[Editors Note: This post was originally published on Medium and is republished here with the permission of the author.]
Nigeria in 1988 — Not a premier investment destination
In 1988, Nigeria was not a premier investment destination. Life expectancy for the country’s 91 million people was 46 years; gross domestic product (GDP) was about $23 billion; GDP per capita was about $256; 78% of people lived on less than $2 per day; about 37% of people had access to sanitation while roughly 58% had access to improved water source; Nigeria had experienced six coups in its short 28 years of existence as a republic. It was also under military rule so technically and literally anything could happen.
Then in 1993 Nigerians woke up to the news that General Sani Abacha, one of the most corrupt and brutal dictators Nigeria would ever know, had become the military Head of State. If you were an investor, Nigeria was just not the place to go.
Yet, executives at Tolaram Group paid little to no attention to those statistics. Tolaram began importing instant noodles into Nigeria in 1988. Since then the company has vertically integrated in-country and grown their Indomie Noodle® instant noodle sales to a staggering $700 million a year. A packet of noodles cost about 18 cents.
They sell more than 4.5 billion packets of noodles per year. In 1988, Nigeria did not have an instant noodle market. How was Tolaram able to set up and sustain operations in one of the most difficult countries to do business? After assessing Tolaram’s strategy, I cannot help but highlight the following attributes and impacts of their business — business model targeting non-consumption, interdependence, patient capital, and job creation and tax revenue.
Business Model Targeting Non-consumption
Tolaram entered Nigeria with a mission to target non-consumption. The company’s vision is to “bring affordability and quality to the lower socio-economic segments” in the country. In order to execute that vision, Tolaram developed a business model that allowed it sell its product profitably for as little as ten cents (due to inflation and currency depreciation, Indomie instant noodles now sell for 18 cents).
Tolaram developed the necessary distribution infrastructure and relationships to get its product to as many Nigerians in virtually every corner of the country as possible. To target non-consumption in a country without the necessary infrastructure — roads, reliable electricity and water supply, etc. — Tolaram had to integrate across multiple components in its value chain.It had to build an interdependent architecture.
Most innovative companies, especially in emerging markets, have to build interdependent architectures because most of the components they need are usually not available.
Whenever a product* or the delivery of that product is not good enough**, the company providing the product has to create an interdependent system. In other words, the company has to integrate across multiple components in the value chain. It does this so that it can manage the interfaces across the different components in the system. Consider Tolaram.
The poor state of infrastructure in Nigeria necessitated Tolaram to integrate multiple components in its value chain. The company has had to provide its own electricity; manage a fleet of more than 2,000 trucks for its logistics; and build a palm oil factory (palm oil is one of the products needed to make instant noodles).
Creating an interdependent system can be expensive, especially when compared to a modular system. In modular systems, there are other players (either the government or private enterprises) that provide the necessary components to build or deliver a product.
For example, if Tolaram were set up in the United States, the company could leverage electricity, water supply, and logistics from existing companies or government entities. This would greatly reduce its cost of doing business.
Interdependence, while typically more expensive, is not all bad. The fact that Tolaram has had to develop these components has enabled it offer those products to other companies in Nigeria.
Tolaram now has 17 manufacturing plants in Nigeria (including noodles, flour, palm oil, seasoning, etc.); a packaging company; and a logistics company. Building an interdependent system enables companies to offer products to other companies once they satisfy their demand.
Stay tuned for part 2 to learn about how Tolaram used patient capital to build their company.
* product here refers to product or service
** not good enough here refers to products that don’t yet meet the performance standards of most customers