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The cooking fats industry
General characteristics of the industry
The fats industry is among the most dynamic industrial sectors and also among the most important sectors in the Ivorian economy. It essentially uses local raw materials (products of Ivorian oil palms) and includes practically all the stages of its transformation, from raw oil to the production of soaps, edible oils, margarine and other derived products.
The industry is dominated by three main actors: Palmindustrie, Blohorn and Cosmivoire. The state-owned Palmindustrie, which has positioned itself upstream of the other firms, is both an agricultural and industrial firm. It even provides managerial support for village plantations and is the main supplier of the three industrial firms of the fats industry. Blohorn, the most important actor in the industry' buys on average 79 per cent of the total production of raw oil and accounts for 85 per cent of the country's edible oil production. Blohorn' which belongs to the Anglo-Dutch group Unilever, has reinforced its dominant position on the edible oil market by taking control of one of its competitors, Trituraf, in 1983/84. Trituraf was formerly state-controlled. Besides edible oils, the firms in this industry produce washing and toilet soaps.
In 1990, the market was structured as shown in Table 11.1 Since Blohorn takeover of Trituraf, Cosmivoire has found itself in second place. It is now the only competitor of the Blohorn group in the sector. It is a private, entirely Ivorian firm, with 13 per cent state participation.
Table 11.1 Market shares by volume in the soap and oil market 1990 (%)
|Edilble oils||50-60||32 *||10|
|Purchase of raw oil (120 000 tons)||79||5||15|
Note:* Production of cotton oil.
History of the firms in the sample
Cosmivoire was formally created in 1974 under the leadership of an agronomist and refrigeration engineer, who had been managing director of an international petroleum exploitation group. But Comivoire's production activities started effectively three years later.
The firm, whose purpose was the manufacture of washing and toilet soap for the domestic market, was a financial success at its launching in 1977. But it very quickly diversified its production, given changes in its competitive environment. Thus it introduced, with much difficulty, the production of edible oil from 1985/86 and later other derivative products (chiefly margarine).
After a difficult period of adaptation to the oil manufacturing technology on the one hand, and despite very active competition on the domestic market on the other hand, the firm is enjoying good performance and significant expansion. Turnover has risen by 50 per cent in comparison with 1990 and now stands at more than 10 billion f.CFA.
The firm was established with majority Ivorian private funds and since the beginning of the 1980s has had a totally Ivorian shareholding (the 1 per cent of capital owned by French interests having been bought out). However, it should be noted that the firm benefits from support from the Société Financière Internationale (SFI), which is a shareholder in one of Cosmivoire's daughter firms and which opportunely provided a loan of US$2 million in 1987. Given its present performance, Cosmivoire appears to be a successful national firm.
Cosmivoire has an excellent relationship with its Italian supplier of production requirements, which built the equipment necessary for the factory and for the diversification of its production. But these connections remain strictly limited to the sale of goods: Cosmivoire is responsible for the acquisition programmes and for equipment adaptations.
In contrast to Cosmivoire, the Société Ivoirienne de Trituration et de Rafinage (Trituraf) was founded in 1973 with majority state funding. Some 79 per cent of its capital is owned by the state and 15 per cent by the Compagnie Ivorian de Développement des Textiles (CIDT). With starting funds of 650 million f.CFA and a total investment of 1.6 billion, the firm started with a throughput capacity of 70 000 tons per year of cotton seeds, which corresponds to 18 000 tons of oil and 15 000 tons of soap per year. Oil production has always been Trituraf's main activity.
Turnover has grown quickly, from 700 million f.CFA in 1975 (when production began) to 10 billion in 1983, then to 18 billion in 1990. The firm widened its field of activity as early as 1983, when it began to develop soap production from cotton and palm oils. The capital was then increased to 1.3 billion f.CFA. Finance for the extension was easily obtained and construction of a palm oil fractional distillation unit was started. The intention was to exploit the soap production capacity fully and raise edible oil production to 25 000 tons per year.
But Blohorn, which had just passed into the hands of the Anglo-Dutch Unilever, reacted to Trituraf's threat of competition on many fronts by deciding to buy the firm. This was done in August 1983.
The story of this firm is interesting from many points of view. J.C. Rochet, initiator of the Trituraf project, was formerly a director at Blohorn. As a consequence of a disagreement on the evolutionary strategy of Blohorn, Rochet resigned from the board of directors of the group in 1970. With the help of the Ivorian authorities and some private individuals, he founded Trituraf in 1973. The process was greatly facilitated by strong support from the Ivorian State and the CIDT, which saw an opportunity to make something from the 100 000 tons of cotton seeds produced every year in the Ivory Coast and wasted. Moreover, a rapid study of the Ivorian market by Rochet during the preparations for the project revealed the similarities between cotton-seed oil and the palmnut oil produced by cottage industry, much appreciated in the area because it is perfectly suited for frying. On this basis a substantial domestic market was forecast. So Trituraf aimed essentially at the production of oil and soap for the domestic market. The firm also produces oil presses for cotton seed (and, since 1984, soya presses), mainly for export markets.
The takeover of Trituraf by Blohorn in 1983/84 immediately meant specialization between the two firms; Trituraf devoting itself to cotton-seed oil and derivative products.
Performance of the firms
Since its creation, Cosmivoire has experienced rapid growth. In fact, from 1.5 billion f.CFA in 1980, production reached 6.9 billion in 1990. At first the firm specialized in the manufacture of perfumed toilet and cleaning soaps but it launched into the manufacture of edible oil beginning in 1986, in response to changes in the market and especially competition on the domestic market.
The industry leader, Blohorn, produces both soaps, edible oil and other products derived from fat, and is as a result in a comfortable competitive position because wholesalers have developed the habit of linking their purchases of oil and soap. This practice, seemingly encouraged by Blohorn since 1984, verges on a system of tied sales. It is to loosen this constraint that Cosmivoire has diversified into the production of oil and other derived products, so becoming a full competitor of Blohorn. This is a good example of product diversification under the pressure of competition.
Looking at Table 11.2, we notice that significant diversification is observable at Cosmivoire from 1988, quickly resulting in the predominance of oil production, which represents more than 60 per cent of 1990 sales. From 1988 on, various derived products were also produced.
Cosmivoire's domestic market share (Table 11.3) increased by a factor of 2.5 between 1985 and 1990 and the importance of exports in its total sales also more than doubled, although the company's share in the total exports of the Ivorian oil industry increased only slightly. There was thus a strengthening of Cosmivoire's market position on both the home and export markets. The firm exports mainly to the local region, with some soap going to European markets. In fact it is hard for Cosmivoire to meet European quality standards for edible oils. Nevertheless, the growth in its market shares indicates that the firm has adopted a very active commercial strategy and it seems able to bear competition without great damage.
Table 11.2 Sales and products for Cosmivoire (million f.CFA)
|Soaps||1 533.2||2 175.0||2 128.8||2 337.0|
|Edible oil||-||-||3 906.8||4 370.7|
|Total||1 533.2||2 175.0||6 918.0||6 860.4|
Table 11.3 Market shares for Cosmivoire (%)
|Total sales exported||-||6.2||13.48|
|Share of domestic market||-||4.8||12.2|
|Share of export market||18.22||19.13||22.09|
Table 11.4 Performance of the factors of production for Cosmivoire
|Productivity of physical assets||1.98||0.85||1.13|
|Average staff unit cost (f.CFA x 1 000)||-||098||0.86|
Note: Production/employee = Tax-free value added/Total staff. Productivity of physical assets = Tax-free value added/Net physical capital. Average staff unit cost = Total wages Total staff.
Productivity per employee (Table 11.4) seems high enough, around 8 on average. It is clearly superior to the average staff unit cost (0.9 on average) and it is very close to the industry average (8.8). The productivity of the physical assets is equally high (1.32) and remains fairly stable. It is also well above the cost of usage of the physical assets, at 0.1.
From Table 11.5, Cosmivoire would appear to be an
overprotected firm.2 This is due to the
over-protection of the local market on which it realizes most of
its sales. In fact, the negative protection of the export market
(nearly -65 per cent) affects the firm only slightly. Cosmivoire
also appears to have performed only indifferently, but it
succeeded in considerably improving, its
comparative advantage between 1985 and 1990 (its DRC moves from 2.12 to 1.14), thus remedying its clear handicap of the early 1980s.
Table 11.5 Protection, comparative advantage and financial performance indicators for Cosmivoire (%)
|Comparative advantage: DRC||2.12||1.14|
|Financial profitability: Net result/owners' equity||9.24||13.8|
|Activity profitability: Net result/total sales||2.58||1.4|
Notes: ERP = (DVA/IVA) minus 1 = Effective rate of
DRC = (Ls * Ws + Ks * rs)/(lVA * SER) = Domestic resources cost.
DVA = Domestic value added.
IVA = International value added.
Ls = Labour stock valued at shadow price.
Ws = Shadow wage rate.
Ks = Capital stock valued at shadow price.
rs = Shadow price of capital.
SER = Ratio of official exchange rate to shadow exchange rate.
OP = Over-protection.
These results are easily understandable in terms of the firm's diversification of production. This loosened the constraints of tied sales, enlarged the range of its products and improved its return on equity ratio, which moved from 9.24 per cent in 1985 to 13.8 per cent in 1998. According to the managers of the firm, the improvement in the return on equity played an important part by facilitating the realization of investments and improving its utilization of technical assistance.
Trituraf manufactures three main products: edible oils, soap and presses, of which oil is the most important (see Table 1 1.6.). It is on this product that the firm realized most of its turnover, more than 55 per cent of total sales except in 1984.
The sales of soap, the second product, reached 4.2 billion f.CFA in 1984 (34.7 per cent of total sales). The stagnation of soap sales experienced by Trituraf beyond that date was a general phenomenon. Soap being an everyday product, there is a significant amount of unsophisticated local production and importation (mainly smuggled across the borders). Besides, the fall in people's purchasing power has meant a shift in consumer preferences towards less refined and cheaper soap (from cottage industry and imported).
Trituraf is oriented towards the domestic market (see Table 11.7) but between 19 per cent and 24 per cent of its sales are exported. These exports consist of oil presses going to European markets where presses are no longer produced in significant quantities. Trituraf is thus selling secondary products on these markets, without having a real export marketing strategy.
With sales of 700 million f.CFA, the firm had only 5 per cent of the domestic market when it began its activities in 1975. This share increased to 32 per cent between 1984 and 1988 and to 34 per cent in 1990. The growth in Trituraf's market share, on a domestic market which, especially after 1980, was scarcely growing (with an average annual rate of 1.5 per cent between 1984 and 1990) shows the dynamism of this firm. This success is due to the fitness of its products to the characteristics of the market and a very active marketing policy.
Table 11.8 shows a constant improvement in productivity. Productivity per employee, for example, grew from 5.7 in 1980 to almost 12 in 1990. The high level of productivity and its rapid growth was accompanied by a moderate staff unit cost. Therefore, despite the slight rise in the average staff unit cost in 1985 and 1990, we can say that to a certain extent Trituraf has production factor costs under control.3
Table 11.9 shows that Trituraf benefited from moderate protection until 1985 (13 per cent on average). Thereafter its level of protection rose, to become very substantial in 1990 (52 per cent). This corresponds to the general characteristics of protection in the Ivorian economy, with high levels of protection for the domestic market and very low levels of protection, and sometimes negative protection, for export markets. Nevertheless, the weak protection of the 1980s was accompanied by good financial results, which fell in the mid-1980s and recovered again by 1990.
We also notice that the firm was quite efficient in 1980. and 1985, when its DRC was well below 1, but in 1990 the DRC was close to 1. This comparative advantage of Trituraf confirms its efficiency in the use of factors of production, which seems not to be affected by changes in ownership.
Table 11.6 Sales and products for Trituraf (million f.CFA)
|Oil in barrels||3 527.9||5 419.0||7 932.8||9 915.3|
|(19 842)||(25 028)|
|Soap||-||4 217.0||2 658.7||3 635.6|
|(11 842)||(15 014)|
|Cotton oil presses||1 216.8||1 967.0||2 300.6||2 996.7|
|(48 948)||(55 373)|
|Other||22.8||539.0||1 128.2||1 452.4|
|Total||4 767.5||12 142.0||14 020.3||18 000.0|
Note: Figures in parentheses are production volumes in tons.
Table 11.7 Market shares for Trituraf (%)
|Total sales exported||-||23.3||22.8||19.32|
|Share of domestic market||5.0||-||32.0||34.0|
|Share of export market||-||18.22||19.13||22.09|
Table 11.8 Performance of the factors of production for Trituraf
|Productivity of physical assets||0.8||1.18||1.4|
|Average staff unit cost||0.9||1.70||2.3|
|(f.CFA x 1 000)|
Note: See Table 11.4 for definitions of these ratios.
Strategies and capabilities of the firms
Table 11.10 clearly indicates that the firm does not produce under licence. It is the managers of the firm who design the processes and select the machines to be bought. The present plant for both oil and soap production was provided by Italian manufacturers. Cosmivoire's investments (Table 11.11) reached a peak in 1985, the year in which the firm began edible oil production. The firm also pursues a policy of very active management of the machinery inventory and machinery replacement and of the depreciation of fixed assets.
Table 11.9 Protection comparative advantage and financial performance indicators for Trituraf (%)
|Comparative advantage: DRC||0.58||0.52||0.99|
|Net result/owners equity||103.38||50.98||96.50|
|Net result/total sales||14.10||4.85||6.72|
Note: See Table 11.5 For definitions.
Table 11.10 Indicators of the management of technology and human resources for Cosmivoire (million f.CFA)
|Royalties on licences and patents||-||-|
|Training costs||1.8 (0.05%)||11.7 (2.00%)|
|Technical assistance fees||6.2 (1.90%)||13.3 (2.30%)|
Note: Figures in parentheses show percentage of total wages.
Table 11.11 Investment strategy indicators for Cosmivoire (million f.CFA)
|New investment in physical assets||15.9||382.3||145.7|
|Total new investment||54.3||437.5||340.7|
Table 11.12 Investment strategy indicators for Trituraf (million f.CFA)
|Investment in physical assets||914||599||1 021|
|Total investment||989||869||1 325|
Table 11.13 Indicators of the management of technology and human resources for Trituraf (million f.CFA)
|Royalties on licences and patents||-||-||155.7|
|Technical assistance fees||115.6||266.7||487.0|
Cosmivoire intends to install a computerized control system for certain segments of the production lines soon. These computer tools are intended to ensure the rapid feeding of the oil processors with precise and constant quantities of raw oil. This new system will replace the present manual operation which is generally less precise and more difficult to control and which often results in losses of raw material in the process. Cosmivoire therefore expects a notable increase in productivity as a consequence of these improvements. The improvements are also intended to increase the technical precision, which is necessary to meet the manufacturing standards required by export markets.
Cosmivoire's technological approach and the implementation of the new technologies require the firm to resort to specialized companies to install machinery and train staff to adjust them. This involves substantial training and technical assistance fees. The notable increase in the training costs in 1990 (2 per cent of the total wages in 1 990 versus 0.05 per cent in 1985) shows the firm's desire for independence, although it continues to use expensive foreign technical assistance (from 1.9 per cent of the total wages in 1985, these expenses increased to 2.3 per cent in 1990). Technical assistance was mainly focused on the maintenance of machinery and staff training.
The marked increase in training and technical assistance fees between 1 1985 and 1990 was due to the diversification into oil production. A French engineer specialized in manufacturing techniques for edible oil was recruited to start the oil factory and to train the production personnel. But the managers of Cosmivoire are conscious of important weaknesses which remain at the level of the production process and labour organization. The principal concerns are the precise definition of employees' tasks, the links between the various segments of the production lines, and the separation of certain functions (especially the technical functions on the one hand and financial and administrative functions on the other).
Cosmivoire's marketing strategy is one of the keys to its success. At the outset, the firm established sales depots at wholesalers and at certain retailers. By doing so it shares the risks inherent to distribution. This system strengthens customer loyalty. The other decisive element in the marketing strategy is the promotion policy. Each product launch is generally preceded by a detailed study and by the identification of simple and perceptible differentiation factors, followed by advertising campaigns backed by the traditional media (newspapers, audiovisuals, billboards, etc.).
In searching for differentiation factors, the focus generally lies on the specific characteristics of the domestic market. The idea is that matching the characteristics of the market is more important than the adoption of the latest technological innovations. In its edible oil production, for instance, the firm is satisfied with a product which is sure to meet the regional quality standards, which may differ from the generally stricter standards in developed countries.
From Table 11.12 (p. 354) we can see that Trituraf invests a great deal, 800 million f.CFA per annum on average over the period of study, with peaks of more than 1.3 billion in 1984 and 1990. The bulk of the investments are acquisitions of physical capital. These investments are essentially self-financed.
The circumstances of the firm's establishment, especially the central role played by the Ivorian State, the CIDT and the initiator, Rochet, determined the venture's access to advanced and suitable technology. Rochet, an engineer and former member of the managerial staff of Blohorn, brought with him his technical experience and international contacts, particularly his links with European suppliers of machinery and materials for the realization of the project. The suppliers were also reassured by the presence of the Ivorian state and CIDT.
The processes and the equipment were progressively put into operation under Rochet's instruction, beginning with the oil production unit in 1976, followed in the early 1980s by the soap factory. The addition of cotton-seed processing was a major innovation in the Ivory Coast, so that the process of setting up production units and processes involved the staff deeply. This quickly resulted in very good local proficiency in running the machinery.
All these elements explain why the firm pays very little in fees and royalties for the use of licences or patents (Table 11.13). There were no royalty costs until after 1985. Outside technical assistance, mainly for major overhauls of production units and the maintenance of the larger plant, is used and is important, especially after 1985. An average of more than 350 million f.CFA of technical assistance fees were paid between 1985 and 1990 but Trituraf is reducing this assistance.
The firm's human resources management is characterized by professional training efforts which are intended to increase the firm's independence. The policy of recruiting skilled Ivorian professionals and employees with at least a general college education has permitted a rapid and sizeable reduction in training costs while building up a qualified and motivated workforce. The technical standard of the staff was so high that after the takeover by Blohorn in 1983 the accent was put on management training, preferably in-house or in Europe. This explains the peaks in the training expenses of 1985 and 1986 (more than 600 million f.CFA).
Given the novelty of its product (cotton-seed oil and derived products) and the presence of two other firms on the market (Blohorn and Cosmivoire), Trituraf decided from the beginning on an active marketing strategy, based on the promotion of its products and the establishment of a diversified distribution network. The size of the distribution network and the externalization of most of its marketing functions explain the high level of brokerage and commissions on sales' which have been regularly increasing since 1980. These costs moved from 11.4 million f.CFA in 1980 to more than 40 million in 1990. Furthermore, the dynamic marketing policy of Trituraf has meant expensive advertising, growing from 41 million f.CFA in 1980 to a little less than 200 million in 1990.
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