Is Africa in the right businesses?

Oct 07, 2007 Strategy, Sunday Nation

What is the coffee business? What is the football business? What is the athletics business? What is the flowers business?

For us in Africa, the answers to those questions are very simple indeed. The coffee business is BEANS. The football business is PLAYERS. The athletics business is RUNNERS. The flowers business is GREENHOUSES.

In all of those lines of business, we are part of a global supply chain. In all of them, we remain stuck at the primary production end. We provide the raw material, at a low price (and remain under pressure to make it ever lower). Other people do the sophisticated stuff: they handle the logistics; they build wholesale and retail operations; they manage the final consumer; they nurture brands. And they make all the money.

Let’s look at coffee in more detail. Have you met a rich coffee farmer lately? No, I didn’t think so. That’s because a coffee farmer violates the first law of market power: what is scarce, commands power in the market. Think back to your first economics lesson in school: the entire world economy runs on the fact of scarcity. And those who know how to build scarcity and benefit from it reap the rewards. The rest sit in the heaving crowd waiting for international rescue schemes.

Back to coffee. Why are coffee farmers poor? Is coffee not a valuable product? Actually, it is one of the five most heavily traded commodities in the world. Most producers are in tropical and sub-tropical regions; most consumers, however, live in Europe, America and the Far East. Each cup of coffee therefore represents a global chain of activities, linking connoisseurs, cafe owners, dock workers, clearing agents, warehousers and peasants. We are the peasants in that chain.

There are more than 50 coffee producing countries in the world. Most of those countries contribute a tiny proportion of world output; yet that output might be a large part of their own exports. And there are 25 million coffee farmers around the world, all sending plenty of beans into the system, and mostly living on the edge of poverty. The more they produce, the more the price they receive falls. What they sell is not scarce; it is widespread and easily produced.

Is life just as rough further down the value chain? Not quite. We start to observe some scarcity emerging. Four large coffee processors – Kraft, Nestle, Proctor & Gamble and Sara Lee – control this part of the industry. They buy close to half of the world’s coffee beans every year. They each have coffee brands worth US$ 1 billion or more in sales. They have profit margins of up to 25 per cent – very high compared to other food products.

Business is generally quite good in this part of the line – if you can get in. And as you get further down the chain, scarcity becomes a feature. Once upon a time there were many little coffee shops serving millions of customers. Then some of them got wise and learnt about scarcity: companies like Starbucks built global retail operations and a powerful brand; in other words, Starbucks built scarcity, and now owns more than 13,000 cafes in forty countries. For Starbucks, the sun rarely sets: it charges four or five dollars or more per cup sold. The actual cost of the beans in that cup is actually a few pennies.

In Africa, however, we are content to be in the coffee beans business. And we make a habit of complaining about the exploitation we suffer at the hands of these demons. Let’s stop whining. The savvy guys in coffee have understood scarcity; we have not. The smart operators have understood that you can build different skills, design unique business models and develop powerful brands that allow you to become distinctive and get away from the crowd. We ARE the crowd, and it keeps growing.

Shall we talk football, the world’s most popular sport, supported by maniacs who will pay any price to watch it (this author included)? It is a humungous money-making machine for those who control the scarcity: the top clubs, agents, merchandisers and television companies. Africa’s role in this money-fest is to provide many of the players. The individual players might make small fortunes; our economies get next to nothing for the talent they produce.

You get the picture. We can either complain about the exploitation, or we can realise there are bigger arenas to play in. But those arenas require sophisticated skills, more than just picking up a jembe or kicking a ball around. Until we learn the skill-sets that underpin advanced business models, we will be playing in the poor man’s stadium.

Those are the logistical skills of designing complex supply chains; and the psychological skills of building brands that that command high prices. The skills are known, and they are available to all those who care to open up their minds a little. You can make other people queue up to play in your playground, by your rules. Just think about it.