Anyone who has attempted to launch a food business knows how difficult it can be. Whether it’s raising capital, finding and retaining talent, balancing a side hustle with a full time job or finding reliable co-packers, we hear lots of stories from entrepreneurs that raise our sympathies and admiration. But nowhere have I encountered a group of entrepreneurs more tenacious and resourceful than in a city a world away: Lagos, Nigeria.
This summer I had the opportunity to meet with a number of “SMEs,” operators of small to medium-sized enterprises that are a growing part of the Nigerian food sector. Despite the fact that they exist in the world’s fastest growing populace, projected to rise from 185 to 220 million by 2020 and overtake the U.S. by 2050, I have taken to refer to them as small to medium sized miracles.
They deal with all of the issues faced by their U.S. counterparts; however, they also deal with a spate of other, more fundamental challenges that would send most people running for the exits. Three specific challenges I was struck by are credit, foreign exchange, and production infrastructure.
These are fundamental roadblocks that influence almost all strategic decisions for Nigerian SMEs. Yes, these entrepreneurs are savvy marketers who understand the importance of human-centered design and have developed strong brands and careful consumer positioning. However, these roadblocks mean that instead of making packaging, sales, distribution and merchandising decisions based on a well thought out company vision and brand strategy, these SMEs must choose whatever solutions or workarounds are feasible in the face of these core challenges within their trade environment.
In the United States, 99% of grocery sales happen at food retailers such as grocery stores, supermarkets and supercenters. Food entrepreneurs may start out by selling at farmers markets, but typically they quickly pursue shelf space at grocery stores with the ultimate goal of getting nationwide distribution at a leading retailer like Whole Foods or Kroger. By contrast, the formal food retailing sector in Nigeria, consisting of supermarket chains like SPAR and Shoprite, represents about 5% of food sales. The vast majority of shoppers buy food at outdoor markets, where pack sizes are smaller, prices are lower and the produce is perceived to be fresher.
This channel is not just important because of the volume. Outdoor markets are essential for SMEs because tens of millions of shoppers pay in cash, shortening the cash cycle in an economy where credit is very hard to come by (or at 20%+ interest if available) and supermarkets pay on a 120-150 day cycle. That SMEs must either work within the limited market penetration and cash challenges posed by retailers, or sell through outdoor markets, places serious limits on the types of food businesses they can develop. If the product requires a cold supply chain, SMEs that sell through outdoor markets may very well have to build it themselves. If it requires refrigeration at retail, sales could be limited to the 100 or so grocery stores in the formal supply chain that serve just a fraction of the population.
I was struck by the fact that even the smallest SMEs were already or actively exploring opportunities to export their goods, and were willing to do so at a loss! Why would a small entrepreneur go through the hoops to export its products when there are 185 million mouths to feed at home? The answer is foreign exchange, or forex.
When the price of crude oil dropped in late 2014, so did the flow into Nigeria of dollars, pounds, euro and yuan, the world’s trading currencies. This forced the Central Bank of Nigeria (CBN) to limit who can exchange Naira and how much foreign currency they can obtain. It’s not even a question of exchange rate, it is the fact that the bank notes simply are not available. This means that Nigerian-based food companies are not able to purchase foreign inputs such as ingredients, packaging and equipment regardless of how well their businesses are doing. (It would be like traveling overseas with a credit card in good standing and literally not being able to buy anything with it!) And in many cases these products are not available or of significantly poorer quality locally.
Forex is the lifeblood for SMEs in Nigeria and other nations similarly strapped—so much so that many export their goods at a loss in order to access it. The situation has improved somewhat this year. In April the CBN began allowing SMEs to import up to USD $20,000 of eligible goods per quarter.
Here SMEs are often caught between a rock and a hard place. If they design beautiful packaging that makes their products more competitive domestically and for export, it probably means procuring it from a foreign supplier—likely one in China, India or Europe. Local packaging manufacturers exist; however, the SMEs we spoke with uniformly agreed that they do not meet the same high standards as foreign equivalents, a shortfall that impacts even the largest domestic consumer products companies and importers that pack inside Nigeria. One thing we were very impressed by is the sophistication that many of these SMEs have when it comes to package structure and design, marketing and branding. They know what it takes to be successful but simply don’t have the options to put their good ideas into practice. Unwilling to settle for substandard local packaging options, many SMEs will incur stock-outs while awaiting a container shipment from overseas. Lots of U.S. food entrepreneurs also source packaging from foreign suppliers and face lead time and production planning challenges, but adding to that foreign exchange limits creates a perfect storm. Try making a sales forecast under those conditions!
We did find one advantage in being a food entrepreneur in Nigeria. Unlike the cottage laws that govern this in the United States, there is no limit to the level of sales for goods produced in one’s home. So long as the dwelling has two rooms or an adapted kitchen 12’x12’ in size and a few other minimum requirements (like screened windows and doors to keep out insects), SMEs can obtain a registration number from NAFDAC, the regulatory equivalent of the FDA, enabling their products to be sold through formal channels.
However, it does get more challenging when SMEs determine it’s time to move out to a separate space. NAFDAC requires 5 separate rooms—one for cloaking (think smocks and hair nets), one each for raw material and packaging storage, one for production, and one room for storing and shipping finished products. Property is hard to find and expensive in Lagos, so SMEs make it work in the tiniest of spaces. They will often convert a private home into a production facility, paying rents equivalent to USD $2,000-$6,000 per month depending on the location for a small 4BR house that meets NAFDAC requirements.
No matter where they produce, whether at home or in a private facility, all SMEs face the same challenges of intermittent power and poorly treated water. In a meeting with a supermarket executive, it was clear who was the novice when the power switched off, the conference room went black, and I was the only one who stopped talking! It is such a frequent occurrence that meetings carry on seamlessly, whether or not you can see your colleagues. Imagine trying to operate equipment or maintain consistent temperatures when the power goes out routinely. All of Nigeria generates 380 megawatts for 185 million people, who consume 1% of the power of U.S. citizens per capita. This power deficit impacts much of life in Nigeria, including the availability of clean water when treatment facilities are unable to pump water through their systems. And for SMEs it means operating expensive gas-powered generators which makes energy a much higher proportion of the costs of production compared to that in the U.S.
So what do these SMEs have when they go without power, water, inputs, and packaging? Determination. Lots of it!
We were humbled by the challenges faced by these intrepid SMEs, and how different their challenges are compared to those faced by startups in the United States. It was a strong reminder of the importance of market research, and to never assume that what works here will work across cultures.