Africa offers Nestle a reality check

Nestle, the world’s largest food company, announced today that it would be sending home almost a quarter of its African workforce. The move is in admittance of its overestimation of growth projections, particularly that of the continent’s middle class.

“We thought this would be the next Asia,” a deflated Cornel Krummenacher, told the Financial Times this week. Cornel is the Chief Executive for Nestle’s equatorial Africa region, covering over 21 countries including Kenya and Angola. He oversees a significant portion of its 11,000 employees spread across the continent, many of whom are expected to receive a notice of termination in the coming weeks.

Krummenacher explained that the food company is struggling to meet its 10 percent growth target, and with job cuts, might be lucky to break-even this year. “… we have realised the middle class here in the region is extremely small and it is not really growing,” he noted. There are a number of factors that may have discouraged the growth of the African middle class.

In South Africa, a combination of wage strikes—which cost the country’s mining sector $6 billion in lost output—and an unstable power sector have scared off mega companies like Ford from investing. This would have provided more jobs for South Africans, lifting many into the middle class. In Nigeria, the recent oil crisis has forced the government, which is heavily dependent on crude sales for revenue, to trim its budget for 2015 and close its coffers to new capital projects, while Ghana’s economic woes—including a soaring inflation and currency crash—are making it harder for entrepreneurs and start-ups to access cheap loans.

Beyond the middle class growth challenge, Nestle has battled with external issues across its top market. In Nigeria, one of Africa’s biggest consumer markets and Nestle’s most profitable, the year hasn’t been very rosy. Its first-quarter pretax profit fell 50.7 percent to 3.48 billion naira ($17.5 million), while revenue plunged to 27.55 billion naira, from 33.42 billion a year earlier. One of the key reasons for this drop is the lingering insecurity in the Northeast of Nigeria, one that has led to the death of over 10,000 people and rendered over 1 million more homeless. Nestle says the Boko Haram-led terror activities have grounded parts of its business in the North – crippling its distribution channels and shutting down its warehouses.

The rapid spread of Ebola also proved costly. According to Politico, the Ebola epidemic threatened to halt Cocoa imports from West Africa – the largest cocoa producing region in the world. Nestle had no factories situated in the three worst-hit countries–Liberia, Guinea, and Sierra Leone–but its major supply market, Ivory Coast, borders two of the countries. Fears of a possible outbreak in Ivory Coast at-the-time forced cocoa prices to skyrocket, raising the overall cost of production for the Swiss-based food company.

Nestle might have placed its bet on Africa’s middle class, but socio-economic challenges are also proving greater hiccups. If it intends to secure a long-term future with the continent, navigating the host of these socio-economic will be key.

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