Olam Bets on Africa Reward as On-The-Go Food Demand to Climb

Sunny Verghese, Co-Founder, Group Managing Director and CEO, Olam

Olam International Ltd., one of the world’s largest food traders, is hunting for more investments in Africa as it looks to benefit from the continent’s increasing appetite for everything from instant noodles to lollipops.

Long endowed with rich agricultural resources including coffee and cocoa, Africa has a growing middle class that is now demanding more packaged food, according to Chief Executive Officer Sunny Verghese. That’s presenting increased opportunities for investment in branded foods as well as raw materials such as rubber, cotton and lumber, he said.

“The risks are slightly higher, but the rewards are better,” Verghese said. “It’s a good bet to make.”

One of Olam’s key bets in the continent is on branded food, driven by Verghese’s prediction that Africa’s working-age population will overtake China’s in 20 years.

Already established in 24 countries in sub-Saharan Africa, the agribusiness giant controlled by Singapore’s state investment company is looking to expand its market share across the continent. Olam’s sales from Africa climbed to S$4.13 billion ($3 billion) in 2014 from S$1.7 billion in 2010. Its packaged food operations in Nigeria, Ghana and South Africa, now have sales of $350 million to $400 million a year from nothing in 2005, when they were started.

The company wants to increase its integration along the production chain from seed to consumer, according to Verghese. For example, Olam plans to source the oil and flour in its Tasty Tom brand cooking oil and pasta from oil palm crops it grows and wheat mills it purchased.

Convenience Food

“Africa in some of these markets is at the cusp of convenience foods,” Verghese said. The rising number of dual-income families where both the husband and wife work is transforming food habits, he said. “Convenience foods for on-the-go consumption is increasing. Noodles and pasta are two very good categories where we’ve seen very high growth.”

Olam isn’t alone in looking to benefit from Africa’s growing middle class, said Carey Wong, research manager at OCBC Investment Research Pte in Singapore.

“When people’s incomes increase, the quality of food also increases,” Wong said March 14, adding that being integrated from farm gate to consumer helps companies benefit further from that growth. “Since they own the whole value chain they can adjust prices as of when they want, rather than wait for suppliers,” he said.

Growth Potential

Africa’s average growth over the past 50 years has trailed only China’s, according to Verghese. With Africa’s largest economy Nigeria forecast to grow at 4.8 percent next year and Ghana at 6 percent, that’s poised to continue.

Some brands owned by Olam are already household favorites in Africa, including Chic Choc biscuits, Tasty Tom tomato paste and Cherie instant noodles. In Nigeria, the most-populous African nation with 178 million people, Olam’s brands are ranked in the top two in five out of eight food categories, and it’s the most-preferred manufacturer of creams and wafers and confectionery sweets, according to the company.

Middle Class

The increase in per-capita income across Africa has also driven growing consumption of food staples in the estimated 90 million emerging middle-class households, Verghese said. Instead of expanding reach across many more countries, Olam will focus on strengthening its position, limiting its total capital employed in any one African country to 10 percent.

“We don’t think we will get into many more new countries — there’ll be one or two countries we’ll get into. It’s going to come from getting deeper into and investing more into our existing geographies,” Verghese said. “I don’t think there are successful just noodle manufacturers, or just pasta manufacturers. The successful players are all integrated players.”

Olam this year bought wheat mills and pasta-making plants from one of Nigeria’s biggest millers, BUA Group, for an enterprise value of $275 million, a move that will double its milling capacity in Sub-Saharan Africa.

Some 30 percent of Olam’s future expansion will come from the food sector and industrial raw materials, including rubber, cotton and wood, while 70 percent will be greenfield acquisitions. In Gabon, it inked government partnerships to develop oil palm and rubber plantations, including a $500 million investment to cultivate around 50,000 hectares of the oil palms. It has also taken up 49 percent equity in another Gabonese government program to develop another 70,000 hectares of palm. It’s also currently looking at expanding timber and wood production in the Republic of Congo.

“Africa’s growth will be long term, and it will continue to grow for the next 40 to 50 years,” Verghese said. “We have particularly good operating and risk management capabilities to manage the African risk slightly different, or better, than a lot of others.”

Source: Bloomberg Business – European Edition

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