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The Report
By The IA Team
Investors and businesses are aware of Africa's tremendous potential; it is the world's second fastest-growing market, only after Asia. It might surprise you, though, to learn that Africa's growth is driven more by a booming consumer market than by outside investment. Presenting their findings from a study conducted on 15,000 customers across the continent at the African Awards for Entrepreneurship in Accra in October 2012, Reinaldo Fiorini of McKinsey & Company and his colleague Safroadu Yeboah-Amankwah affirmed this notion.
“When we were investigating the growth in Africa, one of the myths that was always there was that the growth in Africa is only coming from resources,” said Fiorini. “But actually, when you go and look into the numbers, a big part of this growth is actually driven by the rise of the consumer.”
“The GDP per capita has risen 10% a year,” he continued. “So that is significant. People see that in their lives, their consumer patterns change. Actually, you are creating consumers for the first time.”
According to Fiorini, the rise of consumer spending in Africa is more significant than in Brazil or India, creating a vast potential for multinational companies catering to consumers. But to seize these chances, businesses must comprehend who the African consumer is and how they think and act.
Customers' purchasing decisions are frequently influenced by a variety of factors. This is true all over the world, including among African consumers. However, in Africa, several factors vary by region. Consumer-focused businesses on the continent have increased by $400 billion, highlighting its most significant market opportunity by 2020, but many are still figuring out how to take advantage of this aforementioned capacity due to a lack of market research.
Several elements are influencing the new class of consumers . Most of Africa's population, the youngest and fastest-growing in the world, lives in cities. Smaller families, more significant salaries, better education, and internet activity characterize this new generation of customers. Interestingly, many Africans (84%) think they will be financially secure in two years. According to Safroadu Yeboah-Amankwah, Intel Corporation's Chief Strategy Officer, the majority of African consumers arehopeful and aspirational.
Business executives and investors have recently become more conscious of the enormous potential in Africa's expanding consumer market. By 2025, the continent's population of more than 1.1 billion people will make up one-fifth of the planet’s inhabitants. With tens of millions escaping poverty in recent years, more and more Africans are joining the consumer class.
Unpredictability in politics and inadequate infrastructure, to name a few, are well-known barriers to doing business in Africa, which may cause some companies to be hesitant to enter the market. Nonetheless, a select group of global consumer packaged goods (CPG) companies has made significant inroads into Africa. Others hoping to capitalize on an opportunity in one of the consumer markets with the highest effective growth rate may benefit significantly from their experience.
Africa's working-age population is growing at a 2.7% annual rate. By 2025, nearly two-thirds of Africa's 303 million families are expected to have disposable income. Because of this massive increase in the consumer base—an addition of approximately 90 million customers in only ten years—the continent's GDP will rise from 4.9% to 6.2% over the next ten years, exceeding the global GDP growth rate of 3.7%.
African customers are young and eager to spend their money. In Africa, 53% of wage workers are between the ages of 16 and 34, a group that is often more open to trying new things and is more aware of them. Over the next ten years, the consumption of these customers will increase to the value of over $400 billion. By the end of the next decade, Africa will have one-fifth of the world's consumers, and an increasing number of these people will be affluent or middle-class. Rising disposable income will increase demand for high-quality, niche, and foreign-produced goods, and rebounding oil prices in Algeria, Angola, Nigeria, and Egypt may help the luxury goods industry gain market share. However, ultra-high net worth individuals (those with net assets exceeding $30 million) can already be found all over the continent, including South Africa, Egypt, Nigeria, Kenya, Tanzania, Ethiopia, and Morocco. Growth in GDP per capita will increase purchasing power among these groups of people, and luxury goods retailers should continue to look to the continent for entry points.
Urbanization and the rise of mobile communications drive this explosive growth and will continue to impact Africa's consumer market. By 2025, cities will house nearly half of all Africans, and Africa already has more cities with a population of one million than North America. For example, incremental growth in food and beverage sales in Cairo will be to the value of approximately $3.9 billion between 2010 and 2020, compared to $3.7 billion in Brasília and $3.3 billion in Delhi. Consumption growth in Africa's most prominent cities could soon rival major cities in Brazil, Russia, India, or China. The continent’s customer concentration will be advantageous for CPG firms looking to secure distribution in these rapidly expanding locations.
Because of mobile technologies, things are changing. Despite an estimated 89% coverage by the end of 2014, the mobile range in Africa is rapidly increasing and facilitating activities such as microfinance and money transfers. For example, Kenya's mobile payment networks processed over $2 billion in monthly transactions in 2013.
Political instability and conflict. War and authoritarian governments continue to adversely affect business and policy in many countries. According to world freedom indexes which measure political and civil liberties, of 54 African nations, only ten are considered “free”, 22 are “partially free”, and 22 are “not free”
Inadequate infrastructure. Although many African cities now have cutting-edge transportation infrastructure, only one-third of Africans live within 2 kilometers of a year-round paved road. Traveling within the continent is prohibitively expensive and challenging, with transportation costs five to eight times higher than in economies such as Brazil or Vietnam. Over 70% of the population lacks access to power and because the ports in many African countries face capacity concerns and high costs, these challenges limit consumer demand and supply.
Language diversity. Businesses must provide marketing messages in various languages to effectively interact with African consumers. South Africa has 12 official languages, and Nigeria has only one official language, English, however, Nigeria’s citizens speak over 500 regional languages . The continent's 67% literacy rate complicates consumer communications even more. Some countries, such as Burkina Faso and Nigeria, have literacy rates lower than 30%.
Despite these significant challenges, pioneering businesses have included Africa in their success stories. Africa generates at least $1 billion in revenue for over 400 companies. Coca-Cola, Nestlé, and Unilever, among others, have been present on the continent for many years and have significant market shares in their respective categories; P&G has more than quadrupled its African business in the last ten years. So what can we learn as we pave the way forward?
Companies that have had the most success in Africa have been those that have been cautious and selective in their market entry. They have concentrated on the fastest-growing cities or city clusters, and urban areas with much higher per capita income and consumer spending than the national average. For example, Nairobi's per capita income is three times that of Kenya’s. In contrast, Lagos' average income is double that of all Nigerians. Luanda, Angola's capital city, accounts for 45% of total consumption. By 2025, the 20 largest African cities will account for roughly 60% of total consumer expenditure.
Given the increasing rate of urbanization and the disparity in growth rates even within the same country, Africa requires a city-based approach. However, selecting the towns with the most potential is only one piece of the puzzle; another is culling the right time. Leading companies provide fact-based estimates of market readiness for specific product categories.
An S-curve is commonly used to depict consumer demand, with per capita income as the primary determinant. For men's grooming items such as razors and blades, the "hot zone"—where penetration growth is significantly increasing—is already present in many African cities. A company must thoroughly understand economic data, regional market patterns, and statistical growth models to forecast when consumer demand for a category will take off.
Consumer goods companies interested in expanding into Africa must be willing to make long-term investments. It will undoubtedly be a difficult journey. However, a company that successfully gains the African markets’ favor may enjoy long-term market success.
But, just as Africa's potential has been widely recognized, so have the risks of doing business there, and several obstacles remain despite recent progress.
Disparities in consumer behavior. Africans speak a variety of languages, but their purchasing habits differ. Consider price sensitivity: 73% of Angolans compare prices and look at advertisements to find the best deals, and only a fraction of Kenyans do the same. Brand perceptions vary by country and location.
Retail market with fragments. Most African grocery purchases are made at neighborhood kiosks or independently owned convenience stores, while supermarkets account for only a minor portion of grocery purchases in several countries. South Africa is an outlier, with supermarkets accounting for 75% of all grocery purchases.
Low availability and quality of data. Except for the major cities, much of the continent has traditionally been devoid of economic statistics and market research. Companies occasionally extrapolate current statistics on major cities to the national or regional level, resulting in incorrect conclusions.
Following a broad approach, a large packaged food company has recently focused on 15 cities that account for approximately 25% of the expected growth in packaged food sales across Africa over the next five years. The organization investigated several subcategories and discovered, for example, that 10 cities across five countries will contribute 25% of overall growth in the non-alcoholic beverage industry. In comparison, 10 cities across six countries will contribute 23% to the dairy industry. Because of these findings, the company was able to devote resources to the most promising projects.
2. Adjust the offer to reflect local needs and preferences
Before changing their offerings, businesses must understand the regional demands and preferences that promote widespread acceptance of their products. P&G recognized that lather is seen as a sign of a detergent's quality and efficacy among Nigerian customers, so it altered the recipe of its Ariel detergent to lather faster and with less water. SABMiller created a beer specifically for Onitsha, a sizable commercial metropolis in southeast Nigeria, to give it a distinct personality. The beer's label features an Igbo cultural icon, the rising sun. Because it is less harsh than traditional European lagers, it is better suited for drinking in hot weather. SABMiller's Mosi brand, known as Victoria Falls in Zambia, has a label that reads "the waterfall."
Consumer goods companies must be aware of regional purchasing habits and product preferences. For instance, consumers in Lagos and Luanda consider low-cost food to be of questionable quality; customers in Abuja, Accra, and Nairobi do not share this viewpoint and would not hesitate to purchase low-cost food. CPG companies' success in local markets relies heavily on in-country teams tasked with gathering consumer insights and carrying out pilots and idea testing.
It is also critical to create a brand Price Pack Architecture (PPA) that covers all market tiers, from entry-level to premium. For example, a company may launch more miniature packs or innovative packaging to appeal to low-income customers (such as shampoo in sachets). However, it is also critical to provide "aspirational" products—premium brands with familiar packaging—at prices well within reach of Africa's growing middle class, particularly in sectors where brand awareness is high.
Furthermore, consumer packaged goods (CPG) companies may benefit from local firms that have tailored their offerings to African customers, and they may even collaborate with them. To alleviate Nigerians' concerns about providing their home address or making online payments, e-commerce pioneer Konga in Nigeria established pickup sites and a "pay on delivery'' service.
3. Define your own route-to-market model's geography and channel
A company must ensure that its products are available for purchase in the areas identified as having the highest growth rate. Effective distribution is the most important factor influencing success in African consumer markets. Due to the fragmented retail and wholesale scene, most African countries lack a ready-made national or regional network of distributors. The most successful companies develop a marketing strategy that prioritizes the most appealing channels first. For example, CPG companies in Ghana only sometimes need their products on store shelves since open-market stalls and nearby kiosks are the most common and rapidly expanding retail locations. Small neighborhood kiosks, for example, would receive deliveries six times per week via a distributor's motorized tricycles. In contrast, more giant kiosks would receive van deliveries three times per week, plus a sales representative visit every two weeks to provide product demonstrations. A confectionery manufacturer mapped the outlets in Ghana's major cities, segmented them based on sales volume, and tailored a route-to-market model for each segment.
The most successful companies form long-term relationships with their carefully selected trading partners. Companies should choose distribution partners with sufficient scale, i.e., partners who earn economic returns at least ten percentage points above market borrowing rates, to increase their chances of a long-term and stable partnership. This is because smaller players frequently struggle to maintain cash flows and may not last for long. To ensure adequate attention from a distribution partner, a corporation should aim to represent at least 25% of that partner's profits. Although exclusivity for a specific product or category is preferable, it is not required. More critical than exclusivity are trade agreements that promote product growth and sell-through.
Diageo, a British multinational alcoholic beverage company, launched its ambitious "Route to Consumer" program in 2013 to increase distribution and promote engagement in retail stores worldwide. The company is now expanding its presence in Nigeria's southern states from 8,000 to the 45,000 outlets discovered in a recent market census, has begun to focus on the outlets it can service economically, and expects to expand its sales team. As part of a similar initiative, Diageo increased its coverage by 20% and the size of its sales team by more than 140 in Ghana.
4. A large sales force that is well-equipped is a must
Underestimating the size of sales teams needed in Africa is a common mistake businesses make. Due to the high level of retail fragmentation, consumer corporations must employ massive armies of salespeople—many more than they are used to having in developed markets—to establish and maintain connections with thousands (or tens of thousands) of remote retail locations.
The most successful companies highly value sales force performance management and competency development. For example, they provide comprehensive sales training and direction, breaking down the specific tasks each salesperson must perform during sales visits and establishing simple procedures. The productive call ratio, which measures the proportion of sales calls that result in a client placing an order, is one of the metrics.
Winners also invest in products and services that allow their sales teams to better serve clients while gathering data severely lacking in most African markets. Cadbury, for example, provides mobile devices to its over 1,400 South African sales representatives to quickly check inventory and pricing, place orders, and process invoices. Heineken provided tablets to its African sales agents, allowing them to access current account information, plan and organize sales trips, and photograph merchandise at retail locations.
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