American entrepreneur Christopher J. Bak is set to bring Subway – a US restaurant franchise that primarily sells submarine sandwiches and salads – to Kenya in August. His firm, Liberty Eagle Holdings, runs two Subway stores in Tanzania and intends to develop up to 20 outlets in the region over the next five years. Bak told How we made it in Africa’s Dinfin Mulupi about his decision to move to Africa, his experience of doing business in Tanzania and why, even with the challenges, operating in East Africa still makes sense.
How did you end up doing business in Tanzania?
My background is in finance. I had been living in New York, working for an emerging market hedge fund and was covering Africa for them. I had been looking at deals all over the continent, but mostly in West Africa. In 2008, just before the recession, I decided to move to Africa. What we were doing at the fund was very high level: primarily fixed income, which is something you can do from New York for Africa. However, when you want to get into the more interesting opportunities it is just not possible to do it from New York. For me, East Africa was more compelling than West Africa from a quality of life perspective, so I moved to Tanzania to work with an advisory firm that largely focused on regional cross-border acquisitions. After moving to Dar es Salaam I started looking at the restaurant space.
Why the food business?
Lots of companies are focusing on Africa’s emerging middle class. Telecoms and financial services are obvious demand sectors for new consumers, but they require hundreds of millions of dollars of investment. The next level of consumer spending is retail, particularly in food. Consumers here want the same experience as consumers anywhere else in the world: the ability to buy a quality product at a fair price, while having an enjoyable customer experience. The customer experience element is the biggest gap in Tanzania, and this is something that Americans have excelled at globally. Subway, at the time, was the only international brand in Tanzania. Subway has been in the Tanzanian market for 13 years and there are currently six stores, two of which we own.
What experience have you had doing business in Tanzania?
When we used to briefly characterise Tanzania to US-based investors, we would say that the country had similar levels of development and institutions as a number of the post-conflict markets that we covered, without having the emotional scars of recent fighting. It is predominantly the socialist experience that slowed things down in Tanzania. The biggest challenge we face today is in finding quality counterparties like suppliers and landlords.
In the US it is easy; you go to one website and order everything – from cleaning supplies to chicken breasts – from one distributor, and it comes on one truck within a pre-determined delivery window. In Tanzania, we have more than 15 suppliers of tremendously different quality. There are lots of structural hurdles that Tanzania has to overcome. Power, for instance running the generator, is a huge expense for us. When I look at our staff today, they have great potential when provided with the right training, but the existing educational system has largely failed them. But the experience is certainly not all negative. Our newest store is already serving similar numbers of customers as a restaurant in the US, proving that Tanzanians are willing to spend if you can offer them a healthy, international-quality product, served by friendly staff in an inviting space.
You are expected to expand to Kenya this year. Tell us about that.
We plan to open our first store in August. We are actively looking at a number of other locations in Nairobi, and expect to focus our development on the capital for the time being. Expanding beyond Nairobi is very expensive from a supplier cost and quality perspective. Our goal is to open three stores in Nairobi this year and hopefully do three to four stores every year after. The purchasing power is a lot stronger in Kenya than it is in Tanzania and the supply chain is a lot better, but it is nowhere near where it needs to be. Subway is the largest purchaser of lettuce in the world, but it is not easy to source lettuce in Tanzania, especially in the rainy season. In Kenya, it’s easier because there are some greenhouses that supply UK supermarkets, but consistency and quality are still issues. We can open 20 stores in Kenya in the medium-term, once the supply chain allows us to offer our fresh subs and salads at the right price. Currently, our input costs are a lot higher in East Africa, particularly for meats, than they are in other markets.
With all these difficulties, aren’t there easier markets to operate in than Kenya and Tanzania?
If all I cared about today were profits, it would make no sense to be in Kenya or Tanzania. There’s a large developmental element to what we do, and we do it in a way that is much more sustainable than many of the social enterprises operating in the region. At the core of the Subway model is a brilliant, globally-proven toolkit designed to give a driven entrepreneur the know-how required to run a profitable restaurant business. Subway HQ does not own a single restaurant in any of the 100 countries in which the brand is found. They develop the system and then train their franchisees. The same goes with our relationship with our staff. In more than three years in Tanzania, we have never had an employee leave to work with another company. I’d love to see my managers own their own stores some day. With rapid urbanisation and a Kenyan population that is expected to double in the next 40 years, they should have plenty of opportunities to do so.
I have seen other international food brands launch here with a lot of fanfare and a few months down the road their stores are empty. What is your strategy to keep customers coming in long after the hype is gone?
Value is the answer to that problem and our biggest opportunity. In Tanzania, we offer an international quality product at a price that customers can afford multiple times a week. Nobody has a true value offering in Nairobi today. If you go to any of the international brands in Kenya, they are charging a huge premium compared to their menus in South Africa or the US. By taking a more sophisticated approach to pricing and by utilising value campaigns, we can set ourselves apart from the other food players in Kenya and create customer loyalty.
We are seeing a lot more young entrepreneurs from the West moving to Africa. What is the reason behind this?
At its core is the belief that in Africa it is possible to make money while doing good. Training staff, building supply chains, raising consumer expectations, paying taxes, and following the rules all have large developmental effects that you just don’t see any more in the West. The challenges are also far more interesting than you find in a place like the US. In New York I could pick up the phone and buy US$10 million worth of Ugandan government bonds and the transaction would be done in three minutes. In Dar, I pick up the phone and order 50 kilos of lettuce and the supplier only brings me five kilos because its rainy season and his truck couldn’t make it into the city. So I spend four hours driving around town trying to buy up every head of lettuce from every duka (Swahili for ‘shop’) on every street corner in the largest city in the country. The business opportunities associated with solving those challenges are bringing some of the best Western minds to East Africa.
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