Africa is a land of promise; but, is not full of promises...

Dear Readers:
                        Nestlé Switzerland is cutting 15% of its workforce across twenty-one African countries because it overestimated the rise of Africa's middle class.  Nestlé says Africa's middle class is in hindsight actually extremely small and it is not really growing anywhere close to the rates in the studies they reviewed before deciding to expand capacity.  The cuts began in 2015.  

Nigeria is not included among the twenty-one African countries where a reduction in workforce is expected.  Nigeria is said to have a middle class of about 8 million people.  This is less than 5% of its current population. 

Barclays increased its shareholding in Absa Group from 55.5% to 62.3% in 2013 and in the same transaction handed over ownership of its banking operations in eight African countries to Absa.  Despite this, Absa did not rebrand to Barclays in South Africa.  Barclays Africa Group continued to remain a multi-branded banking group instead of the envisaged "One Bank in Africa."  

Two-and-a-half years later, Barclays is in the process of selling off its African operations that once generated 20% of its global profits.  Barclays has had a majority stake in Absa since 2005.  Once, it handed control over eight of its ten operations (Egypt and Zimbabwe were excluded) in Africa to Absa, the union started to unravel in my opinion. 

Barclays took a bet on South Africa while Absa took a bet on the rest of Africa.  Two parties looking in different directions while moving in another direction typically, leads to a breakup.  Thirty months later and this breakup is now in progress.  Companies that are closely related need to be friends and not just roommates to form a progressive bond. 

The signs may have been ominous given that Absa South Africa never rebranded to Barclays even after acquiring Barclays's African assets in 2013.  One thing is clear: Absa will remain as a South African company while Barclay's African (ex-SA) operations will not.   Barclays took a bet on South Africa and deviated from its focus on Africa all these years.  Now, Barclays wants out of Africa while Citibank remains standing.  Africa is one continent but is not one business.  Each country has its idiosyncrasies that you must understand to be successful.       

There is a lot of money to be made in Africa.  This is one region of the world where understanding of each local market beyond understanding of the continent is essential to remaining a going concern.   More time should be devoted by multinationals to study the market directly and rely less on market studies typically filled with hyperbole to draw you in. Cultural beliefs, systems and practices can make or mar a new business venture in Africa despite success of the brand in the developed countries of the world.  Barclays understood this initially; and then, reversed itself.

Even within the continent, market dynamics are more different than they are similar. Ask Woolworth that was doing relatively well in South Africa; came to Nigeria with high hopes and had to pull out within two years due to low patronage.  In Africa you not only have to look before you leap, you have to stare.  The word adaptation has no better home than in Africa.  Multinationals need to adapt quickly and project later instead of the other way around.  See the reality instead of dwelling on the fantasy.

The irony of business unfolds as Africa's biggest lender by assets (Standard Bank) is disposing of its international assets and refocusing on Africa.  This is where it has the core of its operations and logically has a better understanding.  This is the same thing Barclays is doing by refocusing on the UK and USA markets.  China's biggest lender by assets: ICBC, (has a 20% stake in Standard Bank) is acquiring more international assets as it raises its ambitions and follows Chinese clients across the globe.  I guess, there will always be different strokes for different folks.  What will Absa bank do now to have a footprint in Africa like other South African banks?   

Africa is a land of promise but, is not full of promises; proper advance due diligence will save many investors a furrowed brow.  Just like in equity research, sober analysis should always be chosen over irrational exuberance.