. Industrial-scale oil theft is preventing the government making rainy day savings, leaving it exposed to a drop in the price of crude. While the infrastructure is slowly improving, it is still poor and a big impediment to business.
Yet as Dufil has shown, most of these problems are not insurmountable, given the size of the market. Dufil, a joint venture between Salim Group, the Indonesian conglomerate that owns the Indomie brand, and Tolaram Group of Singapore, struggled in its early years. Sani Abacha, the military dictator, was in power and the economy was stagnant. The flip side was that there was no competition for noodles or much else. When there was return to civilian rule in 1999, Dufil’s fortunes shifted. Since 2003, its revenues have increased at an average rate of almost 30 per cent a year. One reason is the heavy marketing focus. The company’s advertisements appear on buses and buildings around the country. Mothers with young children are a particular target market. One of Dufil’s popular catchlines reads: “No mama be like you, no noodles be like Indomie”.
The baby boom has been a significant factor in the company’s success. During its 17 years of noodle production in Nigeria, the population has grown by more than 50m, equivalent to the entire population of South Africa, the continent’s biggest economy. The typical Nigerian woman gives birth to five or six children, which is higher than the average fertility rate in sub-Saharan Africa as a whole and more than three times that in the developed world.
Although the market is going to get much bigger, Mr Singhal reckons that the company’s revenues will slow to between eight and 10 per cent growth in the next few years as the sector becomes more crowded. From being the only instant noodle maker in the country, Dufil now has 16 competitors, including Mr Dangote, who launched his own brand of the snack a few years ago. The competition is good news for a country that has historically been unfriendly to manufacturers.
Nigeria’s emergence as an oil producer around the time of independence in 1960 mirrored a decline in the country’s agriculture sector and its infrastructure. Once the world’s biggest exporter of palm oil, which along with wheat flour is a crucial ingredient in noodles, Nigeria is now a minnow in global terms. Even though local output is now increasing, Dufil could buy the two biggest palm oil producers in the country and it would still have to import more.
The ports are congested and the road network dilapidated, increasing transport costs. The power shortage is chronic. Bangladesh, which has a similar-size population and less than half the gross domestic product of Nigeria, produces almost twice the amount of electricity per capita.
To get around the problem, Dufil generates its own power at each of its three noodles factories, as well as its palm oil refinery and packaging plant. About 2.5 per cent of the sales price of every pack of noodles is spent on electricity – three times more than at a noodle factory in Indonesia. Yet the size of Nigeria’s market means that local manufacturing is still worthwhile.
“We have done it, Unilever and Nestlé have done it,” says Mr Singhal. “If you want to encash, you have to produce locally. Otherwise you’re just a container business.”
The population explosion may be good for business but it brings challenges for the government, which has to keep a lot more people happy. If rising income is the measure of contentment, then its policies need improving. Despite the growing economy, Nigeria’s poverty rate declined marginally from 64 per cent to 63 per cent between 2004 and 2010, according to the National Bureau of Statistics. Dufil’s own research backs this up. Mr Singhal says that while the banking and telecoms sectors have created “a bit of middle-class growth”, poverty levels remain high.
The youthful population – about 44 per cent are under 15 – is cited by economists as one reason why Nigeria, and other countries in sub-Saharan Africa, could enjoy competitive advantages over the rest of the world in the coming decades. But this will be an asset only if there are jobs to fill. In Nigeria, the official unemployment rate is 24 per cent and rising. Among those aged 15 to 24, it is 37 per cent, a statistic that worries people such as Ngozi Okonjo-Iweala, the finance minister. “We need to grow our GDP at 8 to 10 per cent in order to solve the unemployment problem facing us in the country,” she said last month.
The paucity of prospects for young people has been cited as a contributing reason for the insurgency by Boko Haram in northern Nigeria in a campaign that has claimed close to 4,000 lives over the past four years. The overall economic impact has so far been limited because the oilfields and most businesses are based in the south. But consumer goods companies have suffered. Dufil’s sales have declined in the north over the past year because markets in some areas are open for only a few days a week owing to the violence.
The kidnapping and subsequent murder of 10 foreign workers by Ansaru, another Islamist group, has also forced companies to rewrite their security policies. Dufil’s 60-odd expatriate workers, mainly from India, Indonesia and Singapore, are barred from going to northeast Nigeria, where the government has declared a state of emergency.
Nigeria’s macroeconomic performance last year was “broadly positive”, the International Monetary Fund said. But the economy remains vulnerable to oil price shocks. Crude production has slipped to about 2m barrels per day, compared with 2.5m b/d predicted in the budget. The shortfall is partly due to the theft of more than 150,000 b/d, and has forced the government to dip into its oil savings account, which in May stood at $6bn, down from $9bn at the start of the year.
The other main threat to the economy is political. The presidential election is scheduled for 2015 but name-calling and scheming are well under way. Despite the relative fiscal stability and efforts to reform the power sector, critics of Goodluck Jonathan, the president, complain that he is a weak and ineffective leader who has allowed the country to drift. Many people in northern Nigeria also believe he should be disqualified from running under the informal arrangement that the presidency should rotate between the mostly Muslim north and Christian south.
Efforts to oppose Mr Jonathan are growing. The Congress for Progressive Change and the Action Congress of Nigeria, the main opposition parties, have formed an alliance with two other parties this year. Perhaps even more worrying for Mr Jonathan, who is from the minority Ijaw ethnic group in the Niger delta, is the discord within the ruling People’s Democratic party, which may splinter ahead of the presidential election, analysts say.
Bismarck Rewane, managing director of Financial Derivatives, a Lagos consultancy, feels that the country is entering a period of heightened political risk. “It has got to the point where the big ethnic groups in Nigeria would rather decide together who runs the country than let it be in the hands of some that they believe are mediocre.”
Mr Singhal, though, appears to be unconcerned. As he points out, no matter what happens, Nigerians still have to eat.
Electricity: Jonathan pledges to fix power disconnect
In Nigeria, a generator is not just purchased as a back-up for when mains electricity cuts out. It is often the primary source of power. Supply from the grid is so weak and erratic that many large companies don’t even bother connecting.
In May, the total amount of electricity generated in the country fell to 3,520MW. South Africa, Nigeria’s rival for the continent’s largest economy, produces more than 40,000MW, and has only a third of Nigeria’s population. The disparity is even more puzzling in view of Nigeria’s position as Africa’s largest oil producer with vast reserves of gas that can power plants.
The chronic power shortage is a fact of life for ordinary Nigerians. It also adds greatly to the cost of business and is a significant disincentive for companies looking to invest. Successive governments have promised to tackle the problem, spending billions of dollars to little effect. Goodluck Jonathan, the president, has gone further, staking his legacy on improving the electricity supply through a large privatisation effort. Though the results may only be seen in a year or two, the process is well under way.
His government has pushed ahead with the $2.5bn sell-off of 15 state-owned generation and distribution companies, which are all underperforming. In April, the winning consortiums, which include local and foreign companies, paid 25 per cent of the sale or concession price, and should take ownership of the assets later this year.
A further 10 new gas-fired power plants, with a potential capacity of 5,000MW, are being sold. Last month, the government launched a roadshow for investors interested in acquiring majority stakes in the plants, which are part of the National Integrated Power Project initiated by Olusegun Obasanjo, former president, in 2004.
More than $15bn has been spent on the plants but only six are complete – a record that points both to corruption in the public sector and the strength of the vested interests opposed to reform.
