Last updated: March 13, 2013 6:19 pm

African groups seek growth across borders

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A view of a section of Nakumatt's shopping hall in an upper-market area of Nairobi©Reuters

Nakumatt’s mall in Nairobi: the retailer has established itself beyond its Kenya home

In recent months Africa’s largest pharmaceutical group has withdrawn staff from northern Nigeria because of fighting between the army and Islamist forces, and from Mombasa as a precaution ahead of Kenya’s elections.

Stephen Saad, chief executive of South Africa’s Aspen, which has sales representatives in 42 sub-Sahara African countries as well as operations in Asia and Latin America, says investing across the continent is “not for the faint hearted” and requires “patience and perseverance”.

Sub-Saharan stock markets

Sub-Saharan stock markets
Number of listed companies on selected exchanges

However, Mr Saad says Aspen’s regional expansion has helped to offset some risks. “It’s a bit like venture capital, you know at any one stage you are going to have four or five of those with potential problems, but they come right,” he says.

Branching out across the region has become a vital strategy for African companies wrestling with how to thrive on a continent of small and fragmented markets. Many western multinationals have sat on the sidelines as African economies have expanded, leaving the door open for domestic players to build a pan-African presence. But the competition is now intensifying.

The trend has been most pronounced in South Africa, home to nearly half the continent’s largest 40 companies by market capitalisation. Many of them are leading a charge across the Limpopo River, expanding into less developed neighbouring countries.

Other African companies, particularly from Nigeria and Kenya – the economic powerhouses in the west and east – are following suit as they seek to dominate various sectors in their regional hinterland and beyond.

These pan-African companies have provided a route into the continent’s growth story for international investors. A study by the Boston Consulting Group found that a hypothetical $100 investment in Africa’s 40 biggest listed companies by market capitalisation in 1999 would have been worth more than $900 by November 2009.

Nigerian banks, for example, are beginning to challenge their South African counterparts for market share on the continent, with Lagos-based United Bank for Africa boasting a presence in 19 Africans countries, from Gabon to Uganda.

It is a process that was accelerated by reforms in the wake of Nigeria’s 2008 banking crisis that forced weaker banks to sell out to stronger rivals, triggering a period of consolidation in the sector.

Another west African group, Ecobank, which began life in Togo in the 1980s, now has bold regional ambitions and a network stretching across 32 nations.

In comparison, South Africa’s Standard Bank, Africa’s biggest by assets, which has been streamlining its international operations and refocusing on its home continent, has a presence in only 17 African states.

Outside of finance, Dangote conglomerate has already established itself as the biggest investor in the cement industry of sub-Saharan Africa. The Nigeria-based manufacturing group – owned by Aliko Dangote, Africa’s richest man – is building cement plants in 13 countries as it looks to consolidate its dominant position.

In Kenya the likes of Nakumatt, a regional retailer, and Bidco , a maker of edible oils and soaps, have established themselves beyond their borders in east Africa, where a regional economic bloc has boosted cross border trade. But most Kenyan companies have so far hesitated to expand further across the continent.

“The brand can travel but I think east Africa does not know west Africa well,” says Vimal Shah, Bidco’s chief executive.

An exception is Scangroup, a marketing and advertising group, which counts Airtel, Unilever and Nestlé among its global clients, and recently opened offices in Nigeria and Ghana.

“Nigeria is bigger than combined east Africa – east African companies are all scared of west Africa but they all have to go there,” says Bharat Thakrar, Scangroup’s chief executive. “If they want to grow they have to become pan-African.”

“Businesses have caught on and accepted that longer term for their survival they need to look beyond their market and become regional players – it isolates them from single-country shocks,” says Sev Vettivetpillai at Abraaj Capital, the Dubai-based private equity group focused on emerging markets. “We have to find solutions to bring the very large dominant players in the respective regions all under one.”

Barriers faced by African companies seeking to expand in the region include the practical hurdles of difficult logistics, dealing with unwieldy bureaucracies and the dearth of basic infrastructure, as well as cultural and linguistic challenges.

Yet Mr Saad at Aspen is unambiguous about the potential offered by the world’s second-largest and second most populous continent. Many South African companies operating in a relatively mature home market view expansion across the continent as critical to their next stage of development.

Progress, however, can be slow, and as a general rule Africa’s corporate sector remains small, with companies often struggling to access finance, while manufacturers face mounting competition from cheap imported Chinese goods.

“It [regional expansion] will be a growing trend, but generally excess capital is not something too many corporates have,” says Brian Mugabe, head of African research at Imara, an investment house with a presence across sub-Saharan Africa. “I think you will see South African companies dominate that space [of cross-border growth] for some time.”

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