Reuters/Philimon Bulawayo
Selling low is not a hard sell
NESTLED GROWTH

What Nestlé forgot to mention when giving its reasons for scaling down in Africa

By Sibusiso Tshabalala

Five years ago, Nestlé announced its bold expansion plan for the sub-saharan Africa region: a $161 million investment to build three new factories and 13 new distribution facilities. The desired outcome? Increased sales for the food multinational and 750 new jobs for the 21 countries in the region. This plan was inspired by the much-talked about economic revival of Africa and its “rising middle class”.

Now, in 2015, the tune has changed and Nestlé wants to scale down.

It will start off by cutting 15% of its workforce, reducing its product line by half, and focusing on more “core” product offerings.

In an interview (paywall) with the Financial Times, chief executive of Nestlè’s equatorial Africa region (EAR) Cornel Krummenacher, said:

“We thought this would be the next Asia, but we have realized the middle class here in the region is extremely small and it is not really growing.”

What is missing from Krummenacher’s explanation is a good-ol mea culpa.

In this case, it would be: “Sorry, we focused too much on Africa’s emerging middle class, and forgot about the low-income consumers.”

Nestlè let it sights off Africa’s low-income consumers

While much of the continent’s modest but steady growth is consumption-led–fuelled by an emerging middle class (pdf)–success in the consumable goods business mainly lies at the bottom of the pyramid.

Indian-born economist CK Prahalad, was the first to champion this idea.

Prahalad believed that the world’s largest multinational companies – like Nestlè, Unilever and Johnson & Johnson – would achieve greater success if they focused on serving low-income consumers.

Nobel Prize winner Muhammad Yunus also made this same argument. Ten years ago, Yunus partnered with the French multinational Danone to form Grameen Danone. The goal of the enterprise was to develop a cheap, yet highly nutritious yoghurt product for low-income communities in Bangladesh.

The Grameen Danone model was unique: saleswomen would sell yoghurt in remote areas with few shops or refrigerators in single units, and these women earned a commission for each unit of yoghurt sold. Demand spiked, and eventually, a low-cost production facility to develop different types of yoghurt with essential nutrients was opened.

This is not only limited to food. As the Boston Consulting Group notes, Samsung did the same by manufacturing TVs with built-in power surges, to provide for electricity uncertainty on the continent and Renault did this with its its low-cost, yet high-quality car, the Dacia.

As it turns out, Nestlè has experimented with this model already in Cameroon – by selling the Nestlè Nido baby formula in sachets and empowering women entrepreneurs to be resellers.

So why then did it ditch a winning formula for dismal sales in Nespresso coffee capsules and pet food?

A misunderstanding of Africa’s diverse consumer base–their changing preferences, split between low-income and middle class and consumption patterns–could be attributed to Nestlè’s difficulties. Its decision to roll back on selling “elite products” and move back to core products, like stock cubes and powdered milk, is telling.

Many African consumers are still at the bottom of Prahalad’s pyramid. They desire affordable quality, and this is an opportunity to exploit. A multinational company like Nestlè will find that strong growth lies with low-income consumers, not at the middle.