After false starts, SA firms find winning ways in Kenya

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South Africa invests more in the continent than China does, but it hit surprising headwinds in some markets – but it seems to have learnt.

MGAfrica >> THE slowdown in the Chinese economy and its recent currency, has sent Africa to whom it has been a key trading partner, reeling. 

Amidst the jitters, attention has now focused back on the hitherto little-spoken-about fact that European Union countries, led by France and the UK, are overwhelmingly the largest investors in Africa, not China.

The US is also significant, and even South Africa invests more in the continent than China does.

Despite its own economic difficulties, this South Africa role as a key FDI source for the rest of the continent is likely to become more critical in the years ahead.

However, clear successes in other African countries, South African companies for some time had a troubled past finding a footing in some key continental economies – most surprisingly of all,  Kenya. This was among the issues highlighted at the Kenya Trade & Investment Summit held in South Africa’s commercial heartland, Sandton, in Johannesburg.

Ground shifts

High expectations and vigorous investments did not always pay off, pushing South African companies to continually innovate and find news ways of penetrating this potentially lucrative market.  

The ground has shifted lately, though. The June 2015 launch of Game, Massmart’s retail brand, coincided with the confirmation of a deal between Choppies, a successful retailer from Botswana, to take over Kenya’s Ukwala stores. 

The interest in retail matches South Africa’s most critical investments across Africa in the last five years, which have included telecommunications, manufacturing, and mining. Because of its strategic location, the Kenyan market offers a gateway to the lucrative 140 million-strong East African Community market.  

New investors in the Kenyan market are trying hard to avoid the fate that befell South African brewing giant SABMiller. In 1998, the company opened a production unit for its Castle brand in Kenya. The Kenyan market had, since the 1920s, been the near-monopoly of East African Breweries Ltd. The entry of a much bigger brewer sparked of what came to be famously known as the “beer wars”.  

SABMiller eventually threw in the towel, as its rival played on the patriotism of Kenyans, leading to the sale of Castle to EABL in exchange for distribution rights in Tanzania. In 2011, SABMiller announced its return by buying Crown Foods and increasing the distribution networks of its Tanzanian brands into Kenya. 

Its new “softer” strategy has become the telling mark of the second wave of South African investors in the Kenyan market — those who are much more adept to local sensitivities.   

The first modern wave of South African investments began after the resumption of diplomatic relations in 1994 with the end of apartheid and the election of Nelson Mandela as the countries’ first democratic president. 

There had been a 29-year break, during which early investors such as Old Mutual survived in a market that was unfavourable to South African companies and investments. 

With SABMiller’s initial misstep, followed by Nando’s and other brands, South African companies’ interest in the Kenyan market dipped somewhat. Other players who  failed to gain traction in the market include iWayAfrica and Africa Online, both owned by Telkom. Barclays, now owned by ABSA Bank, also reduced its presence in Kenya as locally-owned banks grew, while retailer Woolworths sold several of its stores to Kenyan retail giant Nakumatt.  

The favourite model

In 2005, South African investment giant Sanlam bought Pan Africa Life, becoming the first SA-owned Nairobi Securities Exchange-listed company. Most companies now prefer to use that model: buying existing ventures instead of starting up from scratch, although Game’s entry is a greenfield investment. 

Massmart had tried to buy family-owned Naivas supermarkets before making the decision to go it alone. In the brewing industry, 26% of Kenya Wines and Alcohol Limited was sold to Distell Group in 2013.  MTN Business acquired UUNet Kenya while Altech increased its share in Kenya Data Networks, both internet firms. Naspers has a ubiquitous presence with Multichoice Africa’s brands DSTV and GoTV. 

Greenfield players
In manufacturing, Tiger Brands currently has a 51% stake in Haco industries and also bought Rafiki Mills and Magic Oven Bakeries. In banking, Old Mutual, which has been in Kenya for more than a century, launched an aggressive acquisition campaign where it acquired, among others, the hugely successful Kenyan microlender Faulu Kenya. 

Stanbic Bank bought CFC Bank, giving birth to the CFC Stanbic Holding and Liberty Kenya Holdings.  

There are still companies using the greenfield investment strategy. In Kenya’s lucrative real estate sector, property services provider Broll entered the market in 2013. 

Seafood diner Ocean Basket also opened an outlet to take advantage of Kenya’s growing middle class consumer culture. The American brand Kentucky Fried Chicken (KFC) made its entry into Kenya through South African franchise holder Simon Schaffer. Other franchises such as Mr Price, Steers, and Debonairs Pizza have had mixed success in the Kenyan market. 

Trade deficit
The trade deficit between South Africa and Kenya stood at $33-million at the resumption of relations in 1992 and has since grown more than tenfold. Kenyan companies tend to show less hunger for investments outside their immediate East African region, while South Africa has been aggressively investing across the continent as its home market becomes saturated. 

This partly explains why, while there are over 60 successful South African companies in Kenya, there are very few Kenyan companies in South Africa.  

ARM Cement set up its South African subsidiary in September 2004. The arm has a capacity of 30,000 tonnes per year, half of which the main plants in Kenya produce. Olympia Capital, the NSE listed investment holding company, has struggled to make headway in South Africa. Its two subsidiaries, Plush Products Ltd and Natwood Limited, were liquidated in 2009.  

Plush Products was a manufacturer of blinds and window decorating accessories while Natwood made wooden lifestyle products. Their successor, Tiespro Trading, was closed in 2013. The company made bathroom and kitchen fittings. Kenyan juggernauts such as Safaricom, Kenya Commercial Bank, and Nakumatt have yet to show interest or capacity to invest beyond East Africa.  

According to the World Bank’s Ease of Doing Business Index, South Africa ranks second for favourability in sub-Saharan Africa, after Mauritius. Kenya ranks 15th. The ranking is of little consequence to Kenyan companies and exporters who have found it difficult to penetrate the South African market. 

Apartheid legacy

According to the 2014 Economic Survey, South Africa exported KES70.7billion worth of goods to Kenya while the latter only managed KES3.277billion in 2013. The problem, it has seemed, is that South Africa is yet to dismantle the high tariff barriers it instituted during the apartheid era.  

This is particularly true for countries like Kenya outside South Africa’s key trading blocs. Tea, Kenya’s most successful export to the world, attracts a four-rands-per-kg tariff to access the South African market. Soda ash attracts a 12% levy, making the market prohibitively expensive for Kenyan exporters.  

The battle to access the South African market has however accelerated this year, with diplomatic tiffs over visa regulations and trade agreements sparking a flurry of bilateral activity to resolve them. 

Right now, South Africa’s huge market remains tantalisingly out of reach for Kenyan exporters and investors. Kenya’s market, on the other hand, is still a working experiment for South African companies and a solid market for exporters.

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