Africa's Youth

Investing in Africa’s consumer markets

Africa is home to more than one billion people, presenting a massive potential consumer market. Moreover, population growth remains rapid, so much so that the UN forecasts the continent’s population will surpass the 1.5 billion mark by 2030 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.

Apart from Africa’s favourable demographics, there is also a favourable outlook for economic growth, despite the current challenging global environment. As a result, the purchasing power of the continent’s large consumer market is expected to increase significantly over the medium- to long-term. This presents lucrative opportunities for investment in consumer-focused industries, including retail.

According to a report by the African Development Bank (AfDB), some 122.7 million Africans are now classified as ‘middle class’ (daily per capita expenditure of between $4 and $20), a figure that is 30 percent higher than in 2000. The AfDB further estimates that there are a total of 190.6 million people on the continent that spend between $2 and $4 daily, many of whom will join the middle class over the next decade.

The important indicator to monitor is income per person. Unfortunately, a perfect proxy for this is lacking due to inequality distorting per capita indicators such as GDP or consumption per head. We believe that, across the board, Africans will continue to get richer over the next decades, setting forth a trend that gained traction in the 2000s. This will be driven by demographics, resources, improved macroeconomic policies, and lower political risk.

Africa’s demographics

UN projections suggest that Sub-Saharan Africa (SSA) will experience a prolonged period (between 1990 and 2075) during which its working-age population will expand at a faster rate than its overall population. The difference between the two growth rates is expected to reach a peak in 2035. In North Africa, the change started some 15 years sooner, and is expected to last 20 years less.

Although declining, SSA’s dependency ratio is still very high due to the large number of young people in the population. But towards the end of the current century, SSA’s dependency ratio is forecast to be lower than that of India, China, and North Africa. This period will give the region the chance to boost consumption spending power significantly, provided there is sufficient job creation.

In contrast to the developed world where people are getting older and increasingly moving into retirement age while at the same time fertility rates have declined drastically, in Africa and other developing countries, young people still dominate the population; this is expected to continue to be the case for a number of decades to come. Thus, while in Europe and the US private and public funds will have to be directed at supporting the elderly, in Africa resources will be freed up as people go from being dependents to income generators.

Urbanisation trends affecting consumer patterns

Since purchasing power in urban areas is usually higher than in rural areas, while infrastructure is also of better quality, studying urbanisation trends is key to understanding consumption patterns. In SSA, the urbanisation rate increased from 24.1% in 1980 to 36.3% in 2010. There are however vast differences within SSA; the urbanisation rate of East Africa is much lower than the rest of the SSA region, and projected to remain lower over the next few decades as well. The fact that East Africa has such a low urbanisation rate is understandable given the importance that subsistence agriculture still plays in the economies of these countries. For SSA as a whole though, the urbanisation rate is projected to continue to increase at a rapid pace, reaching 43.2 percent in 2025.

Macroeconomic drivers and spending patterns

From 2001 to 2011, the SSA economy grew at an average rate of 5.7 percent p.a. in real terms. This meant that GDP per capital rose from $461 in 2001 to $1,219 in 2011. 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. Over the next few decades, a more educated cohort of young people will enter the labour market, leading to the rise of a wealthier middle class that will fuel growth in the services industry. Botswana, Mauritius and South Africa have purchasing power parity (PPP) adjusted levels of GDP per capital 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.)

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’.

Apart from food, another product category that is likely to see strong growth in Africa over the next few decades is alcohol. Given that more than half of SSA’s population falls in the lowest income category, not surprisingly, alcohol consumption per capita in SSA is still much lower than in other regions. As people move up the income ladder, per capita spending on beer rises significantly. Given the large number of people in Africa still earning less than $1,000 p.a., combined with the expectation that economic growth on the continent will be much higher than in most other regions over the forecast period, this implies that there is massive potential in the alcoholic beverages market (especially beer).

We estimate that in 2010, close to 579 million Africans earned $1,000 or less p.a. (expressed in 2000 constant US$ throughout). This is up from 529 million Africans in 2000, even though the percentage of people falling in this bracket declined from 77.6 percent of the total to 67.9 percent 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. The incentive for investors to put their money in Africa is clear.

Have a question on Investment in the Consumer Markets sector?

We invite you to join us on LinkedIn for a discussion today by 14:00 CAT to engage with our Consumer Markets sector Partner from Nigeria, Toyin Gbagi. Should in case you can’t join us for that hour and you have a question, simply send it in an email to projectafrica@kpmg.com and we’ll help ensure the question is posted on your behalf.

 

David Okwara

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