Despite the challenges of investing in Nigeria, many companies are planning to enter or upgrade their operations in the country. The reasons that make the country attractive now have been reported on widely: huge population, growing economy and a growing number of young middle class professionals with disposable income.
A report, published recently, points out that a significant demand for products and services is not being fulfilled because potentially lucrative sectors outside of oil and telecommunications, are under-exploited. In this article, we hope to give some insight to first-time investors on how best to assess an opportunity in Nigeria.
Assessing the Nigerian opportunity for new market entrants requires answers to four basic questions: Does the opportunity exist? How big is the opportunity? What are the challenges for accessing the opportunity? And what is the risk?
Does the opportunity exist?
A quick test for assessing the existence and depth of opportunity in the Nigerian market is to perform a per capita usage gap analysis in Nigeria versus other parts of the world. Take the case of a quintessential household purchase: cooking fuel. In the liquefied petroleum gas (LPG) sector, Nigeria today sits at the lower end of the market; residents use approximately 0.5 kilograms per person, compared to 8kg in other West African markets.
The LPG example is symptomatic of conflicting factors that many new entrants will face in Nigeria: a high-growth opportunity that is tempered by the challenge of the “last mile.” Today, Nigeria produces significant LPG volumes as part of its massive gas trains, but the majority of this LPG is sold into international markets due to a lack of domestic distribution infrastructure. A lack of investment in this last mile infrastructure after the 1980s economic crisis caused the local LPG market to stagnateâ€”a state that continues today.
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.
How big is the opportunity?
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% penetration rate. Using MTN Group’s US$12 monthly average revenue per user (ARPU) as a proxy, the market is worth US$540-million per month, or US$6.5-billion per annum. Should penetration rise to 60% (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.
Lotion/body products: Nigeria’s 140 million plus population averages five people per household, with approximately 30 million households. Assume each household purchases one bottle of Vaseline lotion or related body product three times per year at a local price of about 800 naira (about US$5.29). As household incomes rise, we can raise the purchase frequency to five bottles per year. Holding all other metrics constant, the market value rises from US$900-million to US$1.5-billion. In order to bet on such expansion potential, the entrant will need to believe that Nigeria is undergoing a phased economic transition that will result in rising purchasing power and a shift in brand preferences.
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 considerationsâ€”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 start-up 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 sub-contracted 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 labour 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 labour.
How do you deal with 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 localised. For executives considering business investments, this is the pattern to look for. Companies should 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%, would executive teams be in a position to respond in a way that minimises the impact on their business?
What are the 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 merger and acquisition(M&A). In picking the entry path, 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 underserved 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 US$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.
Whichever path your company takes to evaluating this opportunity, winning a slice of Nigeria’s more than 140 million consumers in a growing economy should be on the agenda.