Capturing the African Consumer Market Truths, Trends, and Strategies for the Road Ahead
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Atlantic Council AFRICA CENTER ISSUE BRIEF Capturing the African Consumer Market Truths, Trends, and Strategies for the Road Ahead SEPTEMBER 2017 ALEKSANDRA W. GADZALA Headlines about Africa’s emerging middle class are grabbing the attention of analysts and investors. A decade of strong economic growth, rising consumption, an African shopping mall boom, and a growing number of gated residential communities in some urban centers seem to suggest that a significant societal shift, and an accompanying surge in spending, is afoot. This perception that a substantial new African marketplace is on the horizon has been reinforced by journalistic essays and private sector reports, such as McKinsey & Company’s Lions on the Move (2010) and Deloitte’s The Rise and Rise of the African Middle Class (2012), which enthusiastically tout the advent of a “middle class” consumer segment in Africa. There are real economic opportunities associated with the burgeoning African consumer market, but they are often exaggerated and poorly understood. As it exists today, the African consumer market is highly segmented and fluid—and absent a discernible “middle.” Africa’s consumer market is continually reshaped, most significantly by technological advances and urbanization. These trends do not unfold linearly, and they have varying implications for different consumer groups. The picture is messy. This brief will help potential investors unpack some of these details, better understand African consumers, and appreciate the complexities of the continent’s development. Finally, it will reflect on effective strategies for capturing the opportunities offered by Africa’s growth. Africa’s Two Consumer Classes What is often referred to as Africa’s “middle class” is a heterogeneous and not easily quantifiable cluster. In its 2011 report The Middle of The promotes Africa Center 1 dynamic geopolitical the Pyramid: Dynamics of the Middle Class in Africa, the African partnerships with African states Development Bank (AfDB) estimated that 355 million people—34 and shapes US and European percent of the continent’s total population—were middle class. policy priorities to strengthen Somewhat controversially, this included anyone with a daily per capita security and promote economic growth and prosperity on the continent. 1 African Development Bank, The Middle of the Pyramid: Dynamics of the Middle Class in Africa, April 2011. ISSUE BRIEF Capturing the African Consumer Market expenditure of between $2 and $20. Of this group, the million people,5 will spur the sales of higher-end brands AfDB estimated that 60 percent fall into a “floating and luxury goods in Africa, although with limited class,” with a daily per capita expenditure of $2–$4.2 volumes in the near term. These two consumer groups A daily expenditure of $2 is only slightly above the are key targets for consumer companies. developing world poverty line and just enough to purchase a hot drink in most of Africa’s shopping malls. Africa’s Entry-Level Consumers Others suggest Africa’s middle class accounts for only Many of Africa’s entry-level consumers are those who fifteen million households in the largest eleven sub- broker trade in goods and services among informal 3 Saharan economies. Based on more internationally and fragmented markets.6 They are wholesalers and accepted definitions of middle class (daily incomes of retailers, drivers, manufacturers, construction workers, $10 or more), the Pew Research Center suggests only chefs, delivery couriers, technicians, and those who 6 percent of Africa’s total population can be classified might in the United States be considered early stage 4 as middle income. entrepreneurs. As economic conditions in their communities improve, they are often the first to notice Disparities stem from both monetary and sociocultural and the first to scale up their operations; informal differences in defining the “middle class.” There is sector workers are the primary drivers of Africa’s rapid today no single African population group with a shared urbanization.7 As a collective, they comprise over 60 character, position, or impact on society that brings percent of the continent’s workforce and contribute 38 about the kind of political and economic shifts seen percent of its gross domestic product (GDP).8 in “middle-class” groupings elsewhere. Competing kinships, ethnicities, and divergent living conditions The informal sector in Africa has little to do with have historically complicated such ascriptions. “Middle black market activities, or what may otherwise be class” in Nigeria is unlike “middle class” in South Africa considered dubious transactions in the United States or Côte d’Ivoire. That individuals in Nigeria’s Lagos and or in Europe. Informal economic activity includes any Bayelsa states feel part of the same “class” is equally unregulated commercial transactions, any business unlikely. that is not taxed, and any worker who does not receive social protections. While many who labor in Africa’s Optimism about the African consumer story will informal economy are marginalized from formal sector pay off for American companies over the long term, employment and forced to pursue informal work out but not immediately. Despite uncertain definitions, of necessity, others enter voluntarily. In Ghana, for consumption in Africa is rising. Rather than a middle example, university graduates become entrepreneurs class, it is more useful to speak of an African “consumer in search of better professional status.9 Heterogeneity class.” Consumer demand is being driven by two key within Africa’s informal sector means market and segments. The first is “entry-level consumers,” with consumer behaviors vary widely and are unlikely to daily per capita expenditures of $2–10. They are the follow trends observed elsewhere. Those who hover largest in terms of size, the fastest growing, and the on $2 a day and rely on volatile revenue streams are most rapidly urbanizing. Rapid technological uptake at constant risk of slipping below the poverty line. is also reducing the costs and barriers that have And although theirs are the fastest growing incomes, previously prevented companies from accessing this they emerge from low bases—some as low as 70¢ demographic. Consumption is also driven by a much per day.10 Among more educated informal segments, smaller upper segment that already enjoys many of the trappings of the Western middle class: access to credit and savings, and a significant disposable income. This 5 African Development Bank, The Middle of the Pyramid. consumer segment, comprised of an estimated twenty 6 Bright Simons, “Beware Africa’s ‘Middle Class,’” Harvard Business Review, June 2013, https://hbr.org/2013/06/beware-africas-mid- dle-class. 7 United Nations, World Urbanization Prospects, 2014. 8 International Monetary Fund, Regional Economic Outlook: 2 Ibid. Sub-Saharan Africa Restarting the Growth Engine, April 2017. 3 Standard Bank, “Rise of the Middle Class in Sub-Saharan Africa.” 9 Franklin Obeng-Odoom and Stephen Ameyaw, “A New Infor- Standard Bank Blog, August 2014, https://blog.standardbank. mal Economy in Africa: The Case of Ghana.” African Journal of com/node/61428. Science, Technology, Innovation and Development 6 (3): 223–30, 4 Pew Research Center, A Global Middle Class Is More Promise than 2014. Reality, July 2015, 24. 10 Laurence Chandy, Veronika Penciakova, and Natasha Ledlie, 2 ATLANTIC COUNCIL ISSUE BRIEF Capturing the African Consumer Market A shopkeeper serves a customer in the Somali capital Mogadishu. Photo credit: AMISOM Public Information/Flickr. tastes and spending patterns also vary. As more and a day to buy items like a spoonful of sugar, a single more governments enact policies that make it easier piece of fruit, or a cup of rice.11 Patterns vary widely to open, own, and operate businesses, the structure by country: in Kenya, low-income consumers shop on of this constituency will continue to shift, opening the average thirty-eight times a month.12 In South Africa, door for companies to reap the gains. where formal retail is more developed, consumers tend to buy monthly supplies of staple foods from larger Around 90 percent of sub-Saharan commerce takes supermarkets and perishable items on an as-needed place in the informal sector, at open-air markets and basis from informal retailers.13 kiosks, and at the hands of table-top sellers and street hawkers. Consumers generally pay for goods in cash, Because cash flows are tight, consumers place a although the advent of mobile money is starting to premium on price and reputation. Brand and retailer change this. Sales of fast-moving consumer goods like familiarity, as well as word-of-mouth recommendations, cosmetics, toiletries, foodstuffs—especially perishable are strong purchase drivers, with levels of consumer and ready-to-eat items—and other necessities dominate caution varying by geography. this consumer segment. Consumers shop often, and make purchases in small quantitates. In Madagascar, for example, entry-level consumers shop an astonishing seventy times per month on average, in some cases visiting the same kiosk or table top two or three times 11 The Nielsen Company, Africa: How to Navigate the Retail Distri- bution Labyrinth, 2015, 16. 12 Ibid., 3. “Africa’s Challenge to End Extreme Poverty by 2030: Too Slow or 13 Ann Steensland, “Informal Food Economy Vital for Producers and Too Far Behind?” The Brookings Institution, 2013, https://www. Consumers,” Global Harvest Initiative, 2017, http://www.globalhar- brookings.edu/blog/up-front/2013/05/29/africas-challenge-to-