Africa is on the rise. For the past decade the picture has been steadily improving both economically and politically. No longer is it the ‘hopeless’ continent whose media narrative was one of war, famine and poverty. It is now the continent of hope and rising prosperity where technological advancements developed there are being exported back to its one-time colonial rulers. The media perspective too is more positive as evidenced by recent glowing reports from the Financial Times and the Economist. Companies once put off by the riskiness of investing in Africa are now establishing operations locally to take advantage of its expanding economy and population.
Today Africa as a region is growing faster than Asia. According to the IMF, seven out of the 10 fastest growing economies in the world will soon be African. The World Bank estimates that Africa is currently at a point where China and India were 20 or 30 years ago and poised for a similar rapid economic expansion. Like those countries, Africa is also set to reap a demographic dividend. Already the world’s second largest continent by population (and area), its population is expected to more than double by 2050. During this time it will produce ever increasing numbers of adults of working age who will help facilitate – and take advantage of – further economic growth. This will help rebalance its economy away from commodity-fuelled export growth of today (thus reducing tensions with an increasingly active and influential China), to one driven by consumer demand served by a local manufacturing base.
All this growth has created a new local economic and political force – the much-lauded African middle class. The African Development Bank has classified that segment of the population that lives on $2-$4 a day as the ‘floaters’ at the bottom of Africa’s middle class. By this (admittedly generous) definition the middle classes number 300m today and are expected to increase four-fold over the next 40 years. It is not their absolute wealth that matters here, more that they are a large consumer block with discretionary spending power who, through exposure to television and internet, are becoming more brand savvy. Increasing urbanisation means that this group are now easier to serve for the fast moving consumer goods companies (FMCGs) that are attracted to the continent. These companies are actively targeting Africa for growth as revenues in their traditional home markets have matured.
According to a recent report by McKinsey, revenues for consumer-facing industries in Africa should grow to $410bn by 2020, with consumer goods accounting for 45% of that. This creates a unique opportunity for those FMCGs wishing to operate in Africa. And many do, with around 70% of the world’s top FMCGs already present there with more to follow. However given the difference in consumer affordability and tastes with their home markets, companies are having to tailor their products for the African market. For instance, SABMiller makes a sorghum and a maize based beer (an acquired taste) for the eastern and southern African markets. Their locally sourced ingredients mean that they retail for one quarter the price of an equivalent bottled beer. Samsung too make a fridge that keeps food cool during black outs.
There are also mobile phones aimed at the African market. Feature phones still dominate but as the reliability and capacity of data networks improve there are an increasing number of smart phones being manufactured for Africans. Nokia has a range of smart phones that retail for less than $100, some of which have dual-sim and are capable of operating on both 2G and 3G data networks. There are a number of Chinese manufacturers who are designing smartphones that will retail at $50 or less. Of course mobile technology is one industry where Africa takes a leading role with Kenya being the birthplace of mobile money. East Africa has become a hub of mobile app development with local start ups creating software with local content aimed at the local market. Some argue that this may take the place of manufacturing in the future, with Africa exporting mobile technology software to the world, as China and India do today with manufactured goods and IT services.
However despite relatively developed mobile communications infrastructure, poor infrastructure elsewhere eats into the otherwise healthy margins that consumer goods companies experience in Africa. This is most obvious with physical infrastructure, such as roads or electricity but it is also true in financial services such as payments. FMCGs are increasingly setting up manufacturing bases on the ground and sourcing supplies locally. As many of the payments in their supply and distributions chains are still in cash, unnecessary costs and inefficient processes are introduced. As highlighted in a recent white paper, on collections alone this can cost companies up to 20% of the value collected.
However help is at hand. FMCGs operating in Africa can leverage off of existing mobile technology to introduce mobile payments into the supply and distribution networks. With the right financial services or mobile operator partner, they can reduce the direct costs associated with paying and collecting cash, as well as eliminating inefficient processes. This in turn gives those companies a competitive advantage in their sectors and allows them to gain market share in rapidly expanding economies.
In my next post I will be focusing on one sector within consumer goods that has enormous potential for growth in Africa – the brewing industry – and highlighting the favourable economic and demographic conditions that exist for exponential growth. As part of that I will examine how mobile payments can be introduced into supply and distribution systems, allowing brewers to substantially reduce costs, improve processes and capture market share.