Business in Africa: Pieces of the African pie

29 Feb 2016 by Clement Huang
Wandering around Accra Mall in Ghana’s capital, it’s hard to believe that this city was ever considered part of the “developing world”. Fashionable couples promenade through Mango, Puma, Levi’s and Apple stores; women emerge from glamorous boutiques; a huge supermarket sells everything from ice cream to barbecues; a five-screen cinema shows all the latest Hollywood releases; and there’s parking for 900 cars – many of them flashy SUVs. All this without mentioning the food court offering fried chicken, smoothies and a bouncy castle for the kids. Drive there via the spiralling highways of the city, meanwhile, and you see glossy adverts for iPhones, beauty products, flights, mortgages and the luxury condos that have recently appeared in the region. It’s the same in many major African cities. Nairobi, Lagos, Cairo and Dakar are all experiencing a shopping boom: it’s the new fashionable pastime, along with fitness (gyms are having a moment, too). In Dakar, the Sea Plaza mall houses 44 shops including Benetton and Aldo, ten restaurants, a cinema and a spa run by the Radisson hotel group on a site that, back in the 1990s, was a rugged bit of cliff overhanging the Atlantic Ocean without a paved road running past it. In Lagos, the Ikeja mall opened in 2012, while the Palms centre is home to brands including Hugo Boss, Mango, Mac, Wrangler, Swatch and Sony, plus a cinema, food court and 1,000 parking spaces. In Lusaka, Zambia, several complexes offer supermarkets, clothing, electronics and everything in between, led by South African retailer Shoprite and Woolworths. There is more growth to come. In two years’ time, it’s anticipated that there will be 179 new malls in Africa. Julien Garcier, managing director of Sagaci Research, which in 2013 predicted strong retail growth across the continent by 2017, says: “The number of new malls is impressive, driven by retailers’ growing interest in looking for new growth opportunities. We are today at a major turning point across the continent.” NEW GENERATION A burgeoning African middle class with disposable income and a high awareness of global brands via films, TV and music is driving the demand for consumer goods. Africa has the world’s youngest population, with more than half under 20. The consumption habits of these young people are quite different from their elders – they are more likely to search for information online, seeking products and stores that reflect the right image; they are more brand-conscious, looking for the latest fashions and trends; and they like to try new things. Combined with urbanisation and the increased availability of credit, it seems like a winning formula. In the cities, more and more people are flocking to malls rather than the smaller, informal shops and markets that have been the traditional choice. They are seen as places to eat, drink and socialise. According to McKinsey, Africa’s consumer-facing industries are predicted to grow by more than US$400 billion by 2020, accounting for more than half of the total revenue increase that all businesses are expected to generate by the end of the decade. Research by Euromoney shows that, since 2000, consumer spending in sub-Saharan Africa has grown at a steady 4 per cent per year, reaching almost US$600 billion in 2010. The market is expected to be worth US$1 trillion by 2020. These are impressive figures, representing glittering opportunities for brands and property investors. Many consider the continent to be something of a new frontier in retail terms, with its huge, untapped source of potential consumers. Karl-Hendrik Magnus, a McKinsey analyst based in South Africa who worked on a report called “The Rise of the African Consumer”, says: “The key factor here is that 45 million households across the continent are entering the ‘discretionary income’ sector. They have enough to spend, not just on bread and other basics, but on non-essentials such as entertainment and aspirational goods. Ultimately, we’re sitting in the second-fastest growing region in the world, after Asia, and that’s underlying this.” Grant Hatch, former South Africa strategy lead at Accenture, says that nine countries will account for almost 75 per cent of total consumer spending in sub-Saharan Africa by 2020: Kenya, Ethiopia and Uganda in the east; Angola, Zambia and South Africa in the south; and Senegal, Ghana and Nigeria in the west. “Within these attractive markets are a wide range of consumers for whom companies must tailor appealing, differentiated offers,” Hatch says. He recommends that they develop a deep understanding of competitors, and build partnerships and trust with local producers. “Company managers need to be prepared to walk the markets and gain insights from talking to street vendors, watching consumers and building a qualitative model of how the market operates.” THINK LOCAL  Still, many brands have little idea how to translate the opportunities into action and profit. International investors have to compete with traditional “umbrella” market stalls often offering cheap or counterfeit goods. A lack of information about the African consumer is leaving companies at a disadvantage, and it is those with years of experience here that do well. Then there is corruption and bureaucracy to overcome, while the logistics can be unreliable and infrastructure lags behind much of the developed world. Plus, the very diversity of Africa – 54 countries with differing cultures, languages, demographics and currencies – makes local knowledge implicit to success. It is notable that the brands that are successful are those creating market-specific products catering to the needs of the consumer in different countries. Africa is enormous, and the taste of shoppers in Senegal differs widely from those in Kenya or Zambia. David Gyori, executive director of Banking Reports, which provides banks with research and analysis of economic markets in Africa, says it is the brands that understand these specificities that do best. “The African consumer is changing at high speed, so a dynamic understanding of their journey is what makes a Western brand especially successful,” he says. “Part of this understanding is the right price point, one that takes buying power into account and that brings the joy of owning a certain brand to the customer at an affordable price.” Despite controversies, Nestlé has been present in Africa for decades, specialising in food products such as instant coffee and powdered milk – yet a recent announcement that it will scale back its operations has been attributed to a misunderstanding over the past few years of the continent’s changing consumer base. It is seen to have chased the middle class while neglecting the low-income consumer that was always its major customer base. In contrast, Unilever has adjusted its strategy to take into account local needs, resulting in double-digit growth on the continent over the past decade. It has created affordable food, water-thrifty washing powders and grooming products to fit local tastes, such as a line of black hair products in South Africa, which previously relied on expensive US imports. It has also packaged products in smaller sizes and at low prices to capture the loyalty of poorer customers. Gap entered the South African market in 2012, while Walmart purchased a majority share in local retailer Massmart some years ago and has seen huge expansion on the continent using the same strategies as Unilever to launch products such as cheap, effective sun cream in South Africa. Other brands exploring the market include Zara, Cadbury, Coca-Cola and KFC. Still, few international names have dipped their toes in the water so far, despite consumers crying out for new places to shop. “In Dakar, furniture and clothing is really expensive, even when it’s second-hand,” one Senegalese friend tells me. “We hear about shops like Ikea and Primark and we’d love to see them open here. Everyone would go.” So how long will it be before such retailers wise up? Garcia says: “I’d agree that consumers are looking for mass-market quality products [from the likes of] Primark, Zara and H&M. But entering these markets can be complex for those firms as they often face high import duties and transportation costs, and need to make sure that the market can handle their business. For Ikea, it’s going to take a long time before they enter the sub-Saharan African markets since it needs a very large customer base, as well as the right infrastructure and customs set-up.” Yet as shopping malls develop and multiply, more and more brands should gain confidence. Add e-commerce to the mix, enabling companies to enter these sectors without going through the bricks-and-mortar store phase, and it could be that in 15 years, Africa will be the world’s new shopping centre. MINING AFRICA’S RESOURCES: THE CHINA FACTOR  “For the next 20 years, Africa will be the single-most important business destination for many Chinese mega-corporations.” So says Zhao Changhui, chief country risk analyst for the Export-Import Bank of China (Eximbank). The same could be said of the last ten years as well: a significant amount of the growth and investment in Africa can be attributed to huge amounts of foreign direct investment (FDI) from China, whose continued interest in financing infrastructure projects throughout the continent – all the while purchasing raw resources – shows no sign of abating. China’s spending power has seen it become a major player in global commodities trading; it has purchased an eighth of the world’s oil, a quarter of its gold, and up to half of all major base metals, according to The Wall Street Journal. With Africa’s abundance of natural resources, it’s no wonder the underdeveloped continent caught the eye of China’s energy- and resource-hungry business players. Also significant is the fact that the many obstructions to investment faced by the West – from human rights issues and employee safety to politically ostracised governments – are of little or no concern to China, allowing it to invest freely in a variety of lucrative markets. According to FDI Intelligence (a division of the Financial Times), China’s FDI in Africa totalled US$87 billion in 2014 – a 64 per cent increase year-on-year. Cash loans from the East are also being pumped into infrastructure developments within Africa, with Eximbank providing the necessary funds for projects that meet both parties’ interests – essential roads for the local populations, and easy access to and from mining and other business centres for Chinese companies. A 2013 report by the South China Morning Post (SCMP) revealed that China will invest US$1 trillion in Africa in the years leading up to 2025 – funds that will enable the development of transnational highways, railways and airports across the continent – with Eximbank providing a majority share (70-80 per cent) of that. “We have the budget for major projects,” said Eximbank’s Zhao to the SCMP during the Africa Investment Summit in Hong Kong. “China has US$3.5 trillion of reserves, which cannot just [be used to] buy US treasuries… we need to use part of [the reserves] in overseas investments.” Such a close trading partnership means Chinese companies get first dibs on Africa’s rich commodities, which include oil, timber and copper. Infrastructure projects also pave the way for Chinese companies to secure lucrative service contracts in many African countries, which in turn attract a growing number of corporate travellers and increased travel demand. China Southern Airlines and Air China, two of China’s largest carriers, launched flights to Africa last August, with the former now operating a three-times-weekly service between Guangzhou and Nairobi, Kenya. The latter, meanwhile, relaunched direct services from Beijing to Addis Ababa, Ethiopia following a 21-year hiatus, while also introducing new flights to Johannesburg in October 2015. BUMPY ROAD AHEAD? However, the dependency of many African countries on Chinese investment poses a significant problem – highlighted by the effects of China’s economic slowdown last year. Chinese officials revealed in November 2015 that investment in Africa had fallen by some 40 per cent during the first half of the year, as compared to the same period the year before. Raw material prices have sunk in the wake of the global recession, weakening Africa’s position and raising Chinese fears of default of debt repayments. Adding to concerns is the recent trend in China towards a more consumer-led economy, which may lead to a waning appetite for commodities. But despite these worrying undercurrents, Razia Khan, managing director and head of Africa research at Standard Chartered Bank, believes that trading will remain strong. “There has been a decline in commodity prices, which has impacted the value of China’s trade with Africa,” he says. “[However], if you look at that trade growth in volume terms, it continues to grow strongly. Our view is that China... remains focused on Africa.” The challenge now for Africa is to overcome the economic headwinds (in which growth is weakened due to external factors) that are affecting the global economy and driving investors away from perceived riskier markets. In particular, Africa’s debt to China is quickly getting out of hand, and this became a major talking point at the Forum on China-Africa Cooperation in Johannesburg last December. Business Daily reported that several African countries would seek to renegotiate repayment of existing debts to China, in an attempt to alleviate the economic pressures brought on by low crude oil and commodity prices. This is a temporary fix, noted Khan, and could hurt the region in the long run. “In South Africa [for instance], the net debt has, from around 20 per cent of GDP during the global financial crisis, increased by a further 20 percentage points in a short space of time,” he said, adding that government debt of 60 per cent of GDP is considered too high to be able to rein in and could threaten fiscal sustainability. The road ahead for Africa could therefore be a rocky one, despite the billions of investment dollars and optimism from the retail sector. It will be interesting to see whether the sheer size in population and undeniable drive of Africa’s most influential nations will carry them through to a prosperous future.
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