By David South, Development Challenges, South-South Solutions
SOUTH-SOUTH CASE STUDY
While other parts of the world will spend 2011 worrying about their debt levels and how to spur economic growth, many factors are pointing to Africa potentially following a different story. A frenzy of activity has been building around Africa’s market opportunities and its growing middle class consumer population. Years of steady growth rates up to 2008 and the vast, untapped opportunities on the continent have sparked interest from investors and businesses alike.
Foreign direct investment (FDI) to developing economies rose by 10 percent in 2010 due to fast economic recovery and increasing South-South flows. Africa peaked in 2008 because of the resource boom and fell by 14 percent to US $50 billion in 2010 (UNCTAD). Rising FDI from Asia and Latin America has still yet to match the decline from developed countries – still the majority of FDI to Africa.
However, foreign direct investment to Africa had risen sixfold to US $58.56 billion between 2000 and 2009 (UNCTAD). The amount going to manufacturing and services has been growing, despite the slow down in 2009 because of the global economic downturn. Africa’s 11 largest economies are now being seen as the next to match Brazil and Russia, economic stars of the last few years.
The continent as a whole forms the 10th largest economy in the world. Of Africa’s more than 1 billion people, 900 million can be classified as part of the consumer economy. Out of this group, there is a third – approximately 300 million people – who make modest sums by Western standards, about US $200 a month, but have spare cash to buy things like mobile phones, DVDs and new clothes, or pay for better schools. They are the population that is overlooked when attention is focused only on the very poor living on less than US $2 a day.
This vast group is captured in the book Africa Rising by University of Texas professor Vijay Mahajan, which details the phenomenon of Africa’s middle class consumer society. He calls this group of middle class consumers “Africa 2,” with the desperately poor called Africa 3s, and the extremely rich Africa 1s.
This new group has expanded far beyond ruling elites and government workers. Many of its members work in the private sector, as secretaries, computer entrepreneurs, merchants and others who have benefited from consistent growth rates in many African countries.
The portion of African households with discretionary spending power rose from 35 percent in 2000 to 43 percent in 2008. The challenge will be to turn this wealth to the benefit of made-in-Africa businesses and to create stable, high-quality jobs to ensure this wealth effect lasts.
The new wealth effect can give Africa the tools needed to tackle its long-standing development challenges and lift more and more people out of poverty and misery while reducing dependence on foreign aid. And this can add rocket fuel to the surge toward meeting the Millennium Development Goals deadline in 2015 (http://mdgs.un.org/unsd/mdg/Default.aspx).
The rapidly rising profile of Africa is reflected by the prestigious business newspaper the Wall Street Journal recently running a series titled “Africa’s Growing Consumer Class Lures Multinationals” (http://online.wsj.com/article/SB10001424052748704720804576009672053184168.html).
Consulting firm McKinsey (http://www.mckinsey.com/) believes Africa’s billion citizens should be seen as consumers and says the continent’s growing number of middle-income consumers now outstrips India’s. It boldly claims consumer spending will reach US $1.4 trillion in Africa by 2020, up from US $860 billion in 2008. Consumer spending rose by 16 percent a year from 2005 to 2008 before the global economic crisis.
It is forecast that 220 million Africans now frozen out of this consumer wave will become consumers by 2015 if current trends continue.
The IMF believes the steady growth will continue, with 5.5 percent growth for the 47 sub-Saharan countries this year.
That’s the good news. But many African countries still rank at the bottom in the World Bank’s Ease of Doing Business survey (http://www.doingbusiness.org/rankings). Africa remains a logistical nightmare for companies. Poor quality roads, inadequate harbours and inefficient rail systems, all make it difficult to move goods around the continent and across borders.
This makes distribution in Africa costly. Companies also often have to import building supplies and equipment to construct factories and plants. Then there is the unreliable electricity supply. Unable to trust local power supplies, many companies use their own electricity generators.
If handled right, new brands and companies are set to join African global success stories like Mo Ibrahim (http://en.wikipedia.org/wiki/Mo_Ibrahim), who founded the mobile telecommunications company Celtel.
Some of the new success stories include African companies pairing up with global firms as they seek local knowledge and experience. This will be a substantial opportunity for companies wise enough to organise themselves for global competition. In 2010, Sweden’s Electrolux – one of the world’s largest makers of home appliances – bought Egypt’s Olympic Group (http://www.ameinfo.com/145039.html), a North African powerhouse for household goods.
In the Ivory Coast, Nouvelle Parfumerie Gandour (http://www.npgandour.com/english/index.html) – makers of perfume, cologne, cosmetics and talcs – is an African cross-border success story. It has factories in Ivory Coast, Senegal, Morocco and Cameroon. Thirty percent of its profits come from exports, some of which are to the United States and Europe.
Sonatrach (http://www.sonatrach-dz.com/NEW/) in Algeria is the largest oil and gas company in Algeria and Africa. Is using its base in oil and gas exploration, production, pipeline transportation and marketing of hydrocarbons and by products, to move into other areas. It is increasing its investments in power generation, new and renewable energies, water desalination, and mining exploration and exploitation. Looking to grow its business with 30 percent coming from exports by 2015, it has spread across Africa ( Mali , Niger , Libya , Egypt ), to Spain , Italy , Portugal , United Kingdom , Peru and the United States.
Marwa (http://www.marwa.es/) from Casablanca, Morocco, is an African fashion success story. The brand started by Karim Tazi in 2003 began with just two stores in Casablanca and Rabat. It identified the niche of very fashionable but good quality and inexpensive clothing. It blends international trends with subtle influences from Moroccan tradition. Its prices hover between six euros for a t-shirt and 100 euros for a coat. It has successfully created a Moroccan high-street fashion look that can be exported. It has opened a branch in Zaragoza, Spain and is expanding to Riyadh, Saudi Arabia, Paris, France, Beirut, Lebanon and Istanbul, Turkey.
A survey by consultants AT Kearney (http://www.atkearney.com) found eight out of nine West African subsidiaries of global consumer goods companies discovered quicker revenue growth than their parent companies.
All this new wealth and growth provides substantial opportunities to African brands to build their businesses and markets. The big issue will be who will rise to the occasion and who will be clever enough to learn from existing African brands that are already thriving and have shown the way.
Two trends will also power this growth: urbanization and large youth populations. Africa’s youthful, urban population has already been reached by the telecoms sector through the rapid growth of mobile phones. More than 500 million subscribers have been signed up since 2000 (Informa Telecom and Media), a user base greater than the entire US population.
“By 2040, the continent will be home to one in five of the planet’s young people and will have the world’s largest working-age population,” according to Charles Roxburgh and Susan Lund, authors of a study for the McKinsey Global Institute.
“If Africa can give its young people sufficient education and skills, they could be a substantial source of consumption and production in years ahead.”
1) Afrique Avenir: Inspiring blog tracking Africa’s rising middle class and their global economic impact. Also great photo gallery The Other Africa, a photographic journey through all 54 African countries featuring the rising middle class. Website: http://www.afriqueavenir.org/en/
2) Afrocoffee: A design-savvy South African coffee shop chain that has expanded to Europe. It uses a modern African-themed design in its shops and product range. Website: https://www.afrocoffee.com/index.php?id=4&menustate=&L=1
3) Africa Rising: A book by Professor Vijay Mahajan on how Africa’s consumer economy is growing and growing. Website: http://tinyurl.com/2vk3m9n
4) Arise Magazine: Arise is a Nigerian style monthly started by Nigerian media mogul Nduka Obaigbena, who also publishes Nigeria’s leading newspaper, This Day. Website: http://www.arisemagazine.net/
5) A video on the rising African consumer market. Website:http://annansi.com/blog/2010/12/growth-and-spending-of-african-consumer-video/
6) Annansi Chronicles: A blog packed with the latest news and media on African business and culture trends. Website: http://annansi.com/blog/
7) An interactive map of Africa’s new wealth and where to find it. Website:http://online.wsj.com/article/SB10001424052748704720804576009672053184168.html#project%3DAFRICAMAP0111%26articleTabs%3Dinteractive
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