AFRICA 2014 | INTRA-AFRICA TRADE
The rise of the African consumer market is providing an opportunity for domestic companies to increase their footprint across the region.
Africa’s growth story in the 21st century has been phenomenal. Between 2000 and 2013, the continent was home to eight of the world’s 15 fastest-growing economies. And having achieved an average of 4.9% compound annual growth from the year 2000 onwards, its combined GDP of upwards of $2 trillion is now larger than India’s.
The makeup of this economic growth has also changed significantly. Previously, it was led by extractive industries and exports of energy, minerals and agricultural commodities to Europe, Asia and the Americas; more recently, domestic consumption has provided uplift.
“We are entering a very different stage in Africa’s economic situation,” said Carlos Lopes, executive secretary of the UN’s Economic Commission for Africa, ahead of the Africa-US summit recently held in Washington. Western companies and investors, he suggested, “should be part of it.”
Africa’s success is not just owing to a resource boom, notes Susan Lund, partner with the McKinsey Global Institute and co-author of a series of seminal reports on the region. “In fact, natural resources contribute only about a third of GDP growth,” she notes. “More important, in our view, is the beginning of a real domestic consumer economy, the emergence of a new consuming class. These are households with annual incomes of more than $5,000 in purchasing-price-parity terms, around which point people can start spending on things beyond the basics of food and shelter.”
That consumer class is growing quickly. “We estimate that there will be nearly 130 million [consumers] within the next ten years,” says Lund, “and they are driving rapid growth in spending on mobile phones, leisure, hotels and retail purchases. It’s opening up opportunities for companies, and that’s an important part of Africa’s growth story.”
According to Joseph Rohm, portfolio manager at Investec Asset Management, the number of people with discretionary spending power is expected to double over the next five years. “GDP per capita is growing, and over the next twenty-five years Africa will emerge as having the largest working-age population in the world, surpassing India.”
Although starting from a low base, the potential impact of increased discretionary spending is enormous. As Rohm points out: “Whereas currently, more is spent on food and basic goods, as incomes grow more consumers are seeking out branded goods—for their consistency, quality control and perceived cachet—just as in developed markets.”
1/2 Fraction of Africans that will be living in cities by 2030
McKinsey research sees consumer spending rising to $1.4 trillion a year by 2020. Already, the continent has more middle-class households (defined as those with annual incomes of $20,000 or more) than India. And that process is likely to accelerate in tandem with rapid urbanization. By 2030 half of all Africans will be living in cities, the top 18 of which will have a combined GDP of some $1.7 trillion.
How this new consumer class will be served opens up opportunities for both African and Western companies. Lund observes that “the channels people buy through, including the share of retail sales going though formal outlets, varies very significantly across countries. The fact [that] informal markets are still dominant in many African countries has less to do with consumer preferences than with local regulations and the availability of suitable plots of land. Where sound property laws are in place, you are seeing the rise of shopping malls and modern formats.”
African brands are taking advantage of this situation, says Lund. “These companies saw the rise of African consumers way before outsiders, though Western brands are now seeking to grow. There is still tremendous growth in telecoms—especially mobile telephony. Clothing retail is growing fast, and healthcare spending [is] taking off.”
$1.7 trillion Combined GDP of the top 18 African countries by 2030
This growing consumer market is providing a boost for intra-African trade in goods and services. The old pattern of countries exporting commodities and importing retail and capital goods is changing to a new pattern involving greater local trade. As Rohm says: “Trade between sub-Saharan nations currently stands at around 11% of total GDP, which is low compared to the 40% to 60% levels of Europe or North America.” So there’s plenty of room for growth.
African companies are well placed to build their presence because, as Lund observes, “productivity is rising as people shift to urban areas. There is a more competitive business environment as local companies seek scale and more-efficient processes.”
Intra-African trade has been held back, however, by weak infrastructure and unnecessary border barriers. While manufacturing output per worker is competitive globally, higher transport and logistics costs, customs duties and red tape at borders still make it more expensive to produce and export manufactured goods here than in Southeast Asia.
GDP per capita is growing, and over the next twenty-five years AFrica will emerge as having the largest working-age population in the world, surpassing India.
~ Joseph Rohm, Investec Asset Management
But that is changing, thanks to better governance and the growth of free-trade areas. Rohm sees huge opportunities coming out of increasing regional integration, especially through the harmonization of regulatory policy and tariffs. The most successful to date, he says, is the East African Community, where landmark agreements between Kenya, Uganda and South Sudan have opened the way for an oil pipeline and refinery on the Kenyan coast.
African banks are positioning themselves to facilitate growing intra-African trade, says Rohm, citing Standard Bank’s 2007 acquisition of IBTC in Nigeria, Kenya Commercial Bank’s becoming “a truly regional bank,” and Nigeria’s Guaranty Trust Bank having bought into the East African market.
And while China holds pole position in terms of the value of inward investments into Africa (many of them large turnkey projects), South African corporates, Rohm notes, are actually involved in a larger number of projects across the continent. Many of these projects are targeted at Africa’s new consumers.
But while formal retailers are often constrained by scarcity of development sites and planning permissions, food producers selling into informal markets are swiftly moving into new territories. South Africa’s Tiger Brands, for instance, recently made a significant acquisition in Nigeria.
Foreign investors are also moving in. Wal-Mart’s acquisition in 2012 of a majority share in South African wholesaler Massmart is intended to be a springboard into other sub-Saharan countries. French retailer Carrefour, meanwhile, has partnered with African sales and distribution expert CFAO and plans to open stores across eight countries by 2015.
Events such as the recent Africa-US Leaders Summit—during which $33 billion of new commitments was pledged and a number of deals were inked between African firms, like conglomerate Dangote Group, and international firms—may also signal a new chapter for African growth.
“The US would like to play a larger role, especially through trade,” says Rohm, who points to major investments by companies like GE in power generation and infrastructure. The future of that relationship may depend on how the African Growth and Opportunity Act, due to expire in September 2015, is handled. Hopefully, whatever replaces it will not only be equitable but will also act as a further stimulant to trade.
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