The Market

The theoretical discussion has highlighted several issues speaking in favour of and against an entry into LDCs. Some literature has categorised SSA as a “trailing market”, with little prospects of long term market potential and short term profit convertibility (Arnold and Quelch 1998, 7-20).

Following Khanna and Palepu‟s (2006) arguments of four market segments (global, glocal, local and BOP) in emerging and developing markets, several benefits are at hand in SSA. The reason for this is that global consumers encompass high income segments with strong loyalty to foreign brands, while glocal and local consumers reside within the rising middle class. According to the theory, consumer preferences between high income segments in developing countries and western consumers are similar, which reduces the need for companies to make radical adjustments to their existing product portfolios. Further in line with the theory, economic growth is often perceived to

result in increased demand for premium imported goods, which increases the attractiveness of the market. For 2008, the International Monetary Fund (IMF) set an expected gross domestic product (GDP) growth rate of 6,5 percent for sub-Saharan Africa, which will be primarily driven by oil exporting countries and also expected to result in an increase in GDP per capita (Merwe 2008).

High income segments are easier to target since they are primarily concentrated in major cities where both high-end and middle-class consumers are brand conscious and well aware of the latest trends. In addition, several countries in the SSA region currently experience substantial and consecutive economic growth (Nellor 2008: 32-33) and real per capita income growth. Furthermore, the entry of women into the workforce has increased the demand for processed food and dairy products and spurred a strong growth of supermarkets (Reardon, Timmer, and Berdeg 2004, pp.

168-183).

Urbanisation is among the strongest drivers of demand for high value products in SSA (Ashimogo and Greenhalgh 2007: 2-3). Urban populations are often more informed about trends, have easier access to information, and are better educated than the rural population (Temu and Temu 2005: 8).

Urban consumption is also often supplied through imports rather than domestic production and can be expected to boost the demand for imported dairy products, provided that wages continue to increase (FAO 2007). Busier lifestyles are reflected in a burgeoning demand for pre-packaged products, dietetic products and premium products (EIU: Economist Intelligence Unit 2005: 8). As income levels and living standards rise, consumption patterns are likely to change accordingly.

Rising income may, however, not necessarily be reflected in a corresponding change in the consumption pattern in sub-Saharan Africa. As an example, unprocessed milk is still demanded among higher income households (Hooton 2008). According to the Kenya Dairy Board, the factors that keep driving the continued importance of the informal market are the traditional preferences for fresh raw milk (Kjoeller 2008, 18-21). As a result, people are more reluctant to pay extra to get the milk processed and packaged than would otherwise be the case elsewhere (Kjoeller 2008, 18-21).

Population size and growth rates are very important factors to include when predicting future demand as growth is expected to increase demand for food products (FAO 2007: 134-135). SSA has just over 10 percent of the world's population and a yearly growth rate of 2.5 percent, which surpasses the growth in Asia and Latin America by more than double and makes it the highest population growth rate in the world (FAO 2007: 134-135; May). The division of the population varies considerably across the region. The majority of the total population in sub-Saharan Africa falls under the Bottom of the Pyramid (BOP)

segment¹⁷. According to the theory, the collective purchasing power of the BOP can easily compete with the economic benefits of targeting higher income segments. Here, especially the very large number of people living in the mid- to high income segments within the BOP market possess significant purchasing power themselves (Hammond et al. 2007: 18). The global market at the BOP is estimated to be $5 trillion (PPP). The figure to the right tries to visualise the market how the market size is divided between the different industries. Out of this, the food sector in general constitutes far the largest proportion of the market, which the figure above illustrates (Hammond et al. 2007).

Out of a total population of around 500 million people, Africa‟s total food market is estimated to be

$215 billion. Out of this, approximately 250 million people fall under the category as BOP consumers who account for $97 billion of the total food market.

A majority of countries in sub-Saharan Africa are dominated by BOP consumers who account for 50-90 pct of the national food market depending on the country (Hammond et al. 2007: 89-92) (FAO 2007).

17 The BOP segment is defined as those with annual incomes up to and including $3000 per capita per year (2002 PPP).

The mid-market population segment is defined as those with annual incomes above $3,000 and up to and including

$20,000 PPP. The high income segment includes annual incomes above $20,000 PPP. The figures presented in this thesis use annual income brackets of $500 PPP within the BOP to distinguish six BOP income segments, denoted as BOP500, BOP1000, BOP1500, etc. (Hammond et al. 2007)

Figur 2 The Global BOP Market (WRI 2006) Figure 15, The Global BOP Market (WRI 2006)

Figure 16: Advancement of Arnold & Quelch (1998)

When compiling this market information, the preliminary categorisation that was made of SSA changes. Instead of perceiving the markets in SSA as trailing markets, we have documented why they should be perceived as markets with more long-term market potential. The potential is in particular strong for those companies who manage to combine the strategies of building strong global brands with products for consumers at the different levels of the economic pyramid. These companies are likely to benefit from the diversified income segments in SSA in terms of increased revenue and consumer loyalty. As illustrated in the figure above, the market potential in SSA can be moved from what is characterised as a trailing market towards a role as either a leading markets and/or one that calls for platform investments.

On this basis the following table summaries the immediate, studied market factors that influence and partly determine if Arla Foods should enter SSA. The factors are divided into potentials and challenges, to give an overview of their influence.

Market potentials and challenges in sub-Saharan Africa

Influencing factor Potentials (+) vs.

Challenges (-) Assessment

Various segmentation classes in

the SSA market

+

segments Economic growth

+/-

value-added dairy products/ Income level is still at an absolute low level an unprocessed milk is still demanded despite growing income

Urbanisation and growing middle

class

+/-

concentrated population urban areas ease distribution/Middle class is still relatively small Highest population growth in the

world

+

extensively increase in population Food market is strong within BOP

segments

+

products