Business, Finance & Economics

Can Walmart and Coca-Cola make profits in Africa?

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BOSTON — Is there money to be made in Africa? You bet.

Just ask Walmart, which is offering more than $4 billion to buy a South African retail chain as its foothold into the fast-growing African market.

And Coca-Cola has announced it will spend $12 billion over the next 10 years to improve its production and sales network across the continent. KFC and Subway are already selling their meals to Africans. Top European and Chinese banks are competing for business in Africa, too.

This new scramble for business in Africa has made Wall Street take notice: Africa can be profitable.

These new investments are a significant vote of confidence in the continent’s future. Looking beyond Africa’s image as a poverty-stricken, war-torn continent, Walmart and Coca-Cola are making substantial investments to capture the business of Africa’s rapidly growing middle class.

The companies see statistics that 59 million African households earn at least $5,000 per year and that number is forecast to reach 106 million by 2014. It is a briskly developing market that forward-looking companies do not want to miss out on.

Forget aid to Africa. These new investments may well spur development and economic activity more effectively than charitable donations. Private investment can drive Africa’s economic activity and even help to stabilize Africa’s governance.

This new drive into Africa is different from the rapacious campaign 120 years ago when Europeans flocked to Africa to loot gold, diamonds and other resources. The current influx into Africa is investments by retail companies counting on profits by treating African countries as markets, not as colonies. The global companies are not do-gooders, they are hard-nosed businesses wagering that they can win new sales. These firms have expanded as much as they can in the U.S. and Europe and are looking for opportunities for new growth.

“Africa is the untold story and could be the big story of the next decade, like India and China were this past decade,” said Coke’s CEO Muhtar Kent in Bloomberg BusinessWeek. “You’ve got an incredibly young population, a dynamic population. Huge disposable incomes. I mean, $1.6 trillion of GDP, which is bigger than Russia, bigger than India.”

Of course Africa is not a single country ‚ it is actually 54 separate countries. And the companies will have to negotiate different regulations and conditions in each country. But it is Africa’s combined demographics that are drawing the investment.

Take a look at the Walmart deal. Its offer of $4.6 billion to purchase South Africa’s Massmart retail chain is Walmart's largest acquisition in more than 10 years when it purchased the U.K. supermarket chain Asda in 1999.

The South African firm that Walmart is aiming to buy has 290 shops that posted sales of more than $6 billion last year. And Massmart has 24 stores in 12 other African countries including Botswana, Ghana, Nigeria, Tanzania, Zambia and Zimbabwe. Operations outside of South Africa account for 8 percent of Massmart’s revenue. Walmart is buying a foothold into the entire continent, a company that knows how to deal with all the challenges each different country poses, from corruption and violent crime to volatile politics and civil war.

Walmart is expanding into emerging markets to make up for flat sales in the U.S., where sales have fallen for five quarters in a row. Walmart has 4,000 stores in the U.S. and 4,500 stores in 15 other countries. It has no stores in Africa. The company reported a net profit of $3.3 billion in the first quarter of 2010, led by strong sales in China, Brazil and Mexico. Walmart's overseas sales account for 25 percent of its sales and its international sales last year passed the $100 billion mark for the first time.

Unlike newcomer Walmart, Coca-Cola has been operating in Africa since 1929 and currently operates in every African country, even Somalia. It is the largest single employer in the continent with 65,000 employees and 160 plants. Coca-Cola is everywhere in Africa. In the most remote corners, like northern Zambia and eastern Congo, Coke trucks rumble across rutted roads and little thatched stores sport the trademark red Coca-Cola signs.

Now Coke wants to boost its production, distribution and sales across the continent.

By investing in Africa, these big multinational firms are wagering that what was once known as the “dark continent” has a bright future.