Why dumping the food business makes economic sense for Dangote

News filtered in a couple of days ago indicating that Dangote was planning to divest away from its food business and move into the potentially lucrative power sector. This did not come as a surprise to me as his food business has been the weakling in his vast business empire. Dangote Flour which houses his flour, sacks, pasta and noodles business has churned out profits year after year. However this has been at very low profit margins 6.5%, 8.6% and 7.3% for 2008, 2009 and 2010 respectively. Compare that to its Cement Business that had a profit margin of 33% and 50% for 2009 and 2010 respectively. To make matters worse its 9months unaudited accounts for its Food section returned a paltry 1.8% signifying a red flag.

Its not hard to see where the problem lies as his food business is currently in a highly competitive sector. He currently faces stiff competition from the Chinese, Asians and indeed a porous border which all help flood the market with cheap and affordable staple food. With competition comes high cost of sale as businesses spend fortunes to outwit each other with investment in new products, raw materials, factories, power etc. They also dole out large funds investing in selling and distribution expenses, advertisement, staff cost etc. His pasta and noodles business even faired worse. Between them he made a loss of about N1.8b in 2010 only. In fact, his Noodles Business made a loss of N1.93b in 2010 whilst the pasta business made a paltry profit of N168m in 2010 (N93b in 2009). He is not alone feeling the pinch in this sector. Honeywell has had their own fingers burnt too. In 2011, their Noodles/Pasta had a profit margin of just 1% making a profit of just N75m. This ironically, was better than their 2010 results where they posted a loss of N750m.

To become a global power house like a envisions Dangote needs to place himself in strategic business concerns that see him dominate. With his finances (his and others) and clout there it makes no sense holding on to an investment that cannot catapult you into a global power house. With Cement, Sugar and now Power in his portfolio it is hard to see any major competition in the horizon. These are investments that require high entry barriers and in Nigeria and indeed Africa, early investors are bound to heap a windfall of profit. Nigerians like food and we all love the way pasta and noodles feel in our mouth but as for Dangote’s advisers, their job is to help him put his money where his mouth is.