Olam rethinks its flour price war
Singaporean agribusiness Olam has been quietly letting its competitors know that its price war, which it has been backing for several years, is coming to an end.
But rivals in Cameroon, Ghana and Senegal are not taking the multinational at its word. The competition has caused margins to shrink and some companies to collapse. Cameroonian companies Société Moulins d’Afrique SCMC and SCTC have since shut down.
Meanwhile Olam brought in revenue of $30.5bn from its global operations in 2018.
After Olam began flour milling operations in Douala, the price of a 50kg bag of flour dropped from 16,100 CFA francs ($27.6) in 2015 to 13,300 CFA francs in 2016. Olam has tried to drive competitors out of business in nearly every market where it has gotten into the flour business.
Strategy in action
“Our strategy is to build a group of flour production facilities in African ports […] with Nigeria as an anchor point,” said Keshav Chandra Suresh, who became president of Olam Grains when it was created in 2008. In 2016, Saurabh Mehra, senior vice-president for milling at Olam Grains, explained the company’s strategy. It targets markets with “500,000tn of wheat imports, oligopolistic structure[s] and [that are] surrounded by countries that do not have a robust milling industry.”
- Olam bought the Nigerian subsidiary of Lebanese-owned Crown Flour Mills for $107.6m in February 2010, giving it mills in Lagos and Warri with a total capacity of 1,550tn per day. It later expanded its activities and bought Amber Foods, the milling business of Nigeria’s BUA Group, in 2016. Spending $275m, Olam doubled its milling capacity to 6,640tn per day. The Amber acquisition got Olam into the pasta business and it further diversified by setting up animal feed plants in Kaduna and Kwara in 2017.
- In March 2010, Olam announced plans for the construction of a plant in the Ghanaian city of Tema –30km from Accra – at a cost of $55m and with production capacity of 500tn per day. It doubled its productive capacity there in 2017.
- Olam followed up with 500tn-per-day mills in Senegal in 2014 and Cameroon in 2015.
In just seven years, Olam became the second-largest flour producer in Nigeria and is roughly the third-largest flour miller in Africa, behind the American Seaboard Corporation and Flour Mills Nigeria, with capacities equivalent to those of the Tanzanian Bakhresa but ahead of the South Africa’s Tiger Brands.
Moving for market share
Olam’s large milling capacities give it an advantage over some competitors, but the flour business in sub-Saharan Africa suffers from overcapacity, with some firms using less than 50% of their capacity.
Hence Olam’s strategy of price wars. The plan is working in some places, but not in others.
- In Nigeria, Flour Mills Nigeria controlled 42% of the market in 2018, while between then Olam, Dangote Flour Mills and Honeywell had less than 40% of the market, according to a report by Global Credit Rating Co.
- In Cameroon, Olam is the market’s number-two player, controlling 25% of the market. It is about on par with Sudanese firm Afisa but behind Somdiaa, a subsidiary of France’s Castel.
- Olam has not become a big player in Ghana, and it exports nearly half of its production to Benin, Burkina Faso and Togo.
- In Senegal, Olam is not in the top three in terms of market share.
Olam has deep knowledge of markets, varied distribution channels, its role as a commodity trader – which helps it to reduce its transport costs, as the cost of wheat represents about 75% of a mill’s cost of production – and cheaper access to foreign exchange when compared to many of its local competitors.
- “I’m not convinced by their strategy,” says one industry expert. “If we look at the details, they did not keep their initial promise by building mills that were finally far away from ports. Whether in Douala, Dakar or Tema, their factories are located 15 or 30km from the quays. This is abnormally far in this business, because it increases transport costs. And geographically, here again, the promise is not perfectly fulfilled with a factory in Dakar that forms a fragmented group with the others, not to mention that the two Nigerian CFM factories are very far from each other.”
- Another source who requests anonymity asks is mills are Olam’s top priority: “They sometimes give the impression of privileging their trading activities over their industrial ones. In Ghana, for example, despite sufficient storage capacity, they sometimes rent stores in addition to their own silos because they import too much wheat.”
- A third industry source says Olam should be more aggressive: “If I were them, with their comparative advantages, I would be even more aggressive and would continue to invest to suffocate local competitors who do not have their financial capabilities. They belong to one of the most powerful sovereign wealth funds in the world.”
Asked several times for comment, Olam declined to explain its strategic choices.
What’s next: Knowing that it cannot reduce margins indefinitely and remain profitable, Olam is reviewing its strategy and trying to return to ‘normal prices’ in Cameroon Senegal and Ghana.
- Other players in the sector are also taking a new look at the West African market. Flour Mills Nigeria – the continent’s biggest miller, with capacity to produce 12,000tn per day – says it is restructuring its activities at home and finally looking to expand outside of Nigeria.
This article was first published in Jeune Afrique.