* Opportunity expands for consumer businesses in Africa
* Micro factories viewed as nimble alternative
* High unit costs may deter smaller companies
By Martinne Geller and Matthew Mpoke Bigg
LONDON/ACCRA, July 4 Tucked in a corner of a
Guinness brewery in a run-down part of Ghana's capital, flanked
by industrial silos and crates of bottles, stands the Cube, a
gleaming mini-factory that may point the way forward for global
consumer goods companies in Africa.
The tiny blending and bottling plant for Gilbey's gin,
housed inside five connected shipping containers, gives Diageo
, the world's largest spirits maker, a way to test demand
for new drinks while minimising capital deployment.
"What the Cube enables us to do is a large scale test. We
can produce reasonable numbers, not very high numbers, but
enough to give you a sense of what the market can take," said
Preba Greenstreet of Guinness Ghana, owned by Diageo.
Small, prefabricated factories are also used by SABMiller
and Danish dairy cooperative Arla Foods and
are under development by Nestle to start production
cheaply in markets where the likely demand is unclear.
Africa's middle class is growing fast, with 128 million
households expected to have annual income of $5,000 or more in
2020, up from just 85 million in 2008, according to a report by
global management consulting firm McKinsey & Company.
International consumer and retail businesses have noticed,
accounting for 17 percent of foreign direct investment in 2013
from an average of 12 percent from 2003 to 2007, professional
services firm EY says.
But many remain wary of starting up local production due to
political risks, high costs for power and materials, onorous
regulations and corruption.
In the short term, pop-up factories may not be cheaper in
unit production terms because of their small output. This, plus
their necessarily simple processes, means they are not for
everyone, but for some larger firms, they are a low-risk way to
work out where to make bigger investments.
Established markets like South Africa and Nigeria already
have large food and drink plants so pop-ups are most attractive
in more modest markets like Ghana, Mozambique and Zambia.
In an eight-hour shift at the Cube, 25 people dressed in lab
coats and two managers churn out 8,460 bottles of gin that are
packed by hand in the final step of a process that involves
blending alcohol with flavourings and blow-molding bottles.
In Ghana, where spirits are a staple drink at family and
community events, Diageo can reach a wider market with its local
Gilbey's gin, which sells at around $2.50 per 75 cl bottle, than
with its much more expensive international brand Tanqueray.
"It's really a new business model," said Chris Goddard,
Diageo's innovation marketing manager for Africa, adding that
the Cube, shipped from Britain, cost "significantly less" than a
permanent factory. Diageo, like the other companies, declined to
give exact figures for return on investment.
Success for micro factories is not measured solely on those
terms since unit costs can be higher; SABMiller has found that
successful micro factories can have a short life if demand takes
Other firms appear less interested in the trend. Asked if it
had considered micro manufacturing, Unilever said it
already had full-scale factories in Nigeria, Kenya and South
Africa and planned to expand further but gave no details.
LEGO MODEL VS PARACHUTE
Nestle has been selling food products in Africa for some 60
years, with traditional factories and distribution models. But
it told Reuters it now plans what it calls "modular factories"
with elements like boilers, compressors and offices shipped in
pieces and then assembled onsite.
Depending on complexity, a traditional Nestle factory can
take 15 to 24 months to build and cost 30 million to 50 million
Swiss francs ($33.5 million to $55.9 million). By contrast,
Nestle says it can build a modular factory in less than a year,
for about 12 million to 25 million francs ($13.4 million to
"The concept of modularity already exists ... Lego invented
it a long time ago," said Nestle's technical director for Asia,
Oceania and Africa, Alfredo Fenollosa. "But for us it was a bit
of a real mindset change in the sense that big companies
normally do solid stuff -- built for 100 years."
He said the idea was developed by three young engineers,
freshly plucked from university, who had no preconceived ideas
about how Nestle typically builds factories.
They were given six weeks to come up with a concept and then
six months to fine-tune the idea and sell it within the
company, where some people needed to be convinced that you could
maintain the same food safety and production standards.
"There are limitations to the model. It really is meant for
markets that are small, and for processes that are relatively
simple," he said. In Ethiopia, it could work. It's big enough,
there is business going on, things are moving fast. Sudan is a
bit more complicated."
In Abidjan, Ivory Coast's commercial capital, dairy company
Arla is producing 25-gram sachets of Dano milk powder
in a miniature plant housed inside three 40-foot containers
shipped from Copenhagen.
Nicknamed "the Parachute," the facility was up and running
in only two weeks, versus an average set-up time of two to three
months for a real factory.
"You can parachute into countries where you want to test the
waters," said Rasmus Malmbak Kjeldsen, who runs Arla's business
in the Middle East and Africa.
Building a bigger factory can cost $8 million to $12
million, Kjeldsen said, versus costs of little more than $1
million for the Parachute, which employs a handful of workers
and runs on solar power. If milk powder demand eventually
warrants running the factory at night, it will use a generator.
The Parachute is a market penetration tool and it is too
early to calculate return on investment, but in an ideal world
payback would take between two and four years, he said.
Morningstar analyst Philip Gorham said of the initial costs
of building a Cube or a Parachute: "That's a pretty inexpensive
way to get into a market ... and gauge demand without any
material commitment to (capital expenditure)."
SMALL AND SIMPLE
Africa saw capital investment grow by 12.9 percent last
year, according to EY. Sub-Saharan Africa saw a 4.7 percent jump
in new foreign direct investment (FDI) projects in 2013.
While micro factories provide investors speed, agility and
low risk, they have their limitations.
Kjeldsen says for example that a regular Arla factory can
produce up to 14,000 tonnes of milk powder while the micro
factory can only produce 2,000 to 4,000 tonnes, which is
insufficient to meet substantial demand.
Also, the facility is not sophisticated enough to
manufacture the powder, but simply repackages it from 25-kg bags
to affordable, single-serve sachets that can deliver one glass
of milk when reconstituted.
When entering new markets, Nestle's Fenollosa said simple
repackaging facilities let operators train employees and build
business without heavy investment. When it comes to full
manufacturing that requires lots of different wet and dry
ingredients, traditional factories are needed, he said.
Africa's dominant beer maker, SABMiller, which began selling
beer in the dusty gold-prospecting fields around Johannesburg in
1895, used small container factories to do pilot tests of a
premium version of its Chibuku beer in Zambia and Zimbabwe in
2012. It has since moved to regular factories.
"We put it into an area where we're not 100 percent
convinced about the economics," said Mark Bowman, managing
director for SABMiller Africa.
"But the problem with it is that as soon as it's going well,
we realise we have to make a significant investment and we
eventually knuckle down and make the real investment," he said.
Even though the pilot lines only cost $1.8 to $2 million,
versus $12 to $15 million for a full line, he said: "These
always ultimately cost you much more than you realise."
Still, SABMiller is using them to test lines for Chibuku
Super in Malawi and Mozambique and is about to try them out in
($1 = 0.8946 Swiss Francs)
(Editing by Philippa Fletcher)