African Consumer and Retail: What are the Key Growth Drivers?
Africa is home to more than one billion people, presenting a massive potential consumer market. Moreover, population growth remains rapid, and the United Nations (UN) Population Division forecasts that the continent’s population will surpass the 1.5 billion mark by 2026 and the two billion mark 15 years later. In addition, Africans are increasingly moving to cities, making it easier for companies to target certain consumer groups. Although the demographic make-up of the continent is extremely favourable, success is not guaranteed. Firstly, there are vast differences across countries – North Africa is for example far more developed than sub-Saharan Africa (SSA), while the retail market opportunities in countries will differ due to variances in consumer tastes, culture, income, and demographics. Secondly, it is important to distinguish between opportunities at the national and at the city level. Data at the national level can often be misleading, as a city’s GDP per capita can vastly exceed the national average due to the greater concentration of wealth in some urban areas. Finally, simply because a country has favourable demographics does not mean that this will necessarily translate into higher levels of economic growth and consumer spending. An increase in the proportion of the working-age population relative to the total population (the so-called demographic dividend) is potentially beneficial for consumer spending as it frees up resources. But this will not happen if there is a high unemployment rate in the working-age population.
Africa’s retail sector remains relatively under-developed at present, with most shopping being done at traditional shops. The formalisation of the sector will be a key trend underlying the sector’s expansion in the coming decade. The lack of physical infrastructure has been one of the main constraints to the entry of formal retailers, as there are simply not enough shopping centres available at present, while bureaucratic obstacles and land issues further complicate matters. At present, most African consumers – especially south of the Sahara desert – remain extremely poor and spend most of their money on food and other necessities. This makes for a promising outlook for fast-moving consumer goods (FMCG) companies given the large market to cater for. Crucially, an increasing number of consumers are on the cusp of the US$1,000 annual income level, which will allow for the expansion of consumption beyond just the basics. Retailers will be looking to take advantage of the large market at the low end, while gradually starting to offer these consumers higher-value products.
Demographic factors underpinning Africa’s retail sector expansion include:
- A large population – estimated at just over 1.1 billion in 2014. SSA accounts for 81% of Africa’s total population, while Nigeria accounts for around a fifth of the SSA total. Other countries with notable population sizes include Ethiopia, Egypt, and the Democratic Republic of the Congo (DRC). These four countries account for 38% of Africa’s total population.
- Population growth rates are still relatively high. This trend is confined to SSA countries, as population growth rates in North Africa have already declined significantly on the back of lower fertility rates. In turn, this trend is in line with differences between the stages of economic development that the regions find themselves in.
Urbanisation rates are rising. The effect of urbanisation on economic growth – or vice versa – is dependent on job creation, the economy’s structure, and – crucially – the definition of urban areas. UN figures indicate that in SSA, the urbanisation rate increased from 11.2% in 1950 to 24.1% in 1980, and 36.4% in 2010. (Note that this is a weighted average.) The UN forecasts that SSA’s urbanisation rate will reach 45.9% by 2030 and 56.7% by 2050. The urbanisation rate of East Africa is much lower than the rest of SSA. In 2010, East Africa’s urbanisation rate was almost 17 percentage points lower than that of the Franc Zone, which has the second lowest rate on the continent. East Africa’s low level of urbanisation can be ascribed to the substantial importance of subsistence agriculture in most of these countries.
- Beneficial changes in the age structure. The composition of the population is crucial, as a large proportion of children and/or elderly in a population (i.e. a high dependency ratio) implies that the working population will have fewer resources to save and spend. The dependency ratio is therefore very important for forming a view on the outlook for consumer spending.
Africa’s economic performance has improved greatly since the turn of the century, leading to notable gains in GDP per capita and lower levels of poverty. During 2001-13, the SSA economy grew at an average rate of 6.3% p.a. in real terms, according to the International Monetary Fund (IMF), compared to 2.9% p.a. during the previous 13-year period. This meant that nominal GDP per capita rose from US$571 in 2001 to US$1,750 by 2013 after having declined during the previous two decades. The expansion 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. In addition, several African countries are expected to be among the fastest growing in the world over the next decade.
A key question is whether there will be the complementary economic reforms that are needed to ensure that economies benefit from demographic shifts, since a large working age population will count for nothing if unemployment is rampant. Apart from economic policies and reforms, other factors that are crucial to ensure that a country can benefit from demographic shifts are the effective mobilisation of national savings and a relatively skilled labour force.