Deloitte cb predictions seminar breakout growth & emerging markets by Deloitte Netherlands

Growth Breakout CB Predictions & Priorities seminar

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Introduction

Andre van IJperen Partner Financial Advisory Services +31 6 5261 5646 AvanIjperen@deloitte.nl

Focus: Serving (inter)national private equity investors, corporates, and multinational clients in financial transactions performing acquisition and vendor due diligence and refinancing projects

Randy Jagt Director Food & Beverage Consulting +31 6 1098 0178 RJagt@deloitte.com

Focus: Growth strategy, market and channel strategy, M&A, customer segmentation, trade terms optimization, marketing and sales effectiveness, KPI dashboards and program management

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Case for Growth

Driving organic growth is becoming increasingly difficult for CB companies

Revenue Realization over time

New Growth

Adjacent Growth

Organic Growth

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

Growing importance of new sources of growth

Declining organic growth

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Companies need to construct a growth portfolio that aligns with their ambition and capabilities Primary Growth Levers

New to you

1. Core

Identify new uses or users

Create new markets

• Maximizing profit from core businesses; existing products, customers, channels and geographies; Supporting investment in growth opportunities 2. Adjacent

Extend to new markets, segments

Expand the value chain

Change the basis of competition Existing

Customers / Markets

Non-consumer

Considerations

Retain, acquire customers, optimize pricing, improve existing products and services

Extend products and services

Existing

New to you

• Leveraging core business’ existing assets and capabilities to access adjacent spaces; Achieving growth by creating new revenue streams 3. New • Developing new assets and capabilities to realize growth opportunities outside the existing remit of the business

New to the world

Products / Business Models

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

The Strategy Cascade: the five questions every strategy needs to answer The Strategy Cascade™ What is our Growth strategy?

Where will we play?

• Purpose • Financial objectives • Non-financial objectives • • • •

How will we win in chosen markets?

Customers Products Geographies Vertical strategies

How will we configure?

• Value proposition to customers • Sources of defensible advantage • Distinctive • Profit model(s) capabilities • Partnerships • Enabling operating model

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

What priority initiatives and investments?

2nd Tier Emerging Markets opportunity: Africa

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Middle East and Africa is one of the largest and most populated regions in the world; projected GDP per capita growth for the next 5 years is 5.3% Population growth 2012-2017 (mn)

Population 2012 (millions)

1,5%

1.458 1.333

1,8%

Turkey Cyprus Lebanon Jordan Israel

Syria

828

Iraq

921

Mauritania

Mali

Niger

Egypt

Kuwait Bahrain Qatar United Arab Emirates

‘11 ‘17

Sudan

‘11 ‘17

‘11 ’17

‘11 ‘17

SSA

MENA

LATAM

Nigeria

Ethiopia Central African Republic

Liberia

Cameroon

Equatorial Guinea

Population figures 2012 (millions)

‘11 ‘17

285 289

‘11 ‘17

CEE

GDP per capita 2012-2017 ($, PPP based)

DR of Congo

+5.8% Tanzania

12,229 Malawi

Angola

9,219

Zambia

50-200

Zimbabwe

Namibia

+5.3%

Botswana

3,089

2,272

10-20 1-10

311 330

0,2%

Kenya Gabon

20-50

509 515

Djibouti

Côte d’Ivoire

Sierra Leone

China

Burkina Faso

Guinea

550

462

0,2% 1,0%

Oman

Senegal Gambia Guinea-Bissau

Saudi Arabia

Chad

2,9%

389 435

Algeria Libya

1,9%

Iran

South Africa

2012

0-1

2017

MENA

2011

2017

SSA

Note: SSA denotes Sub-Saharan Africa; MENA – Middle East and North Africa Source: International Monetary Fund, World Economic Outlook Database, April 2012 Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

Key growth drivers are increased domestic demand, driven by higher levels of urbanization and by an emerging middle class Key growth drivers Population growth

Rapid urbanization

Emerging middle class

High growth potential

• The population of Sub-Saharan Africa alone is set to double towards 2bn people by 2040

• Middle East and Africa also has a very young population, with around 40% under the age of 18

• Most people still live in rural areas, but, with around 4% of the population moving to urban areas every year, the spatial demography of the region is changing rapidly • The share of urban population approaches the 50% mark in countries like Nigeria (49.8%), Ghana (51.5%) or Egypt (42.8%) • The middle class, defined as those with a daily consumption of US$2-20 a day in 2005 PPP dollars, makes up around 34% of the population, or a market of over 300m people • Today there are already more than 50 African cities with populations of over 1m, and several cities larger than London • The large youth population is driving important growth in the F&B industry. Eating out is becoming an increasingly popular entertainment option and is playing a key part in driving the segment•growth • Moreover, the adaptation to Western•style food outlets and products is driving both foodservice and retail • Informal retail is the norm in ME &Africa, but a modern formal retail structure is expected to rise in the coming years. (e.g. Shoprite already operates in 16 countries, Massmart in 14 countries and Woolworths in 11 countries)

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

Consumption patterns in the region are changing rapidly, driven by higher incomes, urbanization and changing life styles Consumer trends Middle East and Africa

Comments • In terms of retail, the Middle East and Africa represents an untapped market, where there is an upward trend in GDP per capita and increasingly stable investment environments

Consumers are becoming a lot more globally aware, brand aware and quality conscious

• The region has a diverse consumer market of over 1 billion people

EIU – Regional Retail Market Analysis, 2012

It doesn’t mean that people necessarily have more money, but what people are spending their money on has shifted to more leisure and social activities

• With increasing urbanization levels and busier lifestyles, demand for a variety of imported products is expected to rise significantly in the next 5 years • Urban spending is increasing twice as fast as rural spending and is projected to account for the largest share of the future projected growth; cities are also more densely populated and consumers are easier to reach

EIU – Regional Retail Market Analysis, 2012

Organized fast food industry is doing booming business all over Middle East and Africa, fuelled by a rise in disposable incomes

• Internet use has increased significantly in the region, being currently on par with reported usage in Brazil and China

BMI, Frozen Food report 2012

• In food retail, the distribution of products in the region is currently undergoing significant change: supermarkets and hypermarkets account for ~50% of the market and entries of foreign retailers (Carrefour, Spar, Casino, Metro) is increasing across the region

The volume of frozen French fry imports in South Africa alone has surged from a level of 15,460 tons in 2010, to 30.000 tons in 2011 peaking during 2012 at 46,903 tons BMI, Frozen Food report 2012

Source: BMI; EIU; Deloitte analysis Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

High priority markets are Nigeria, Ethiopia, Egypt, Morocco, Tunisia, South Africa and Ghana Selection potential markets (2012)

Note:Iran has one of the largest economies in the ME region and according to Goldman Sachs it could become one of the world's largest economies in the 21st century. However, real GDP growth is expected to average 2.2% a year in 2012-17, driven by an inefficient state sector, limited private sector, significant informal market activity (millions of people who do not pay taxes and operate outside the formal economy) and widespread corruption Source: International Monetary Fund, World Economic Outlook Database, April 2012 Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Practical challenges for foreign investors acquiring African companies

Cultural differences •

Language barrier

•

Labor conflict

•

Perceived support of ruling government

Business climate •

Business ethics, shortages of key skills, policies, poor regulations, and labor union issues

•

However, according to the World Bank, doing business in most African countries has improved

Poor infrastructure

Political challenges •

Political instability African countries

many

•

Poor state of physical infrastructure, especially electricity and transport

•

Prevalence of authoritarian, repressive, undemocratic or simply ineffective governments

•

Faster growth in recent years has highlighted deficiencies, exposing bottlenecks in ports, roads, rail, and power supply

Labor market

Social challenges

•

Low employment and high unemployment rates

•

High levels of poverty

•

Unevenly distributed educational qualifications

•

High levels of inequality of wealth and income

•

Lack of skilled labor and low flexibility of labor market

•

Lack of basic essentials and social services like health, housing, education, and welfare

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

2nd Tier Emerging Markets opportunity: Myanmar

Country profile of Myanmar

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Myanmar is one of the poorest countries amongst the ASEA countries; It represents one of the last few untapped countries with a large population

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

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Myanmar is in a strong position with a large youthful population and a determined government willing to embrace economic and political change Population forecast 2013-2017

Key characteristics

GDP per capita forecast 2013-2017

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

•

Myanmar is widely seen as the last frontier in Asia with its large population and an economy that lacks the presence of most multinational corporations

•

The size of the consumer business market in Myanmar is estimated to be around USD 6-8 billion

•

Investors should remain cautious as the key to the development of the consumer business landscape in Myanmar is highly dependent on government reforms

•

Monetary and fiscal policies must be strengthened and a more favorable investment climate created before growth can accelerate

•

Initial steps have been taken, but it remains to be seen whether this momentum can be sustained and what the impact will be on the average Burmese

•

Infrastructure and human capital development leaves much to be desired with daily power outages, underdeveloped transport networks and frequent armed clashes in some regions

Key changes in the new foreign investment law provide significant opportunities for market entry; however significant dynamics need to be taken into account Business dynamics

Foreign investment law

• Products are sold in single or small packs to cater to consumers’ affordability

• Investment ratio is negotiable between the foreign investor and local partner, instead of the previously required 35% minimum ownership by foreign investors for joint ventures

• Costly and challenging distribution network due to inadequate electricity, telecommunications and road infrastructure

• Foreign investors can own 100% of businesses without the need for a local partner in 13 newly “freed up” sectors

• High brand awareness of Thai goods – thanks to intensive border trade – has attracted many Thailandbased manufacturers, and the market is dominated by imported Thai Consumer goods with higher quality and similar tast to local Myanmar products

• Corporate income tax exemption has been extended to five years, up from the previous three years

Channel dynamics

Market Characteristics

• Traditional trade still dominates at about 90% of the market.

• The Myanmar economy is expected to expand at a rate of 6-7% per annum

• Route to market in traditional trade for consumer business manufacturers is typically via major distributors and wholesalers.

• The exponential rate of adoption of technology also provides exciting options for market expansion • Purchasing power will increase as the size of the middle class in Myanmar grows

• Distributor sales visits are not frequent and retailers either visit the wholesale markets or order shortfalls via wholesalers

• It is expected that Myanmar will become a middle income nation by 2030 if it can conquer substantial developmental challenges and implementing reforms

• Simple promotions and outlet decorations are common trade investments Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

Considerations for market entry

To support our clients in these transitions we find answers to the questions for each maturity phase

3. EM Optimization

2. EM Growth strategy

1. EM Market entry

• Which markets do you enter? • How do you enter these?

• How do you improve your position in emerging markets? • How do you gain market share?

• How do you optimize your operations in Emerging markets? • What is the optimal tax arrangement? • How do you effectively organize your operations? • Which target operating model is best suited for which country?

Organisation maturity Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

There are five main routes to market entry. A consideration of the specific market opportunities, accessibility and a company’s competencies and resources will determine the most appropriate option Advantages

Disadvantages

Greenfield – set up own operations

• Control over quality and branding • Easy transfer of technology and know-how • Provenance of being based locally

• Large capital outlay with only potential long term returns • Set up new supplier relationships • Have to establish retailer relationships

Acquisition

• Acquire existing production facilities • Established market share to build on • Access to local market knowledge

• Upgrades of production facilities • Cost of acquisition • Integration process can be difficult

Joint venture

• • • •

Access to local market knowledge Access to existing channels Access to local operations Potential tax benefits

• Difficult to find partner • Have to share benefits • Potentially complex structures and merging of assets and processes

Distributors / Agents

• • • •

Lower capital outlay Control over quality and branding Quicker access to market Likely to be profitable sooner

• Limited local market knowledge • Requires strong channel relationships • Less tailored to local market requirements

E-Commerce

• Low capital outlay • Quick access to market, albeit generally a small segment of the market

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

• Limited local market knowledge • Limited ability to provide full customer service • Reliance on 3rd party fulfillment

When contemplating an acquisition, numerous potential relevant aspects are to be considered

Strategy • Is there a compelling strategy? • Does it deliver growth? • What are the key risks to achieving your stated strategy? • Is the strategy clearly articulated and reflected in the forecasts? • What is the growth opportunity?

Transactional

• What is the likely acquisition process? • What is the object of sale? • How do the other interested parties impact your transaction strategy? • Is a DD report required? • How does the timetable impact the attractiveness of the business? • What information can be acquired, and in what format?

Commercial • What KPIs are most relevant for the target? • How do these KPIs compare to the competition? • Do they tell the right story?

Historical Financial Analysis • What does the group look like postacquisition? • Is the financial information readily available (by division / by country)? • How will the key KPIs be presented in the results?

Separation Planning and implementation

Operational

Stakeholders

• How integrated is the • Who will run the • Are the various target in a larger business poststakeholders aligned? corporate? acquisition? • Are any shared services • Do your KPIs reflect the • Does the deal team have a detailed and processes best story? knowledge of the applicable and will business? these be • Who are the key (dis)continued? managers that will • Have potential transfer to the transitional agreements business? Are they on and separation costs board? been considered? • What is the method of overhead/central cost allocation?

M&A Ready® Brand / IP • What are the unique selling points? • Who owns the intellectual property? • Will this service continue? • What value has been assigned to this?

IT • Has an assessment been made of the IT infrastructure? • Is the ERP system likely to be fit for purpose? • What are the systems and controls issues? • What controls are in place for the production of financial information? • Are the processes clearly defined?

Tax Accounting

People

Regulatory and Governance

• Have you identified your normalizing items? • What regulatory issues • What is the underlying exist? EBITDA trend? • Are there any • What is the status of outstanding legal claims impairment reviews? or litigation issues? • Can you report quickly • May the acquisition lead post acquisition? to a potential dominant • Are the optimal market position (should accounting policies the NMa be notified)? used?

Deloitte Consumer Business Predictions & Priorities 2013 - Growth & Emerging Markets

• • • •

• Has an optimal tax structure been Are there any changes identified? to contractual terms • Is complete and up to required? date compliance Are there any other HR information available? issues? • Is there sufficient How will the unionized transfer pricing proportion of the documentation in workforce be managed? place? Have (communication) • Are there any plans been developed outstanding tax audits? for key employees?

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