Africa’s Consumer Markets with NKC African Economics
In conversation with
Jacques Nel
Head of African Economics
NKC African Economics
Africa is one of the world’s fastest growing consumer markets and is projected to boast 1.7 billion consumers by 2030. A growing African middle class has often been signalled as a significant source of future global consumer spending growth. However, the commodity price shock of 2014 and subsequent economic slowdown tempered the African consumer growth narrative. Invest Africa sat down with Jacques Nel, Head of African Macroeconomics at NKC African Economics to discuss their recent research briefing and the reality behind Africa’s consumer boom.
Why did you choose to focus in on consumer spending?
We wanted to counter the narrative that African consumption has been weak since the 2014 commodity shock by showing that that economic structures across the continent differ quite significantly. We wanted to counter the narrative that African consumption has been weak since the 2014 commodity shock by showing that that economic structures differ quite significantly across the continent. These differences have of course had an impact on the evolution of the consumer. We have identified which markets are the most exciting, not necessarily just because of the overall size of their consumer market but also how consumption has grown over the recent years. If consumers are spending significantly more now than they did five years ago, that represents a qualitative change in the type of consumer, and a significant proportion of the population is enjoying an increase in disposable income for the first time. It’s important to understand the consumption dynamics in each market rather than making a continent-wide statement.
Which African markets are showing particularly strong consumer spending?
The fast-growing consumer markets we identified cluster in West and East Africa. They tend to be smaller countries with strong growth rates like Côte d’Ivoire, Ghana, Senegal and Rwanda. Consumer spending is also stronger in diversified economies where services have been a key driver of growth. These countries were insulated against the commodity shock in 2014 whereas mineral dependent economies in Southern Africa, notably Angola and South Africa, took a bigger hit.
Size is also an important factor which needs to be taken into account. You cannot ignore Egypt when looking at African consumer spending. It’s one of the biggest economies on the continent and it is also expected to show some of the strongest growth. However, we chose to home in on those smaller economies where consumer spending has risen considerably over the last two decades because that presents a very interesting investment proposition. In these countries many consumers are going through a key transition where expenditure moves beyond essential to discretionary spending.
The other key geographic trend we found is that urban consumption growth is outpacing national figures. With their concentration of industry and services, cities are a condensed version of the African growth narrative. For example, four Tanzanian cities will be among the continent’s ten fastest growing cities over the period 2020-24 and that correlates with the country’s expected increase in consumer spending. From an investment perspective it makes sense to look at these concentrated regions.
Are Africa’s cities growing fast enough to unlock an age mass-consumption?
Compared to the planet’s largest cities, the GDP of many African cities is tiny. Even for those that are growing quickly, it will take a very long time to come close to the world’s megacities. Cairo is a notable outlier here. We expect it to break into the top 100 cities globally in terms of GDP in the next couple of decades. Egypt’s population has now hit 100 million and a lot of that growth is centred on Cairo. We project that Cairo will be the first, and for the moment the only, African city to play in the big leagues.
What do companies looking to move into African markets need to know about the African consumer?
There are two key things you need to consider when moving into African markets. The first is the structure of the economy. Many African consumer markets continue to be dominated by informal retail. In 2015, informal vendors were the primary source of daily purchases for 80% of Nigerians. Foreign multinationals need to understand this and identify which distribution channels they are going to use. It is not as simple as securing a retail outlet in a mall. The question is not just getting a product to where you want it to be but understanding where people buy products.
The second important aspect to consider is consumer taste – investors need to understand which products African consumers are buying. Many African consumers are climbing up the consumption ladder. They might not be looking at buying a new car, but they are looking at slightly higher quality beauty and FMCG products, for example. We also suspect that, even though you often hear about premium brands in markets like Nigeria, in smaller economies brand loyalty is weak. This makes the consumer markets we highlighted in the briefing potentially good investment opportunities where new products can penetrate.
Given the prevalence of the informal sector in African markets and the promise that the African Continental Free Trade Agreement will facilitate the flow of goods across the continent, is there enough investment going into infrastructure to allow consumer goods to move across the continent more easily?
Despite the complexity of trade negotiations on a continental level, non-tariff barriers, especially infrastructure, remain the main obstacle to the AfCFTA. Over the last decade debt has ballooned in Africa as a result of governments trying to address their infrastructure deficits. Many of those governments now do not have the capacity to take on additional debt so they are going to have to bring the private sector on board through PPPs and other frameworks.
When it comes to consumption, there is also a cultural facet to consider – you cannot just build a road to a mall and then expect people to travel there to purchase your products. It is going to be a gradual transition and this needs to be taken into account when making an investment and determining investment horizons.
Which consumption sectors would you advise investors to consider?
In many of the economies we looked at we found thriving foreign tourism sectors and even stronger domestic tourism markets. The tourism sector is receiving significant support from African governments as part of their diversification and job creation agendas. Its growth is a reflection of higher purchasing power generally – people are able to go on holiday locally and this has spill over implications for wider services and consumer goods. Some the of the countries included in our top 10 consumer markets, notably Egypt, Tanzania and Ethiopia, are also amongst the African nations set to see the biggest increase in overall tourism spending over the next five years.
In light of the current Coronavirus outbreak, do you expect African consumption, particularly in the tourism sector, to be negatively affected?
Many of the economies we highlighted in this briefing will be insulated to a certain extent because their growth models are relatively inward looking in terms of services and consumption. The impact on the larger commodity exporters will likely be more significant as their growth is not driven by domestic consumption. That being said, whatever happens in China is going to have an impact on the rest of the world and the external environment will have an impact on the internal consumer sentiment in these countries.
Tourism is a slightly different story. We continue to monitor the situation and prepare alternative scenarios of the coronavirus’ impact on travel worldwide and to Africa in 2020. Our latest baseline expectation is for global travel to fall around 9% in 2020, with the sharpest declines concentrated in the first half of the year.
African destinations should remain more protected than others as the outbreak has not yet spread throughout the region and much of the travel across the continent is intra-regional. However, the spillover effects of the coronavirus on global demand will still have a large impact. Travel to the continent is still expected to fall 2-3% in 2020, following strong growth in recent years and implying roughly 2 million fewer international visitors than in 2019. However, if the outbreak is contained within the first half of 2020, as expected, a relatively rapid recovery should follow over the next couple of years.
