Logistics causes pain for Nestle in Africa

Alongside the news about Nestle having to destroy US$50m worth of ‘Maggi’ instant noodles as a result of accusations by Indian health authorities that they had been contaminated with lead, the Financial Times has today published an interview with Nestle’s Chief Executive for Africa, Cornel Krummenacher. During the interview he revealed that the Swiss based consumer packaged goods (CPG) company is shrinking its workforce by 15% in the region due to disappointing sales.

Krummenacher attributes Nestle’s problems to an over estimate of the size of what is so often described as the ‘middle class’. He is quoted as saying that, “We thought this [Africa] would be the next Asia, but we have realised the middle class here in the region is extremely small and it is not really growing”.

This retrenchment is likely to take a heavy toll on Nestle’s logistics infrastructure in the region. The FT suggests that 15 of the company’s warehouses will be closed “before September”.

It appears that the prosperity of the continent may have been exaggerated. Where as the African Development Bank estimated that the population defined as ‘middle class’ was as many as 330m people, a more recent piece of work by Standard Bank suggested it may be a little as 15m. It is also emerging that the urbanisation that is taking place throughout the continent is radically different from that experienced in China over the past 20 years, with many African cities characterised by very low incomes per head, inadequate for sustaining the sort of consumer economy the CPG sector is looking for.

However Nestle’s experience is also difficult at the operational level, with Nestle finding logistics difficult in the region. Bad infrastructure combined with the vulnerability of the economy to natural and political disruption has made logistics the dominant cost-driver, accounting for 75% of the cost base.

Whilst it may be the case that Nestle has been trying to sell the wrong products in Africa whilst other more nimble local companies are better placed to understand the consumer, the Swiss giant’s experience does stand as a caution to those expecting an easy expansion of the CPG sector around the globe. Not only is marketing different from western markets but the challenge of creating the sort of logistics systems that are taken for granted in developed economies can be the difference between profit and loss in emerging economies.

Ti will be releasing its latest report Global CPG Logistics 2015 on June 25, 2015. The report allows customers to learn more about the cost structure of logistics in developed and emerging regions, as well as insight into the largest emerging economies for CPG (Brazil, China and India). It also provides a focus on the CPG businesses operating there and the partnerships they hold with LSPs.

For more information about the report or to register your interest please contact Michael Clover.