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Wednesday, May 24, 2017

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Market entry consumer goods – Key distribution issues Ethiopia

Ethiopia is the second most populous country in Africa (after Nigeria) and one of the fastest growing economies, with an average GDP growth rate of 10% (IMF) over the last eight years. When entering Ethiopia, there are a number of issues to consider when designing your Route-to-Market:

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Infrastructure & Territories – Ethiopia has made great progress in infrastructure development with the country spending $US 1.3 billion or 10% of its GDP annually on infrastructural development (SAIIA). However, as impressive as these numbers are, distributing products in upcountry areas remains a challenging undertaking.

Port – Ethiopia lost its port in 1992, when Eritrea became independent. They now rely on the port of Djibouti where costs are high. It costs more to transport a container from Djibouti to Addis Ababa than China to Djibouti (The Economist). The Lamu Port-South Sudan-Ethiopia Transport Corridor (Lapsset) holds future potential.

Territories – In comparison to other African countries, Ethiopia has a low urbanization rate (11% vs. 30%). Addis Ababa, the capital city, contributes the bulk of the volume in Ethiopia. Ethiopia’s second city, Dire Dawa, has a population of 274,000 (ESA) compared to Addis Ababa’s estimated 3 million.  It is estimated that 38% of the population still resides five hours or more away from a city with a population of 50,000 (IFPR).

Trade channels – Modern trade is in the very early stages of development and there are currently no international supermarkets operating in Ethiopia. In a very fragmented trade market, souks/kiosks remains the largest trade channel in Ethiopia.

Market  – The Mercato market in Addis Ababa is one of the largest markets in Africa and the largest in Ethiopia. The market is dominated by wholesalers. Some companies generate more than 70% of their sales from Mercato. Wholesalers make low margins (2-5%) and most tend to be passive, waiting for customers to collect. While the role of Mercato wholesalers cannot be overlooked, they are not always a good option for building relationship with retailers and building brands. Most MNCs (Multinational companies) we talked to highlighted the importance of direct distribution, as it remains difficult to build a brand through a wholesale system.

Route-to-Market Models – MNCs are entering Ethiopia though distributors as they lack the required knowledge, scale and product portfolio to build their own distribution.  However, beverage companies with local bottling operations also make use of direct distribution (key accounts) and micro distribution (such as the Coca-Cola Micro distribution system). It is important to note that foreign companies cannot distribute imported finished products, whether sourced directly or from local importers.

Organization – Most MNCs are still operating out of their Nairobi offices. However, companies are increasingly opening new offices in Addis Ababa. Ethiopia is significantly different from the other East African markets and care should be taken to understand the culture aspects. Including when displaying role models for advertising purposes.  Foreign investors are increasingly recognising the consumer goods potential in the country, as recent acquisitions from Diageo, Heineken and Tiger brands have demonstrated.

Ethiopia is the second most populous country in Africa (after Nigeria) and one of the fastest growing economies, with an average GDP growth rate of 10% (IMF) over the last eight years. When entering Ethiopia, there are a number of issues to consider when designing your Route-to-Market:

Infrastructure & Territories – Ethiopia has made great progress in infrastructure development with the country spending $US 1.3 billion or 10% of its GDP annually on infrastructural development (SAIIA). However, as impressive as these numbers are, distributing products in upcountry areas remains a challenging undertaking.

Port – Ethiopia lost its port in 1992, when Eritrea became independent. They now rely on the port of Djibouti where costs are high. It costs more to transport a container from Djibouti to Addis Ababa than China to Djibouti (The Economist). The Lamu Port-South Sudan-Ethiopia Transport Corridor (Lapsset) holds future potential.

Territories – In comparison to other African countries, Ethiopia has a low urbanization rate (11% vs. 30%). Addis Ababa, the capital city, contributes the bulk of the volume in Ethiopia. Ethiopia’s second city, Dire Dawa, has a population of 274,000 (ESA) compared to Addis Ababa’s estimated 3 million.  It is estimated that 38% of the population still resides five hours or more away from a city with a population of 50,000 (IFPR).

Trade channels – Modern trade is in the very early stages of development and there are currently no international supermarkets operating in Ethiopia. In a very fragmented trade market, souks/kiosks remains the largest trade channel in Ethiopia.

Market  – The Mercato market in Addis Ababa is one of the largest markets in Africa and the largest in Ethiopia. The market is dominated by wholesalers. Some companies generate more than 70% of their sales from Mercato. Wholesalers make low margins (2-5%) and most tend to be passive, waiting for customers to collect. While the role of Mercato wholesalers cannot be overlooked, they are not always a good option for building relationship with retailers and building brands. Most MNCs (Multinational companies) we talked to highlighted the importance of direct distribution, as it remains difficult to build a brand through a wholesale system.

Route-to-Market Models – MNCs are entering Ethiopia though distributors as they lack the required knowledge, scale and product portfolio to build their own distribution.  However, beverage companies with local bottling operations also make use of direct distribution (key accounts) and micro distribution (such as the Coca-Cola Micro distribution system). It is important to note that foreign companies cannot distribute imported finished products, whether sourced directly or from local importers.

Organization – Most MNCs are still operating out of their Nairobi offices. However, companies are increasingly opening new offices in Addis Ababa. Ethiopia is significantly different from the other East African markets and care should be taken to understand the culture aspects. Including when displaying role models for advertising purposes.  Foreign investors are increasingly recognising the consumer goods potential in the country, as recent acquisitions from Diageo, Heineken and Tiger brands have demonstrated.

Comments

One Response to “Market entry consumer goods – Key distribution issues Ethiopia”
  1. Sitra Ali says:

    You have to understand the Ethiopian market very well it has been a closed society for so long, it still values tradition and religion. The African market specially the Ethiopian market has been neglected by all the multinational companies due to different reasons. One thing they need to understand is first this is an emerging market which is still growing and a long way to go to reach to where the western world reached secondly they need to understand Ethiopian do value their norm and tradition. When all the advertisement or market penetration is done this value has to be understood. From my experience Ethiopians need to see people who look like them on their billboard and TV advertisements. As for distribution, as still talking from experience the first real FMCG distribution was brought to the market by P&G they are the first to penetrate the market in that way others tried to follow but no one followed it properly or forced the distributors to do so. Upcountry market is still covered by Merkato, Merkato being its own heart for every business, every upcountry business will get their product from Merkato which are wholesalers who trade in small margin but secure their volume and benefit from it. Specially the business between Merkato and Upcountry is based on trust and you find trades once they are working with one wholesaler they do not tend to change because of the trust built in-between which leads on credit sales and etc… Upcountry is an untapped market specially the cash crop areas. What this country needs is business people who sees the society not int their own eyes but sees the country in the eyes of Ethiopian…which makes a lot of difference in the way you approach the market……

    I am just saying ……

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