Packaging Industry: Gavin Dehning Discusses Silafrica’s Growth Initiatives Across East Africa

Interview with Gavin Dehning, Group CEO at Silafrica

Could you elaborate on the recent expansion of Silafrica, especially regarding the contracts secured with Heineken and Coca Cola? What developments are taking place?

From an investment point of view, Silafrica has invested quite heavily on PET, particularly in Ethiopia. We put another two and a half million dollars into a brand new PET unit, commissioned last year. We expect to see increased volume this year, as most of the products we are producing in Ethiopia on the PET side were previously imported. This move aims to encourage local purchases instead of relying on imports. The plan behind our expansion in Ethiopia is to gauge the market’s response and potentially consider the next expansion, which would involve closures, another machine to complement the PET expansion. In the short to medium term, Ethiopia is expected to show strong growth in PET sales, followed by a leap into closures, contributing to the complete market of rigid consumer packaging.

On the industrial consumer side, specifically in crates, we are considering adding one or two additional molds. We have a significant contract with a company named Kegna, a new brewery in Ethiopia, requiring over a million crates for the year 2024. We anticipate fulfilling this demand before the end of the year. Additionally, we have secured a lucrative contract with Heineken, where they will supply raw materials to our premises, mitigating the risks associated with forex fluctuations. This arrangement taps into Heineken’s established means of obtaining forex, providing a significant upside for us in Ethiopia this year. These are the primary growth plans for Ethiopia in the coming year.

Looking ahead, we are exploring the possibility of purchasing our own premises, which would trigger further investments in equipment and expansion. Ownership of land brings its own set of benefits. Shifting focus to Kenya, investments are centered around Thin-wall. We have entered into a single-source contract with Upfields for our Thin-wall business, transitioning it into In-Mold Labeling (IML). Robotics required for IML have been purchased and are set to be installed in Kenya by the end of February. The agreement with Upfields makes us the sole supplier for the Blue Band brand, consolidating a larger share of the appeals business, resulting in a significant increase in rigid consumer packaging volumes in Kenya. We are also planning to establish a 4000 square meter warehouse in Kenya to accommodate the expected growth in business, providing better handling of raw material inflows.

On the agricultural side in Kenya, our foray into agricultural exports of avocados has been remarkably successful. In just two years, we have gone from zero to almost 3000 tons of product crates, marking one of the most significant growth phases in our organization’s history.

Could you explain how the process works? It seems you cater to a single major client?

Our collaboration with the Exporters Association of Kenya has been instrumental. They work with growers who export approximately 70,000 tonnes of avocados annually to various European countries such as Spain, Germany, Sweden, and the UK, as well as the United States. These exports are facilitated using reusable, foldable crates, specifically designed for the export market. These lightweight crates, weighing only about 300 grams, possess excellent tensile strength, making them suitable for carrying a seven kg load of avocados without any issues.

The widespread adoption of these crates is due to two main factors. Firstly, unlike traditional paper cartons that absorb moisture and lose integrity during export, our plastic crates maintain their strength, resulting in minimal losses for growers and exporters. The only reported losses occurred when crates at the bottom were not stacked properly, causing the weight on top to crush the avocados. Secondly, evolving legislation in countries like Holland and Spain prohibits the use of one-way packaging. This shift aligns with our reusable packaging approach, allowing our crates to meet the changing regulatory requirements.

Interestingly, some traders and importers in Europe and Spain are utilizing these crates beyond their initial purpose. They fold them up and send them back and forth to locations like Peru. While certain markets allow this, we are actively working on gaining similar permissions for Kenya and East Africa. This evolution aligns with the changing import regulations across European countries, moving away from single-use packaging to reusable alternatives. We believe that our entry into this space has been timely, witnessing significant growth in this specific area. The process is underway, and we anticipate further evolution as time progresses.

Could you elaborate on the logistics aspect? When these crates are re-imported, do they occupy a significant volume?

The crates are designed to fold flat, akin to a piece of paper. So, while you may be importing a large quantity of empty crates, the ratio typically stands at one crate equating to about five crates when folded for return. This translates to a return cost of around 20%, which, surprisingly, is more cost-effective than manufacturing new crates from scratch. Essentially, this process not only optimizes costs but also introduces a new market opportunity.

We have been in discussions with IFCO, a German company specializing in crate pooling operations. They procure crates in bulk, assemble them into a pool, and provide them for hire across various countries, primarily in Europe. Users pay a nominal fee per day or per use, making it a sustainable model for value chains. Recently, we have explored potential partnerships with IFCO and another German company to establish a similar crate pooling operation in East Africa.

This initiative extends beyond avocado exports; it also caters to local manufacturers like British American Tobacco, Unilever, and Upfields, as well as PETCO, who rely on single-use paper cartons for packaging products like cigarettes, shampoo, soap, and detergents for retail distribution. We are implementing a system where individual cartons, sized to fit standard product quantities, are collapsed and returned to the pool after use, minimizing waste.

The crate sizes are standardized to accommodate approximately 90% of the product range, reducing the number of SKUs to six or seven pack sizes. These crates are equipped with lockable seals for secure transportation. However, optimizing space within the crates remains a challenge, requiring meticulous product dimension planning. We have already conducted extensive work in Europe to address this challenge and have a memorandum of understanding in place to launch this initiative in East Africa.

Unilever, in particular, is pushing us for the implementation of this solution, emphasizing the potential benefits for their operations.

Do you encounter competition from existing plastic manufacturers in Europe, China, or elsewhere, who might already be engaged in a similar product line, considering its global appeal?

Currently, in East Africa and across the entire continent, there is only one player involved in this pooling operation, and that is a company known as CHEP South Africa. Their focus has primarily been on pallets—producing and renting them to the industrial web. The rental model involves clients paying fees per day, hour, or month for the use of the pallets. If a pallet breaks, it is returned, replaced, and a new one is provided. This rental arrangement is the core mechanism they have employed.

Unilever has expressed interest in this concept for the past four or five years. However, they are not inclined to become crate owners themselves. Managing a stockpile of crates, worrying about maintenance, and dealing with replacements are aspects they prefer not to handle as it is not their core business. They are seeking an organization or entity to oversee this process.
If you have been to Europe, you have likely seen these crates in supermarkets. Various brands, such as Unilever or Procter and Gamble, use these crates to transport products to the retail sector. The retail staff unpacks the products, collapses the crates, and sends them back into the pooling system. This concept is what we are introducing in East Africa. As we extend our reach into other East African markets like Mozambique, Tanzania, and potentially Kenya and Ethiopia in the future, the success of this model depends on a well-developed retail sector.

Could you shed some light on your operations in other markets?

Moving on to Tanzania, it has consistently been our top performer in recent years, representing the family’s strategic intent to establish a business foothold in East Africa. Tanzania holds a special place as our flagship operation, accounting for 70% of our business volume. This is not because Tanzania is larger than Kenya, but rather because it has not witnessed the same level of investment by competitors. In Kenya, we deal with 147 converters, while in Tanzania, the number is not more than seven. Kenya, for some reason, attracted significant attention, resulting in a crowded market. In contrast, Tanzania provided us with a unique and less competitive landscape.

The Shah family’s early investments in Tanzania set the stage for our success. We initially faced uncharted challenges, building our capacity to serve the market, particularly with Pepsi contributing significantly—utilizing $240 million in our services. Our robust water tank business, being the first to produce large domestic water tanks, has thrived. With an additional $2 million invested for expanded capacity, we have also invested $2.5 million in PET capacity, now operating our fifth or sixth production line.

Expanding our footprint, we have entered the agricultural crate space in Tanzania to meet the demand for exports. Much like in Kenya, our growth is fueled by agricultural expansion. Pepsi, heavily investing in PET, provides opportunities for growth in Tanzania. The thriving water tank business, recently expanded, further contributes to our success.

In Kenya, we have seamlessly integrated into the agricultural value chain, starting from the farm to the packers and exporters. Our “cricket crate” that was initially designed for laborers on the farm to harvest fruit, has evolved into an integral part of Silafrica’s value chain. This steady evolution over the past three to four years began with cricket crates in 2020, evolved into export crates in 2022, and now, in 2024, we offer multiple variants catering to different export commodities, including avocados, sweet peas, cherries, and tomatoes heading to the European market.

The latest addition to our expansion is Mozambique, marking another significant step in our journey.

Could you provide insights into your current operations in Mozambique?

Mozambique has been an intriguing journey for us. Many FMCGs operating in East Africa have approached both myself and my colleagues, expressing interest in our expansion into Mozambique, and to some extent, Zambia and potentially Angola, though we are still working on that aspect. The primary driver behind this expansion is the trust our customers have in our products, brand, and organizational capabilities. This trust has led us to make strategic investments in Mozambique, where we are setting up manufacturing operations for crates, initially catering to Coca Cola, Heineken, and ABInBev. The plan is to commence operations around March.

Interestingly, Mozambique faces challenges with its current crate supplier, leading to issues, including the retention of molds that do not belong to the supplier. While I will not delve into the specifics, this situation prompted our customers to invite us into the Mozambican market. Once our crate manufacturing operation is established, we aim to broaden our product portfolio and further penetrate the Mozambican market.

A positive aspect worth noting is Mozambique’s changing economic trajectory, particularly since the discovery and export of gas to the European Union. This has resulted in a significant influx of foreign exchange into Mozambique, visibly impacting the country’s development. Having visited Mozambique a few months ago, we witnessed palpable changes, including infrastructure development and other positive indicators. This suggests that our entry into Mozambique is timely, aligning with the positive economic shifts and opportunities emerging in the region.

There used to be internal issues between RENAMO and FRELIMO. Is that still a concern?

No, that has calmed down. It is no longer a significant issue. The primary concern now revolves around the infiltration of what we refer to as Al Qaeda, particularly in the northern region near Quelimane and towards Pemba. However, my intelligence sources indicate that this infiltration is likely a tactic to destabilize the gas project. Given the European situation and Russia’s withdrawal from the supply equation, Qatar has been attempting to assert itself by supplying gas to the European Union. It is suspected that Qatar may have funded certain disturbances in the north to disrupt the gas pipeline project. This strategy was fairly successful, causing a delay in the project. However, the issues have now disappeared, and the ragtag soldiers involved seem to no longer exist. It appears to be a matter of timing and global geopolitics—an attempt to keep Mozambique out of the European Union until a stable gas price is secured. Despite having well-connected contacts in Mozambique, the exact source of destabilization in Quelimane and Pemba remains unidentified, showcasing the complexity of global politics. Nevertheless, with everything considered and accomplished, the gas is currently in motion, bringing revenues into Mozambique.

What is the current situation regarding the Mozambique economy?

Mozambique has never been characterized as a unicorn economy with sudden bursts of growth. Historically, it has experienced slow and steady development, heavily reliant on tourism for revenue. There was a period when there were plans for oil exploration in the Tete province in the central part of Mozambique, but that did not materialize. Rio Tinto was engaged in a significant mining operation in Tete, but that also faced closures. The recent development of gas could potentially be a savior for Mozambique, offering prospects for an economic uptick. Our entry into Mozambique seems well-timed, and we have the support of global multinationals, encouraging our involvement.

Furthermore, a recent discussion with a senior executive from Coca Cola Africa has indicated their support for our operations in Mozambique. They expressed interest not only in crates but in various products that we produce in other territories. This endorsement seems to open doors for our operations in Mozambique. Over the next few years, Mozambique is anticipated to become a significant contributor to our group’s overall performance.

Looking ahead, there are already discussions and signals about potential expansions into Zambia and possibly Ghana. I have communicated to the board that we should aim to at least double our size by 2027 and establish a presence in six to seven countries. Whether it is with the current board or a new one, the overarching goal, direction, and objective remain consistent.

Are there any other countries where you would like to see Silafrica expand its operations?

The prominent consideration is South Africa; however, it poses challenges with its competitiveness and ongoing domestic issues. While it remains an opportunity we are keeping an eye on, delving into the South African market requires careful consideration. Currently, it holds a lower priority on our expansion priorities list.

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