The dual development of modern retail channels and sustained prominence of traditional points of sale are important variables influencing packaged hot drinks in Africa. As the chart below demonstrates, there is a great disparity among African markets in the development of modern outlets in hot drinks retailing, which include supermarkets and convenience stores. Small, independent and informal retailers that serve low-income consumers still constitute the majority of drinks retailing volume in the continent, particularly in sub-Saharan Africa. This traditional channel of sale demands flexibility in terms of price, package size, promotion and delivery in order to reach the vast majority of low-income African consumers. However the uneven but significant growth of modern channels in urban hubs must also play into the complex multichannel strategy of hot drinks brands in Africa. Big and small, multipack and single-serve, affordable and premium: is it possible for new, foreign entrants to build mass appeal in such a disparate retailing environment?
Source: Euromonitor International
Two sets of challenges for brands
Within the hot drinks industry, traditional retailing typically benefits local producers and local brands with the regional expertise to navigate the informal, inconsistent and fast-moving pathways to sale. In contrast, a more developed modern retailing environment (for example, South Africa) can benefit multinational brands servicing larger supermarket and convenience store chains. Large supermarket chains in Africa can be European owned, such as Casino in Cameroon or Spar in South Africa, meaning existing retail relationships with European hot drinks brands that ease market entry. Pack sizes, transport, warehousing and merchandising on the supermarket shelf can be familiar and much easier for brands to adapt to. Supermarket customers are typically more affluent and more likely to be familiar with the format and price point of European hot drinks brands, with less need for major adjustments in strategy. However the small number of African consumers able to reach these urban supermarkets and able to afford regular trips to this channel means the addressable regional opportunity is low. Despite the slow conversion to modern retailing channels, traditional retailing is where the real hot drinks volume will remain in the near-term.
But entering traditional channels may not be easy for brands that face established local competition. An effective market entry strategy must contend with long-standing consumer preferences for traditional retail (such as Tunisia) that may be resilient despite rising incomes and growing consumer economies. Traditional grocery retailers still dominate the retail distribution of coffee in Egypt, with a 71% share of retail volume sales in 2014. The leading domestic producers of coffee in the country (Shaeen Coffee, Fawzy El Banan) maintain long-established relationships with wholesalers and independent retailers and are popular with consumers. Their products are stocked by a dense network of small supermarkets and independent small grocers, which makes it more convenient for consumers to purchase their products. These relationships may be difficult for multinational brands to replicate but are crucial to obtain a meaningful volume position.
At the other end of the retailing spectrum, South Africa leads the continent in terms of modern retailing development, with 80% of off-trade hot drinks volume moving through modern grocery channels. Modern grocery retailers continue to dominate other retail channels in terms of overall hot drinks sales in South Africa. Supermarkets remained the strongest channel amongst modern grocery retailers, with a share of 63% of total hot drinks retail volume sales in South Africa. The introduction of lower supermarket pricing and discount chains (notably, USave) also contributed to modern grocery growth. As noted above, major, established hot drinks brands are the beneficiaries of this familiar, modern retail environment. As a result of a developed modern retailing channel for hot drinks, Nestlé enjoys a much higher share of the market in South Africa than elsewhere in the continent, accounting for 38% of retail value in coffee in 2013.
However, the tiered, multichannel strategy of its flagship Nescafe instant coffee brand has allowed the company to stay competitive in developed, modern retailing channels and adaptable to more challenging traditional retailing environments. Nescafe’s largest value share is in Nigeria, where traditional retailers account for 90% of hot drinks volume. Nescafe provides an excellent example of brand that readily adapts its price point, package size, promotional strategy and delivery to accommodate traditional, independent retailers.
Keys to multichannel success: Price, Package, Promotion & Delivery
Nescafe has become a specialist in adapting its brand, package and price to each market it serves. In markets where modern grocery penetration is low or where the operating environment makes formal distribution difficult, the company employs local sampling teams as well as branded independent street stalls to bring their product to rural areas. In traditional or lower income retailing channels, lightweight, portable, sachet style packaging also enables the company to provide a competitive price point. Furthermore, the Nescafe brand has transitioned to local sourcing of its coffee in Cameroon in 2014 to avoid the import duties which drive up retail sales prices, maintaining its aggressive focus on market share growth.
Source: Euromonitor International
The brand also have a larger Nescafe product in the glass jars familiar to European consumers and a premium Nescafe Gold line that is now available in some African markets and priced for higher income consumers primarily in supermarkets and other grocery outlets. In this sense, Nescafe has been successful in using its package, price mix and channel strategy to reach both segments of consumer. Rather than restricting the brand to a narrow tier of middle class consumers, the company have an inclusive brand strategy that moves up the value chain as retailing environments develop.
Learning from Nescafe’s flexibility
Price/package mix can make brands more affordable for a broader population of consumers, but also more attractive for the informal/traditional retailers they serve. Major brands must foster better relationships with sellers and distributors, through promotional or branded in-store materials and sampling. Tea bags or instant coffee sachets may be opened and re-sold individually by some small independents: brands must be flexible in finding a way to satisfy the needs of this segment of the population.
This flexibility also applies in servicing this fragmented independent channel in dense urban environments or hard to access rural geographies. Soft drinks brand owner Ajegroup are an excellent example of a global company that has built share in tough, emerging market operating environments through innovative transport and delivery. While the company maintains tight control of production and packaging to keep prices down, they also by employ local third-party distributors with expertise in individual markets instead of company owned drivers. Working with local distribution specialists can help to grow the independent retail network for hot drinks brands, reaching out of the way retail partners.
The largest global hot drinks (and soft drinks) companies have the scale and ambition to reach all available points of sale with their brands. In contrast to soft drinks competitors, lightweight tea and coffee products should have an obvious advantage over heavy and less portable ready-to-drink beverages. In order to build share in these emerging African markets, brands must find ways to use their package, adjust their price and educate consumers via sampling initiatives. The products themselves must be lightweight, portable, with packaging resilient enough to maintain freshness in tough retailing environments. Packaging must also be carefully branded: in some cases, tea or coffee packaging may be the best and only form of shopper marketing in traditional channels.
Reaching the appropriate price point and getting brands in the hands of consumers may require sacrifices in terms of margin. But reaching traditional channels of sale offers the opportunity to reach a new, rising group of consumers and build loyalty as their incomes and purchasing power grow.
Additional insights on African retailing are available in Markets of the Future reports.