Coca Cola/Chi Partnership: What are investors missing?
Many Nigerians woke up last week to the announcement of a 40 equity investment by Coca-Cola in Nigeria’s 36 year old Chi Limited. The world’s largest beverage company with over 500 brands plans to fully take over Chi in three years. The market strategy of the two beverage organisations now, is to leverage their strengths and capabilities in offering more products and innovations in the growing Nigerian beverage market. Daniel Obi assesses this partnership and its potential force in the marketplace.
Last week’s announcement of Coca-Cola’s 40 percent investment in Nigeria’s Chi Limited was not unexpected in certain quarters. According to an authoritative source the parent company of the Lagos-based Chi Ltd, Tropical General Investments (TGI) Group which is owned by a European family, had been considering a sale of the company for some time. Apart from Chi, TGI is into Agri business involving seed multiplication, fertilizer distribution, cotton, cocoa and vegetable oil milling as well as health care with Chi Pharmaceutical which owns a WHO approved plant. TGI is also into oil and gas, industrial chemicals manufacturing and real estate development.
Cola-Cola also intends to increase ownership to 100 percent within three years, subject to regulatory approvals, while working on other long-term commercial structures.Chi, makers of Chivita juice brand and Hollandia yoghurt,is the market leader in juices and value added dairy and its product portfolio includes iced teas and snacks.
Although neither Coca-Cola, TGI nor Chi were willing to disclose the financial terms of the 40% equity investment, it was speculated in some media reports that Coca-Cola may have paid between US$250 million and US$300 million for the stake and some put it as high as US$400 million while Chi said to have been valued at about US$1billion last year.
The Coca-Cola Company, whose flagship brand (Coca-Cola) is the world’s most recognized brand with a brand value of $84 billion, is the largest player in the Nigerian beverage industry and its brands are present in almost every home. The company’s decision to invest an undisclosed amount to acquire 40 per cent of Chi Ltd is a strategic step to leapfrog into value added dairy which is an emerging and high growth beverage category where Chi has gained leadership and built a strong competitive advantage over the years. The planned full acquisition, if actualized, will enable Coca-Cola to reclaim leadership of the Nigerian juice market which it lost to Chi Ltd a couple of years ago and also build a strong capability to expand its West African portfolio of still beverages. This investment is clearly aimed at consolidating Coca-Cola’s leadership of the Nigerian beverage market.
Confidence in Nigeria’s market
Nigeria with estimated population of about 170 million (comprising about 90 million youth population), high urbanization and a growing middle class is certainly a huge market that is hard to ignore, particularly for fast moving consumer goods companies
“According to market-intelligence firm Euromonitor International, consumer-expenditure growth in emerging markets has surpassed that in developed markets every year since 2000, and is expected to continue doing so”, Sharon Bailey reports in Marketrealist website.
Kelvin Balogun, President of Coca Cola for Central, East and West Africa, a region that comprises 30 countries shares this view of Nigeria’s growing market and the big opportunities inherent in its attractive demographics. He told BusinessDay in Lagos that their confidence in the value of this strategic partnership with Chi is that it brings complementary portfolio into a very exciting and fast growing market at a very important juncture in the evolution of the market.
“This deal puts us in a very important category, value added dairies, which is one of the very fast growing categories on the African continent and also offers us a platform to potentially expand our West Africa portfolio of still beverages”.
On Coca-Cola’s confidence in the Nigerian market, Balogun said the multinational company which has been in Nigeria for over 65 years has built a robust local knowledge and a very strong business system that has sustained its leadership of the soft drinks market over the decades. “We have tremendous confidence in the future of this market; we feel excited about the opportunities it offers and that we are well positioned for it going forward”, he said.
Explaining this level of confidence in the face of the current economic downturn occasioned by the drastic collapse of global crude oil prices and other factors that seem to discourage investors from Nigeria, Balogun said “When you assess the Nigerian market as an investor, it is important to look beyond the cycle effect of oil price fluctuations including devaluation and inflation but, rather, focus on the fundamentals of the economy which continue to remain strong and has been the reason for the resilience of the Nigerian economy”.
Balogun said that Nigeria might cycle out of the current economic challenges faster than most analysts predict because of the inherent and largely unrecognized strengths of the economy and that the current economic situation presents a golden opportunity which only investors with a long term perspective can appreciate.
Partnering to prepare for the future
To market analysts, the evolving relationship between Coca-Cola and Chi signals a joining of forces to position for the growth opportunities and the increasingly more competitive landscape in the beverage industry in Nigeria and Africa.
Balogun agreed with this view, saying. “The points of synergy between Coca-Cola and Chi are many and although both companies have very successful brands and a wide range of product offerings, we know that given the number of beverage categories and products we find in developed markets the beverage market in Nigeria and Africa is going to be far much bigger than it is now. In fact, we think that we have not yet scratched the surface and we know that many other global players are seriously looking in, seizing the opportunity and strategizing on how to slice a share of this market. Most of them will come here at some point”.
He echoed the statement in the joint press release that the Coca-Cola and Chi partnership will allow both companies to leverage their respective investments and expertise to further drive innovation, optimize efficiency and strengthen route-to-market to accelerate growth and increase consumer availability and choice. “This will ultimately benefit consumers by providing a wider range of beverage choice at competitive pricing and create more shared value for all stakeholders”, Balogun said.
For Chi, in particular, the relationship with Coca-Cola marks the beginning of the next big stage in their evolution. “We strongly believe in this journey we are starting with The Coca‑Cola Company. The relationship will allow us to expand our regional footprint and product portfolio”, Cornelis Vink, Chairman of TGI Group and Chi Ltd said in the joint statement announcing the partnership.
This was corroborated by Rahul Savara, Group CEO of TGI “We are immensely proud of the success that Chi has achieved in building the much-loved Hollandia and Chivita brands. We recognize the unique opportunity that the relationship with Coca-Cola Company brings to further develop Chi as a strong regional company, building on the tremendous progress achieved to date
Speaking further in a chat with BusinessDay after the announcement, Rahul said “Chi’s ambition is not just to be the largest juice and value added dairy company in Nigeria. We have achieved this as well as market presence in about 12 African countries. But we want to be recognized as the largest in Africa with a strong portfolio of favourite products across the continent. This is the next stage for us, and we need a credible partner to complement our capabilities and help accelerate our regional ambition. Coca-Cola fits this bill best. This is why this partnership is very strategic for Chi.”
Building a mega player
Market analysts say that Coca Cola’s 40 percent equity in Chi, which was founded in 1980 as a small trading company, with eventual takeover in three years, will create a mega player in the Nigerian market.
Both Balogun and Rahul think differently. “Nigeria’s beverage industry today is very small relative to the size of the population and the economy, and the industry is going to get even bigger. There are huge opportunities and this calls for more investment than either Coca-Cola or Chi can afford by going it alone. Together these companies will bring to the table the resources and other capabilities required to tap into the growth opportunities we see not just for today but ten years down the road”, said Rahul.
“And we are not the only ones who see this compelling growth opportunity. Other players and investors within and outside do too, and we know that they are coming. There will be many more strong players such that no one player that can effectively dominate the market”, Balogun added. “What this partnership will do for Coca-Cola and Chi, however, is that it will help us to consolidate the advantages we have built as early entrants so that we can remain a strong player in the emerging competitive landscape that we see down the road.”
What are investors missing?
As market watchers speculate on many aspects of this headline investment and the ensuing partnership, including whether or not it would prove workable, there seems to be a consensus on the fact that this is good news coming out of Nigeria and also a strong positive signal for local and foreign investors who are still grappling with complex projections on whether Nigeria can survive the drastic crash in crude oil prices and the attendant disruptions to the economy. If a company as big, uncommonly successful and conservative as Coca-Cola can take this big bet on Nigeria at this trying period then, perhaps, there is something in the misty horizon that many others are missing.