Business and Finance

Understand your market – SA firms are changing Kenya strategy

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Why SA firms are changing their Kenya strategy

Like several other South African businesses that have opened shop in East Africa’s biggest economy, Kenya Data Networks (KDN’s) entry into the lucrative Kenyan IT sector nearly a decade ago appeared set for big success, until reports emerged recently that the company was bleeding red.

While announcing an impending management shakeup at the company, Tim Ellis, a Group executive of the JSE listed Altech Ltd that owns 60.8 per cent of KDN, hinted strongly that the next CEO of Kenya Data Networks would not be a foreigner.

“The perception that the expatriates do not understand the local market will not end and so we have decided not to renew these contracts upon expiry,” Mr Ellis told the Business Daily on October 3, in an apparent reference to a planned replacement of the three top executives of the faltering Kenyan IT firm.

Mr Ellis also said the data communications carrier was shopping for an equity partner to inject new capital into the business to help it rebuild its competitive muscle.
The arrival of Kenya’s first ever fibre optic broadband internet connection in 2009 was ideally meant to be KDN’s watershed moment, but it marked the beginning of a fiercely competitive environment that has seen some nimbler players eat significantly into its market share and profit margins.

Altech’s management appear keen to reverse KDN’s slide along a familiar path for some South African businesses that have ventured into Kenya.

A few of the notable firms that have beaten hasty retreats after burning their fingers in the Kenyan market include international beer maker Castle Breweries, fast foods chain Nandos, magazine publishers Media24, and cinema company Nu Metro.

But with Kenya being Eastern Africa’s economic gateway, South African firms intent on expanding on the continent have had little choice but to try their luck in the country.

Some have found success, like consumer goods producer Tiger Brands, pay-TV company Multichoice, clothes and lifestyle retailers Truworths, Woolworths and Mr Price.
Critics have cited different reasons for the failure of South African companies that have made premature exits from the Kenyan market.

They include ‘poor’ entry strategies, their insistence on having management teams that are heavy with expatriates, the failure to connect with Kenyan consumers who have strong brand loyalty and the competitive nature of Kenyan entrepreneurs, who give the typically bigger South African firms a run for their money.

Altech declined to discuss its turn-around strategy, or even comment on the mixed bag of fortunes that South African companies have encountered in Kenya.

“Altech’s shares are currently trading under a cautionary announcement (and) we are therefore not in a position to provide any further details regarding our financials or our future strategies,” said the firm in a statement sent to GTA.

The managing director for Tiger Brands in East Africa, Polycarp Igathe, was however blunt in his assessment of South African firms’ experience in Kenya.

“In my view, they (South African firms) lost the battle for sustaining presence in what is a very competitive market upon initial entry,” said Mr Igathe in an interview with GTA. “This challenge is not unique to SA firms, it affects all operators in Kenya,” he added.

Mr Igathe was at the helm of Kenyan consumer goods firm Haco Brands when in 2008 South Africa’s Tiger Brands came knocking with a take-over proposal.

Chris Kirubi, a Kenyan business magnate and owner of Haco Brands, decided to let go and Tiger Brands acquired 51 per cent of the company, with Mr Kirubi retaining 49 per cent.
A look at comments in the JSE listed Tiger Brands’ annual statements for 2011 shows the Kenyan subsidiary is on a growth path, and is projected to return a profit this year.

Tiger Brands’ Kenyan business halved its losses to R43.3 million last year (about $5 million), compared with a loss of R84.6 million (about $9.8 million) in 2010.
“Volumes increased 21 per cent in the year under review with margins being held at approximately 10 per cent.

Profitability is expected to be restored in 2012, but will be subject to volatility in foreign currency exchange rates,” says Tiger Brands.

Tiger Bands is one of the largest producers of consumer goods in Africa, with fifty manufacturing facilities on the continent; forty-four of which are in South Africa and one each in Kenya, Ethiopia, Cameroon and Chile and two in Nigeria. Mr Igathe puts the firm’s performance down to having adopted the right entry strategy.

“The secret of Tiger Brands’ success in Eastern Africa has been the joint venture partnership with Chris Kirubi in Kenya and Bizenu T. Buzuayehu in Ethiopia. The local partners have guided Tiger Brands into local nuances and operating practices,” said Mr Igathe.

Commenting on the issue of having expatriate managers in their Kenyan units, Mr Igathe said Tiger Brands’ belief in Kenyan executives has helped to smoothen its operations in the country.

He likened hiring an entire team of expatriate executives to putting a fresh water fish in salty waters and expecting it to thrive.

Washington Gikunju 2012

http://www.gatewaytoafrica.com/

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