Will your company embrace the uncertainty caused by the spread of
COVID-19 and use it to accelerate growth and break away from the rest
of the market? Or will you need to enter a difficult period of slow
rebuilding, or even be forced out of business?
www.aacs.ng
Executive Summary:
Leading through this unprecedented period occasioned by COVID-19 without the benefit of a traditional planning cycle places a huge burden on leaders. Most meetings demand decisions. Most decisions are critical and involve the allocation of scarce resources. Leaders are making tough calls every day. It is exhausting, and it takes guts.
The most effective leaders will be able to steer their organization through the three distinct stages of the COVID-19 response :
● React – During this phase the key priorities are to protect the health and safety of employees and customers and to safeguard the business from any existential threats.
● Reflect – This crisis is different than any in history. It is first and foremost a global health challenge, but technological advancements have drastically changed the way society accesses information, works, and socializes. Things have changed, and businesses need to take a step back and determine how to proceed.
● Evolve – As companies begin to execute against their post-COVID playbooks, agility and speed will be most important going forwards.
As the efficacy of initial reactions becomes clearer and restrictions are lifted, leaders must confront uncertainty. Every organization will respond and adapt to the crisis at a different pace. While speed and decisive action are critical, it is even more important that leaders continue to learn and adapt throughout the process. We captured five areas where this is most important:
● Adapt to the way that work has changed
● Listen carefully and respond to your customers and other stakeholders
● Identify and bridge the gaps between your capabilities and the new reality
● Remain vigilant and prepare for longer-term disruptive trends
● Reduce all unnecessary costs, but save room for strategic investments
In this paper, we propose 4 steps that leaders should take to guide their organizations towards achieving stronger strategic positions when they emerge from this crisis than they were in before it occurred. The framework we suggest provides a mechanism against which actions can be modulated:
1. Scenario Analysis – What is the range of scenarios that you may eventually face? What will be the impact of each on your business? What would it take to mount an effective response?
2. Portfolio Analysis – How have the fundamentals of your business shifted? What will it take to win in this new environment?
3. Restructuring – What level of capital do you have access to? How does this match with the highest priority opportunities you see?
4. Performance Enhancement – How will you adapt your commercial, operational, and financial performance to be able to support the speed and agility you will need to compete in the future (which is now)?
As always we stand ready to assist you in developing disruptive ideas and to successfully navigate these uncertain times.
Context – COVID-19 Has Had An Enormous Impact On Nigeria:
COVID-19 has had a major impact on economic activity in Nigeria. It is unclear what the trajectory of the pandemic will be going forward, or how long the effects will linger, but the initial impact has been enormous.
Impact of COVID-19 on Nigerian Economic Activity
Nigeria entered the century on a positive trajectory and gained the attention of many foreign investors. Then came the global financial crisis in 2008. There were some knock-on effects, but overall fundamentals remained strong, and things continued to look positive for the country. The oil crash of 2014; however, was different. It had an outsized impact on the Nigerian economy and led to a recession, which caused the destruction of some recent gains.
Coming into 2020, the country was mounting an incremental recovery – 2-3% GDP growth was projected. Despite pressure on oil markets, many observers were cautiously optimistic. Led by Nigeria (and South Africa) sub-Saharan Africa was projected to grow faster than the global
economy. Fiscal and monetary moves from policymakers were expected to lead to an expansion of the economy. Increased private sector lending was expected to encourage investment and job creation. The return of the national budget cycle to a January to December cadence promised to facilitate the early implementation of prominent capital projects. The passage of an increased VAT
(Value Added Tax) from 5% to 7.5% would further support the country’s drive to move away from an unhealthy, over-reliance on oil and gas.
This was in spite of headwinds causing pressure on the performance of international oil markets. An abundance of supply had developed due to the exploitation of new sources of production. The global economy was beginning to stall with weaker growth than planned for. Ongoing trade tensions, most notably between the US and China, apprehension related to political uncertainty
brought on by the recent impeachment of the President of the United States of America, and a lack of clarity around the eventual conclusion of the Brexit process were causing unease. Security tensions in the Middle East also seemed to be on the brink of a dangerous escalation.
The spread of the novel coronavirus in Wuhan, China escalated at an astonishing pace. There was already a major slowdown in oil consumption and of the wider economy in China. When the Chinese government came to terms with the severity of the issue, they took swift action, which drastically
reduced demand during the peak of consumption and travel in the country. These actions put further pressure on international oil prices.
While the SARS epidemic of 2003 is often cited as a reference point for an analysis of Covid-19,
China has changed considerably in the nearly 20 years which have passed since then. It is now much more central to global supply chains. There has been a substantial increase in travel to and from the country, and domestic consumption has expanded. China’s demand for oil has increased from 5.7 mb/d in 2003 to 13.7 mb/d in 2019 – which makes up 14% of the global total and 75% of
growth in global demand for oil. While a concern, most observers and pundits did not perceive the situation escalating to a global scale.
The situation was conflated by the price war between two of the world’s largest oil producers, Russia and Saudi Arabia. The two countries had been working together to prop up oil prices over the past several years as part of the cooperation between OPEC and the unaligned OPEC+ nations
but had a falling out after an agreement between OPEC and its allies to lower output expired at the end of March. Both countries increased production which led oil prices to fall dramatically – by March
1st, prices had fallen by more than 60% since the beginning of 2020.
Then on, March 6th, the World Health Organization (WHO) declared COVID-19 a global pandemic, –
and the entire world was forced to respond. By the beginning of April, 81% of the global workforce lived in countries with mandatory or recommended workplace closures (as China gradually opened this rate declined). 40 to 60 million people are expected to be pushed into extreme poverty in 2020 as a result of the COVID-19 pandemic. School closures in the majority of the world have caused 1.6
2 FRED Database
4
billion learners, 9 out of every 10 students, to be pushed out of school. Oil prices continued to fall with WTI falling to below zero in March for the first time in history. At the peak in May, more than 60% of the global airline fleet was grounded and passenger traffic had fallen to just 10% of prior levels. Global merchandise trade volumes are projected to drop by up to 30% in Q2 2020.
Global Merchandise Trade Volume
(2018 – 2020)(Growth over previous quarter, seasonal adjusted)(2020 figures forecasted) To address immediate needs, Nigerian policy makers took substantial action:
● The nation’s land borders were closed, and domestic and international air travel suspended
● The Central Bank of Nigeria (CBN) established a 50 billion Naira fund to support households and micro and small businesses
● Interest rates on intervention loans were reduced from 9% to 5%
● Three-month repayment moratorium for all TraderMoni, MarketMoni, and FarmerMoni loans
and similar moratorium to all Federal Government-funded loans issued by the Bank of Industry, Bank of Agriculture, and the Nigerian Export Import Bank
● Revised budget to largely maintain spending levels with a proposed record deficit of 5.4 trillion Naira, which will be financed mainly through new debt
● Curfew and restriction of movement imposed on Lagos, Abuja and Ogun state; with interstate movements restricted subsequently
● Fuel subsidies removed, and petrol prices decreased at the pump due to decline in oil prices
● Suspension of the proposed increase in electricity tariffs by the electricity distribution companies
● Waiver of import duties on medical equipment, medicines, and protective equipment for the treatment of COVID-19
But as the number of confirmed cases and deaths continues to rise, the crisis is putting a spotlight on the gaps that exist in the nation’s critical services such as healthcare and education (for a closer look at opportunities in these areas, please see the March and April editions of the AACS Monthly).
COVID-19 Development in Nigeria
Yields on Nigeria’s dollar bonds maturing in 2047 fell from an all-time high of 13.2% on March 19 to
9.1% on May 28, 2020.
Although the economic impact of COVID-19 has been devastating, the recent opening up of a
significant number of economies coupled with unprecedented monetary and fiscal measures taken
by governments around the world, has led investors to believe that the situation may have bottomed out. The view that there is light at the end of the tunnel is evidenced by the 36% increase in the S&P 500 from a low of 2,237 on March 23rd to close at 3,044 on May 29th.
With so much uncertainty, the only thing that is guaranteed is that the status quo has been disrupted. Many changes that were already underway have been accelerated. Others that were not seen to be possible are now part of daily life — the ground has shifted. Successful leaders will be able to adjust and adapt to the new reality.
III. Outlook – Perspective From Nigerian Businesses And Their Leaders:
We believe that the current disruption imposed by COVID-19 will create significant opportunities for
some companies to accelerate and break away from the rest of the market. Conversely, it will also force others to enter a difficult period of slow rebuilding or even push them out of business entirely.
In order to seize opportunities, establish winning strategic positions, and emerge stronger from COVID-19, companies, and leaders will have to chart new courses. We think this should be viewed
against three distinct stages of the COVID-19 response.
As a firm, AACS has analyzed historical and current publicly available data and interviewed numerous executives from leading Nigerian financial services, consumer packaged goods, telecom, and technology start-up businesses, to gauge the level of impact that this period has had on businesses and the ways in which executives are preparing for what comes next.
Historical Perspective:
While we are clearly living through unprecedented times, there are lessons to be learned from the
actions taken during previous crises. For example, during Nigeria’s 2016 recession, consumer packaged goods (CPG) and industrial companies who made smart investments saw their operating profit grow at a CAGR of 35% while that of companies who maintained the status quo dropped by 4% during the same period.
Companies that accelerated through the recession made a number of strategic moves. Some notable examples include:
● Invested in plant and equipment to increase quality and reduce cost (e.g., Dangote Cement)
● Added local suppliers to Improve supply chain resilience and reduce fx risk (e.g., Nestle)
● Increased SG&A spending to drive product innovation, increase category share and pricing
to enhance market position (e.g., Nestle)
Other companies that maintained the status quo:
● Were unable to react to changing customer usage/ demand profiles
● Maintained status-quo business operations
● Maintained a high degree of financial leverage
● Implemented inefficient cost-cutting measures, which reduced capacity to take advantage of available growth opportunities
6 AACS Analysis of the 14 largest CPG and Industrial companies on the NSE with cyclical EBIT growth
There are common themes in how COVID-19 has affected business trajectories. We focused our analysis on 4 sectors that are being impacted significantly.
Key Impacts of COVID-19 on Selected Sectors
For financial services firms in general, and banks in particular, the level of maturity of digital capabilities that they had in place before the pandemic accelerated adoption has been central to the effectiveness of their responses. Larger banks were more likely to be further along in digital transformation programs, and, as a result, have been better able to adjust. Competitive positioning going forwards will be determined by the extent to which financial services firms are able to leverage and continue to increase strength in digital capabilities, the eventual quality of their risk assets, and the speed at which they are able to reframe their modus operandi and introduce new products and services to serve emerging customer needs.
Telecom:
As the platform on which the society is relying during this period of social distancing, telecom operators are in the spotlight. Overall mobile network operators have been well-positioned during
the crisis. Their platforms are an essential component of the digital economy that is taking shape in Nigeria. However, there are significant risks, and the status quo will likely be challenged going forwards. Tariffs in Nigeria are comparatively high, fixed broadband players have an opportunity to
ride the wave of increased work from home and use of applications for collaboration, communication, eCommerce, online banking, etc. to increase share.
Food and home and personal care segments of the FMCG sector have experienced volatile demand patterns, increases in supply costs, and disruptions to supply chains. E-commerce has become a more important channel. For some brands, this has been an avenue for fulfillment and others a component of omnichannel strategies. Companies are working to improve understanding of fintech and distribution opportunities to support the trend of customers shopping online. As working capital management becomes increasingly important producers are exploring opportunities for vertical integration to reduce supply and distribution risks.
Tech Startups:
Nigerian tech startups face varying challenges in the time of COVID-19. Depending on their area of concentration, this period could either be devastating for them as it evaporates supply of capital and
potential sources of revenue, or it could accelerate their growth faster than they are able to easily manage. Especially during these times, Nigerian startups should strive to emulate camels, not unicorns. They should focus on profitable sustainable growth – not growth at all costs.
Unlike the usual symbol of the idyllic start-up,, unicorns, camels are real. They are extremely resilient and can survive changes in body temperature and water consumption that would kill most other mammals. They are known for their relentless work ethic, and endurance, but when called upon, they can sprint nearly as fast as a racehorse (and be less phased by the effort).
Executive Perspective:
While responses and plans for the future vary widely across organizations, leaders are unanimous in their view that the crisis has accelerated the shift to a more digital economy. We captured five key messages that describe a prescription for how to succeed in this new environment. Leaders should:
1. Adapt to the way that work has changed — As business restarts, things will likely continue to change, but it is not going to be less digital. Leaders must embrace the changes and use them to enhance the modus operandi and increase productivity/ decrease costs.
● Once we figured it out, virtual meetings have improved productivity significantly – MPRs reach more people, it’s easier for the team to reflect and engage – especially those
outside of Lagos (CFO – Bank)
● Productivity took a small hit – but we are figuring that out (remote working) … we have saved so much on office running costs and travel (CEO – Asset Management)
● We were already used to working remotely, so the lockdown only boosted productivity – no more commutes or other daily distractions (CMO Tech Start-Up)
● Majority of customer induced transaction are carried out digitally – we will move more
services to the cloud rather than keep buying servers (CFO – Bank)
2. Listen and respond to your customers and other stakeholders — Customer, supplier, and channel/ retail behaviors, needs, and purchasing decisions have changed during this period and will continue to change as the situation progresses. It is important to be first to know what stakeholders want and to deliver solutions to serve unmet needs.
● We have seen a shift in our channel mix – with an increase in sales through modern trade and online (CMO – CPG)
● Customers trust our brand – we are looking into extending into related categories that we can serve through our existing distributors (CEO – CPG)
● Given support from the CBN and trends in end-user behavior, we see opportunities to extend our offerings targeted at informal sectors of the economy (CEO – Bank)
3. Identify and bridge the gaps between your capabilities and the new reality — Assess the gap between the capabilities the organization has today and those that are needed going forward.
● There is a dearth of tech talent within banks, they can use this period to acquire talent from start-ups who are short of cash (Fintech Investor)
● We have typically relied on face to face, in-person marketing – we need to build capabilities in digital marketing and predictive analytics (CFO – Bank)
● One opportunity for start-ups is to seek strategic partnerships with larger corporate entities who are struggling with the changing digital context (Partner – PE)
4. Remain vigilant and prepare for longer-term disruptive trends – Immediate disruption may just be the beginning and longer-term trends could have an even larger impact. In order to take advantage of major shifts, it is critical to track key trends and develop scenarios and for how and when to respond when they are triggered.
● There are a number of predictable repetitive tasks, such as daily reports for the CBN …the production of these should probably be automated via RPA (CFO – Bank)
● Nigerian entrepreneurs tend to be overly optimistic – when developing scenarios – it is important to increase the extremes by at least 2x (Partner – PE)
5. Reduce all unnecessary costs, but save room for strategic investments — This period should serve as a wake-up call. Leaders can not afford to squander resources or other opportunities that this crisis presents to drive efficiency. Use data to bridge the gap between
perception and reality and enable faster better decisions, allocate capital more efficiently, and reduce all unnecessary costs.
● Lockdown made sourcing raw materials from local farmers difficult – not only did prices increase but it has been hard for agents to source cash to pay the farmers (CEO – CPG)
● The most important advice I am giving the entrepreneurs in our portfolio is to be as lean as possible (Partner – VC)
● We have cut our overall marketing budget but increased our online spend (CEO – MNO)
● External funding is a lot more cautious – there are concerns around devaluation,
valuations, etc., start-ups need to be more creative in terms of funding options – consider
mezzanine and other debt sources (Partner – PE)
IV. ACTION PLAN – 4 STEPS TO TAKE TO EMERGE STRONGER FROM COVID 19:
Three months into the COVID-19 crisis there is no way of escaping, leaders must confront the uncertainty, take time to reflect, and determine the best path forward. Every organization will adapt
at a different pace – the key is to keep learning, adapting, and improving throughout the process. We suggest a 4 step framework against which leaders can modulate their response.
4 Steps to Emerge Stronger From COVID-19
1. SCENARIO ANALYSIS
The first step in scenario analysis is to establish a baseline. This isn’t meant to be a lengthy exercise, but rather an opportunity to catalog what your big assumptions were before the crisis hit,
and to assess the capabilities with which you can mount your response. The baseline should include an overview of the company’s existing capabilities, strategic choices, assumptions behind the business plan, and an Inventory of all active or planned initiatives and projects.
The next step is to develop scenarios for the key variables that drive the performance of the business. It is helpful to think about three stages in the evolution of the pandemic and its impact on economic activity.
Stages Disruption to Economic Activity
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8Executive Interviews, AACS Analysis
9Executive Interviews, AACS Analysis
Leaders must develop scenarios for each of the remaining phases (Nigeria partially lifted restrictions on May 4th).
This exercise is meant to consider the extremes – not only the most likely developments. Although
visionary leaders tend to be optimistic, during this stage you must be prepared to consider outcomes that would have seemed unimaginable a few months ago. It is also important to develop an even number of scenarios in order to avoid focusing on the middle of the road option. Scenarios
should be modeled based on variables with the largest level of uncertainty. At this point, we believe the biggest uncertainties are the expected spread of COVID-19 and the effectiveness of the government interventions to stimulate the economy.
With this in mind three “wildcards” could drastically improve the situation.
1. Availability of a vaccine or effective treatment
2. Extent and effectiveness of further government interventions
3. Innovations in testing, isolation and contact tracing
With an understanding of these high-level scenarios, consider the implications of each on the core areas of the business (as defined in the baseline).
2. PORTFOLIO ANALYSIS
While some businesses will find near-term opportunities to take big, strategic moves and innovations, others may need to enter a long and difficult period of slow rebuilding. To determine where each of your lines of business falls on this spectrum, map the composition of the portfolio based on three criteria:
A. Fundamental attractiveness of the business under each of your scenarios (what is the
business’ full potential in terms of growth and margin?)
B. Ability to capture the opportunity, which is determined by assessing a company’s relative competitive advantage in each line of business, alignment with existing capabilities, and the level of effort required to execute.
C. Funding required to bring the business to full potential (How much will you need to invest and in what areas to achieve full potential?)
With this information in hand, the next step is to rank each line of business and determine which ones you should focus on. Then conduct a closer assessment of the level of funding required to position that business for sustained growth after the recession (“uses of cash”).
3. Restructuring
Determine the level of funds the company is able to invest in the selected opportunities (Sources ofCash). This will be a combination of the funds which are available immediately or can be generated through savings from cost transformation programs, the company’s financing capacity through
straightforward loans but also through leasings, securitization, etc.), and the potential proceeds from
the sale of lines of business which are no longer a priority.
Compare sources of cash with the uses of cash as determined in the portfolio analysis step, and,
unless the former is higher than or equal to the latter, go back to the portfolio analysis step and
reprioritize the lines of business on which to focus.
4. Commercial, Operational and Financial Performance Enhancement
With clarity on the way forward, leaders should champion efforts to solidify lessons learned from the initial impact and response to the pandemic and drive enterprise-wide performance enhancement programs to enable delivery against the company’s strategic ambitions. To take advantage of the advancements in organizational decision making and accountability that have been gained while
responding to the initial shock of COVID-19, cross-functional buy-in and contribution should be central tenets of performance enhancement efforts.
Commercial Performance Enhancement:
The idea is to start from the baseline of customer and market understanding, and then to launch a series of initiatives designed to codify the lessons learned and to add new capabilities to boost
performance. Initiatives could include launching ethnographic market research, introducing new products and services, entering new categories, or executing on strategic acquisitions among other
things. It is important to focus on a limited number of high impact activities and to emphasize a pragmatic, results-oriented approach.
Operational Performance Enhancement:
This is a unique opportunity to drive a broader cultural shift within the organization. The urgency
caused by the pandemic has given many within the organization the opportunity to step up and develop or demonstrate the ability to operate at a higher level. The company needs to examine the
key processes it uses to support its operations, and more broadly, into the state of key capabilities
needed to ensure success. Again, the aim is not to implement a wide-scale process improvement program, but rather to zoom in on the most important processes and ensure that they are tuned to
deliver necessary results. Leaders need to have visibility into any bottleneck that exists and to take action to quickly remove it.
Financial Performance Enhancement:
Aggressive cost management will provide the funding to invest in the opportunities identified during the portfolio analysis stage, however, a careful balance between cost-cutting and growth must be struck.
The initial reaction to the crisis was one of survival for many companies, and as such, they took steps to eliminate or drastically reduce costs. With a perspective on the scenarios you may face going forward and your chosen strategic direction, it is important to redefine your base level costs.
Where possible fixed costs should be transitioned to variable costs. This could mean leveraging co-working spaces for certain workers who will not be returning to the office; moving away from
purchasing technology infrastructure and software licenses and toward subscriptions to cloud-based software as a service offerings, outsourcing production, or adjusting the approach to channel management and trade marketing among many other opportunities.
About AACS:
AACS is an international consulting and principal investment firm defined by its purpose which is to
“bring the winning edge by inducing you to think out of the box, and driving the construction of the capabilities to bring those thoughts to life“.
Our creed is a way of life that continually pushes you to walk roads less traveled be it in business, public service, community development, medical & scientific research, or global and human relations.
It is also important to note that a one-time disruption is not enough. Our creed demands that we stay prepared, consistently reimagine the possible and constantly strive to improve.
The Authors:
Rafiu A. Abina – Rafiu is the Managing Partner of AACS. He has extensive experience partnering with investors and management teams to achieve results and execute new business opportunities. He has led numerous growth strategy and commercial and operational performance enhancement engagements with consumer-facing businesses in Silicon Valley, the GCC, and West Africa.
Alberto Pagliarini – Alberto is an investment specialist with a track record of helping companies develop strategic financing strategies and raise over $3b for M&A and restructuring deals in the US,
Europe, and Asia. He has held investment banking roles with Morgan Stanley, Barclays, and Daiwa.
Dr. Hatem Samman – Hatem is a leading economist and expert on issues that impact the economic
performance of countries and businesses. He is frequently quoted and asked to appear on prominent
media outlets including The Financial Times, The BBC, MSNBC, and Emirates 247.
Dr. Falil Ayo Abina – Ayo is the Chairman of AACS. He has over 25 years of experience in the banking sector rising from a Trainee Officer to the level of an Executive Director, where he led industry-leading teams and projects. Ayo is an acclaimed leader of many groundbreaking
developments in the banking sector. He has served on the boards of public- public-spirited organizations including the Lagos State Security Trust Fund and Oyo State Security Trust Fund.
SOURCE: AACS Monthly
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