Africa Consumer Insight: Macroeconomic drivers and spending patterns
Following on from our Africa Consumer Story: Demographics post, we take a look at macroeconomic drivers and spending patterns. Africa’s economic performance has improved greatly since the turn of the century, leading to large increases in GDP/ capital and lower levels of poverty.
After experiencing a decline in the previous two decades, the SSA economy grew at an average rate of 5.7% per annum (between 2001 and 2011). During 2000-10, six of the 10 fastest growing economies in the world were in Africa.
The improvement coincided with an improvement in business environments and a reduction in political risk, although a commodity boom also played a significant role in the increase in real GDP. Several African countries are expected to be among the fastest growing in the world over the next decade.
The rise of the middle class
It is anticipated that with the next generation of educated young people enter the labour market, we will see a rise of a wealthier middle class. This will fuel the growth in the services industry across the continent.
Botswana, Mauritius, and South Africa have purchasing power parity (PPP) adjusted levels of GDP per capita that are amongst the highest on the continent, while countries such as Mozambique, Ghana, Zambia, Tanzania, Ethiopia, and Libya are expected to show the highest growth in this indicator over the 2011-17 period. (Libya’s forecast growth rate is the highest due to the sharp fall in income as a result of the uprising at the beginning of 2011.)
Food continues to dominate African consumers’ spending
Spending patterns are determined by disposable income per capital. There is generally quite a strong negative correlation between the proportion that is spent on food and overall prosperity levels. Currently, food dominates African consumers’ spending, but this will gradually change as incomes rise.
The African population presently remains heavily dependent on cheap staple foods, while the increased inclusion of meat in the diet has barely begun. For the large majority of the African population, the nutritional transition is still focused on quantity increases rather than quality increases.
For these reasons, the fast-moving consumer goods (FMCG) sector on the continent presents retailers with lucrative opportunities, with a wide range of products expected to see a sharp increase in demand over the next few decades as African consumers continue to move up the ‘food curve’
Alcohol product category: Likely to see strong growth
Another product category that is likely to see strong growth in Africa over the next few decades is alcohol.
If SABMiller’s expansion plans are anything to go by, the African beer market definitely presents profitable opportunities. One of the company’s key strategies on the continent has been to provide beers at lower cost in order to target the lower income consumers. In order to lower production cost, the company uses locally produced sorghum and cassava in the production process rather than more expensive imported barley.
According to SAB, the prices of sorghum-based beers have to fall to 80% of that of the mainstream brands in order to get the required boost in demand to justify the investment. In Tanzania, this strategy has not worked very well since the country has a more moderate excise tax regime than some other countries in the region, which implies that the price differential between the sorghum-based and mainstream beers is too small. On the other hand, the tactic has paid off in countries such as Uganda and Mozambique.
We estimate that in 2010, close to 579 million Africans earned $1,000 or less per annum (expressed in 2000 constant US$ throughout). This is up from 529 million Africans in 2000, even though the percentage of people falling in this bracket declined from 77.6% of the total to 67.9% over the same period. This trend is expected to continue.
Despite people continuing to move up the income bracket, population growth will ensure that the size of this market increases, reaching 662 million by 2020, and 702 million by 2030. Encouragingly, the size of the $1,000 – $2,500 income bracket is expected to increase at an even faster pace, reaching 228 million (21.6% of the total) by 2020 and 304 million by 2030 (23.6%) from 183 million (21.5%) in 2010.
The accompanying graph shows the six countries in Africa that we expect will have the highest real GDP growth rates over the following two years out of a sample of 30 countries3. Other countries in the sample that are expected to post high growth rates include Tanzania, Ethiopia, Angola, and Uganda.
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