U.S. Trade Mission to Sub-Saharan Africa Includes Johannesburg, Nairobi and Lagos
Franchisors gain understanding of markets from legal, demographic, real estate and development perspectives.
A recent trade mission to Sub-Saharan Africa provided participants real-time experiences with U.S. and local government authorities in addition to local franchise experts to weight the advantages and challenges of operating in the region. The trade mission, which began Sept. 26, was produced by the U.S. Commercial Service and sponsored by the International Franchise Association and Franchise Times.
- CKE Restaurants − Vice Pres. of Intl. Relations Geoff Spear
- Curves International Inc. − Managing Dir. Clive Robinson
- FOCUS Brands Inc. (Carvel, Cinnabon, Schlotzsky’s, Moe’s Southwest Grill and Auntie Anne’s Pretzels) − Dir., Intl. New Business Dev. Scott Chorna
- Global Franchise Group LLC (Great American Cookies, MaggieMoo’s, Marble Slab Creamery and Pretzelmaker) − Chief Dev. Officer John Barber and Exec. Dir., Intl. Business Dev. John Peddar
- Hertz Equipment Rental – Dir., Global Franchise Dev. David Riker, CFE
- International Dairy Queen − Vice Pres., Intl. Dev. Amir Kremer
- Johnny Rockets − Director, Intl. Sales and Support Duane Messerschmidt
- Tutor Doctor – CEO Frank Milner, CFE
- Wing Zone − Vice Pres., Intl. Dev. Hair Parra
U.S. Commercial Service Global Franchising Team Leader Jennifer Loffredo directed overall coordination of the mission for the three stops. Event sponsors, represented by me for IFA and Editor Nancy Weingartner for Franchise Times Exec., provided initial marketing and support throughout the mission. The goals were to help the participating franchisors understand the markets visited from a legal, demographic, real estate and development perspective, but most importantly to get them face to face with qualified master and area development prospects for individual discussions.
U.S. Commercial Service South Africa Deputy Senior Commercial Officer Brent Omdahl and his team, which included Felicity Nagel and Jean Claude Gelle, welcomed the group while Deputy Chief of the Mission Virginia Palmer and others provided a market update.
Gateway to Sub-Saharan Africa
South Africa, known by many as the gateway to Sub-Saharan Africa, has strong financial markets and solid infrastructure which makes it an ideal country for U.S. franchisors to launch African growth strategies. Seven of the 10 fastest growing cities in the world are located in Africa. South Africa ranks 40th in “ease of doing business,” well above most of its neighbors. More than 400 U.S. companies are operating in South Africa; the country produces $17 billion in bilateral trade. Leading industries in South Africa include energy, health care, agriculture, technology, transportation and retail. The unemployment rate is 25 percent, but is higher in some rural and poorer areas.
Challenges for U.S. companies in South Africa include finding skilled workers and the effects of organized labor on the costs of running a business. While supply chain challenges can still occur, South Africa is much more advanced than its northern neighbors. For food franchisors, beef and poultry can generally be sourced there. Companies are advised to purchase locally due to high duties on imported U.S. beef and poultry.
South Africa’s general population is heading to the large cities: Johannesburg, Durban and Cape Town. It is estimated that more than 40 percent of the country’s GDP comes from the Johannesburg area, suggesting that any entry into South Africa should begin in Johannesburg where the middle class is growing substantially.
Franchise Association of South Africa Pres. Derek Smith reported that franchising now has a legislated definition within the Consumer Protection Act and that FASA has drafted a code to submit to the National Consumer Commission. Smith said that franchising accounts for 9.7 percent of the GDP in South Africa and involves 17 different industries. With 300,000 people employed directly in franchising, there are more than 30,000 small- to medium-sized businesses in franchising. Of the 600 franchisors in South Africa, 90 percent are local. The largest category within the sector is the food and restaurant category: 22 percent of the total.
Smith described a few of the challenges ahead for franchising in the country: finding the right franchisee who is qualified both financially and with the skills to grow the business, as well as increased costs such as labor, utilities and fuel. FASA’s members are optimistic – 88 percent expect growth this next year. Smith described a new jobs fund that the government is rolling out could create 10,000 new jobs per year over the next nine years. With this fund, which will assist with training, mentorship and coaching, FASA hopes to create an additional 150 to 200 new franchise outlets which will spawn 2,000 new jobs in the next three years.
Following numerous morning and afternoon individual visits with franchise prospects, the franchise delegation heard from some local franchisees. Speakers included McDonald’s multi-franchisee Peter Moyanga, Franchising Plus CEO and Nandos co-founder Eric Parker, and Impact Investments CEO, U.S. multi-unit franchisee Salim Shermohammed who is now a partner in a new food brand in South Africa.
Parker described the local franchise market as robust and dominated by some very strong players such as Famous Brands (whose brands include Debonairs Pizza and Steers Burgers and Mug & Bean), Nandos, Chicken Lickin and Wimpy. Parker cautioned U.S. franchisors about finding the right partner, having the willingness to adapt to local flavors, and noted a number of U.S. franchisors that have entered and left the market.
The speakers discussed an important criterion, the Living Standard Measurement, and stressed that U.S. franchisors need to know where their market is located and target it. The upper end of the LSM – 6 and above is already well serviced and the real opportunity in South Africa is in the 4-6 range, noting that the average monthly salary is 2,500 rand (approximately $250 per month).
The delegates’ second day began with a legal update from Adams & Adams Partner Eugene Honey on the aspects of operating a franchise in South Africa. Honey described intellectual property and said that trademarks are similar to those in the United States: the time frame tends to be about two years between application and the granting of the marks, and company marks are protected during that time. On the topic of exchange control, he reported that an application must be filed with the reserve bank. This generally takes two months for a response and must be approved before receipt of any upfront fees.
Following another round of individual business meetings, the delegates attended a session on onsumer behavior and urban retail profiles for South Africa. Urban Studies CEO Dirk Prinslo, Ph.D. and McKinsey South African Consultant Damian Hattingh described what lies ahead for the franchisors from a marketing and customer targeting standpoint.
Prinslo reported that as of 2011, South Africa had a population of 51.7 million that is segmented 80 percent Black-African; 9 percent colored; 8.5 percent white; 2.5 percent Indian-Asian. The real opportunity is in the cities beginning with Johannesburg, then Durban and Cape Town, said Prinslo. He also described the migration of the populations to the cities.
Using the Living Standard Measurement, the potential for growth is in the segment that captures the 4-7 LSM which has more than 4 million people and growing yearly. Car ownership growth among the general population is increasing mobility and providing solid growth in the middle market for goods and services, said Prinslo. He urged delegates to understand the market and remember that their brands are currently unknown in the market and to match their product to the right centers for maximum market share. Identifying the right locations in the malls is important, as well as preparing for the local competition that has been in the market and is very savvy, he said.
Hattingh explained that the growth in Africa will come from consumers and not from resources as in the past. Real GDP growth in Africa (5.1 percent) is the second fastest in the world behind Asia. South Africa and Nigeria stand out as the two highest consuming countries compared to the rest of Africa.
Hattingh described Sub-Saharan Africa as a young and optimistic population with an urban population explosion of 40 percent in the cities. These consumers are also looking for quality at the right price, plus they’re digitally savvy and have modern tastes. He suggested that the keys to success in Sub-Saharan Africa include: a focus on urban areas, anticipating explosive growth, delivering branded quality products, creating a strong value proposition, understanding changing media habits, alternative distribution channels and the art of hiring young talent, and embracing the youth movement.
The third day of the mission, billed as the Urban Safari, included visits to retail outlets in areas surrounding Johannesburg. The delegation toured Soweto’s Southgate Mall, Randburg’s Cresta Shopping Centre and Sandton City Shopping Centre. The delegation next visited Nairobi, Kenya for two days of market briefings and individual meetings with potential candidates.
The final stop on the trade mission was Lagos. U.S. Commercial Service’s Janelle Santerre Weyek, Rebecca Armand and Anayo Agu served as hosts and scheduled more than 120 individual visits for the delegation.
With more than 170 million people and a growing middle class, the market is the largest in Africa. The country is adding approximately 4 million to 5 million people each year, although 65 percent of the population lives in poverty.
Challenges for U.S. brands operating in the country include corruption and fraud. The USCS personnel strongly suggested that any potential partners be thoroughly examined and reminded the group of the International Corporate Profiles service that the USCS prepares for U.S. companies. Infrastructure and supply chain challenges also remain, specifically for food franchisors.
Other challenges include the availability of reliable power. The country has just begun the process of privatizing the power grid, but frequent outages require that all businesses have a generator, equipment that must be planned as part of any new venture in the country.
U.S. brands are highly prized in Nigeria and icons already actively operating there include Coca-Cola, Exxon, Chevron, Pepsi and franchisors Computer Troubleshooters, Crestcom International, Domino’s Pizza, FasTracKids International, Johnny Rockets, KFC, Precision Tune Auto Care and Sign-A-Rama.
Delegates heard from executives of the Nigerian International Franchise Association and franchisees of Crestcom International and Johnny Rockets Nigeria, as well as executives from the National Office of Technology Acquisition & Promotion and the American Business Council.
One of the first recommendations on doing business in Nigeria is to hire local counsel. Registering a brand with the National Office for Technology, Acquisition and Promotion and intellectual property issues appears to be good advice. There was much discussion about the registration process with NOTAP and it was recommended that franchisors submit a draft of their franchise agreements prior to having them signed by partners. Thereby, issues can be resolved prior to completing a deal with a master franchisee.
Franchisees advised delegates that franchisors must be flexible and adaptable with their brands, products and systems in Nigeria. Johnny Rockets franchisee Chris Nahman noted having to adjust burger pricing upward to make a profit and still deliver the quality experience that the brand requires due to supply chain issues and costs.
U.S. Embassy in Lagos
During a brief break in the meetings, a press conference was hosted by Tourism & National Orientation for Nigeria Minister of Culture Chief Edem Duke. It included Consul General of the U.S. Embassy in Lagos Jeffrey Hawkins and me. The final day of the mission included an ongoing series of individual meetings with delegates.
Scott Lehr, CFE, is senior vice president, U.S. & international development for the International Franchise Association. Find him at fransocial.franchise.org via the directory.