by David Fine, director at McKinsey office in South Africa
Nowadays, Africa’s economic potential – and the business opportunities that go with it – is widely acknowledged. Poverty and unemployment are still more widespread than in other emerging markets, but accelerating growth since 2000 has made Africa the world’s second-fastest-growing region (after emerging Asia and equal to the Middle East).
With rapid economic growth have come more prosperous consumers – and vice versa: 45% of Africa’s total GDP growth in the 2000’s (before the financial crisis erupted in 2008) came from consumer-related sectors of the economy. It is expected that, by 2020, more than half of African households – almost 130 million – will have discretionary income to spend (or save), up from 85 million today.
Moreover, Africa has the world’s fastest-growing population – and the youngest, with more than half under 20 years old, compared to 28% in China. The United Nations estimates that the continent will account for more than 40% of global population growth through 2030, with the working-age population expected to surpass that of China by 2040.
Given these trends, the continent’s consumer industries are expected to grow a further $410 billion by 2020 – more than half the total revenue increase that all businesses are expected to generate in Africa by the end of the decade. But, for many companies entering Africa or seeking to expand there from a local base, the challenge now is to obtain a better understanding of the market and its consumers.
In one of the first studies of its kind, the McKinsey Africa Consumer Insights Center surveyed 13,000 individuals from 15 cities in ten of the continent’s 54 countries in 2011 and 2012. The ten countries – Algeria, Angola, Egypt, Ghana, Kenya, Morocco, Nigeria, South Africa, Sudan, and Tunisia – accounted for 81% of Africa’s private consumption in 2011. But, throughout the continent, market opportunities for consumer-facing companies are concentrated more in cities than in particular countries.
Indeed, with 40% of its population living in cities, Africa is more urbanized than India (30%), and nearly as urbanized as China (45%). By 2016, more than 500 million Africans will live in urban centers, and the number of cities with more than one million people is expected to reach 65, up from 52 in 2011 (on par with Europe and higher than India and North America).
This development is critically important for consumer companies. Urban household spending in Africa is increasing twice as fast as rural spending, with urban per capita incomes, on average, 80% higher than those of countries as a whole.
Befitting the continent’s strong macro trends, the survey found a high degree of optimism among urban African consumers: 84% of respondents expect their households to be better off in two years. Sub-Saharan Africans are the most optimistic – 97% of Ghanaians, for example, expect to be much better off in two years. (For North Africans, however, that figure drops to only 10-15%, which is unsurprising given the uncertainty generated by the region’s recent political turmoil.)
Overall, consumers are increasing their spending across most retail categories. Up to 30% of the more optimistic consumers in some countries say that they are shopping more frequently and purchasing new and more expensive products. And half of all respondents claim to make daily sacrifices to save for major expenditures.
This suggests that companies offering cheap, poor-quality, unbranded products are unlikely to succeed in the long term. For apparel consumers, for example, quality is second only to price when choosing a store, and second only to fashion when choosing a specific item. And, in both North and Sub-Saharan Africa, brand loyalty is strong, averaging 58%.
But quality and brand must be delivered at the right price. Even though Africans value brands and product quality, affordability remains crucial. To succeed, companies should work to reach consumers’ price points through a combination of product reengineering (such as removing low-value-added features), smaller package sizes, and low-cost operating models.
Moreover, timing is crucial when choosing where to play. Demand for consumer products typically follows an S-curve. As incomes rise, categories reach a takeoff point where demand accelerates by 3-5 times. At higher levels of income, markets become saturated and growth slows.
Different products and categories enter the “hot zone” at different moments: those with low price points, such as snacks and beverages, typically take off relatively early; beauty products somewhat later; and luxury goods, such as branded fashion, later still. Not surprisingly, in most African markets, few categories have entered the slower-growth “chill-out” zone.
This is where understanding opportunities at a city level is vital. Country-level planning and resource allocation is still the rule for most businesses operating in Africa, resulting in inefficient allocation of human and capital resources. By creating detailed profiles of the most promising urban opportunities, companies could target their investments more effectively.
Identifying growth hot spots is only the start. Substantial differences among and within Africa’s countries imply the need for a much deeper and finer-grained understanding of consumer preferences and affordability profiles by product category. Likewise, many markets are still in early stages of development, and must be built through concerted consumer education and trial.
Here, Africa’s youth merit special attention: the survey found that the 16-34 age group already accounts for 53% of income in urban centers. Young people’s consumption habits are quite different from their elders’. They are more than twice as likely to search for information online and to seek products and stores that reflect the “right image.” They are also more educated, with 40% of 16-24 year olds having completed high school, compared with only 27% of the 45-and-older group.
These characteristics point to a major change in African consumption habits as this cohort ages, its incomes increase, and its behaviors and decision criteria become the societal norm. Many companies – particularly multinational firms accustomed to old and aging populations in the advanced countries – will have to adapt accordingly.