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CEED Institute Report: Unpacking the African consumer: spending patterns and investments opportunities

CEED Institute Report: Unpacking the African consumer: spending patterns and investments opportunities

The African economic path has been largely associated with the continent’s vast natural resources. Mining and oil companies have long been flocking to the region, setting up mines, drilling wells and shipping out its wealth to the international commodity markets. This is changing now. Whereas Zambian copper, Angolan oil and Ghanaian gold have not lost their shine and keep attracting foreign investors, the international business community has begun looking at the region from a slightly different perspective. Domestic consumption and internal markets, which in the past rarely stirred investors’ imaginations, are now becoming business hotspots, and Sub-Saharan Africa has been declared the final frontier for retailers.

In the last decade, Sub-Saharan Africa has seen 4% growth in consumer spending, and according to available forecasts, this trend is not a temporary anomaly. Never before have Africans been called “consumers” on the pages of so many influential reports and official documents. The continent has seen global brands and retailers, along with small businesses and start-ups, including a growing number of firms from Central Europe, knocking on its doors on an unprecedented scale. They are all trying to tap into a potential which, for a change, is not trapped under the ground but very much above – in African consumers’ pockets. Make no mistake, the major reason for this is profit. It has been estimated that African consumer markets will inflate to nearly $1 trillion by 2020. With the African buoyant demographics and an emerging – slowly but surely – middle class, the region is poised to become many investors’ darling in the years to come.

Truth be told, the “Africa rising” gospel preached by so many recently went through particularly rough waters in 2014. In fact, some commentators have already put the Africa rising narrative to sleep, calling it undeserved hype and a sheer statistical stunt. Escalation of Boko Haram’s murderous activity in Nigeria, Somalian Al-Shabaab’s recurrent attacks, the dramatic war that West Africa has been waging against Ebola, continuing instability in Central Africa – it has all captured the imagination of prospective investors and regrettably provided a blow to the notion that Africa is ripe for business and welcomes foreign investors with open arms. However, those who follow Africa more closely, including the authors of this report, are aware that such events hardly paint the continent’s business landscape in true colours. Even so, a series of sombre news events has not helped. As a result, in Central Europe many investors’ appetites for African markets have surely waned.

This report attempts to look at African consumer markets through the lenses of a potential investor from the Central and Eastern Europe (CEE) region. But instead of providing an overall picture, which, we believe, is redundant and not very useful when it comes to real investment decisions, it breaks down domestic consumer markets, whose size is roughly captured by the size of consumer spending, into individual sectors. This is done according to available data, courtesy of the African Development Bank, which helps understand where (into which sectors) an African consumer’s spending is channelled. This methodology is not without problems. As it is based on nominal spending and its sectoral allocation, it ends up lumping all consumers together. This implies that the strategic problem of African consumer segments may not be sufficiently addressed. The report seeks to partly redress this imbalance by devoting a chapter on the middle class in Africa, whose emergence and size should inform investors’ calculations more than other income groups.

The report is structured as follows. The first part of the report discusses underlying features of the African consumer market and its future potential, such as demographics and the middle class, in order to analyse and provide a quantitative justification to the selected sectors. In the second and essential part, all the sectors that the authors identify as significant based on the available data are described. This includes, in order of appearance, the following sectors: (1) food and non-alcoholic beverages, (2) housing, electricity, gas and other fuels, (3) transport, (4) clothing and footwear, and (5) other potential sectors. Additionally, the report includes business case studies of Polish companies that have successfully entered African markets and/or appreciate their growing potential. The case studies also discuss a range of issues which Polish entrants regard as challenges and business barriers.

It should be stressed that the findings of any report are only as good as the data. Here, the report employs a complete dataset prepared by the African Development Bank. Having in mind the problem of data quality in Africa, one should approach these numbers with caution. Nevertheless, since the report uses the data only to establish spending patterns and sectoral allocation, it should not jeopardize the conclusions in any significant way even if the size of respective sectors are not entirely accurate. Another reason for caution, which this and other CEED Institute reports highlight repeatedly, is the simple truth that Africa is not a country, and the business opportunities should be explored individually (on a country level) instead of “regional lumping”. Additionally, as pointed out by Nielsen, a leading global information and measurement company, following market macro-trends and promising statistics (e.g. growing GDP and consumer base) is not enough. To be successful, companies should also put together three key pieces: “who shops, where they shop and what they shop for”.

Moreover, looking at total consumption figures, African consumer markets are in fact dominated by a handful of countries, among which South Africa and Nigeria – two of the continent’s heavy weights – account for 51% of SSA’s total expenditure. Last but not least, the authors of this report do not wish to become simply more names on the long list of uncritical business cheerleaders, ignoring the myriad of challenges the region and individual countries in Africa are still facing. Whereas the harsh realities of many African countries and its inhabitants are fully acknowledged, the focus in this report is to track and follow African consumer spending and establish how the spending patterns may translate into business opportunities for CEE companies.

As argued in various parts of this report, companies from Central and Eastern Europe that are looking to establish (or strengthen) their international footprint should turn their eyes towards the African continent. On the one hand, Africa is considered to be the world’s last “mass consumption frontier” (it is predicted that by 2050 one out of four people will live in Africa), with consumers’ money fuelling various sectors across the continent (from food and beverages, through housing, transportation, clothing and footwear to domestic appliances, ICT and financial services – all discussed in this report). On the other hand, companies from the CEE region have experience in operating within a dynamically changing business environment – which is the state that Africa is currently in. This “wind of change”, along with the unique experience of CEE companies and evolving African consumers’ spending habits, have created an unprecedented window of opportunity for both Africa and Central and Eastern Europe.

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