To many, Africa is perceived as a place full of poverty, with its residents scratching out a living and barely feeding their families. Although poverty is a significant and real concern in many parts of Africa (as well as Emerging markets as a whole – and the United States for that matter), Africa also has a robust and growing consumer class which, according to McKinsey, had a combined spending power of $860 billion in 2008. This number, which has been growing robustly for years is expected to rise to $1.4 trillion by 2020, as population and economic dynamics make it possible for more Africans to increase their consumption of basic and discretionary goods and services.
As some background, you can see from the World Population Bureau’s 2010 datasheet here that there were over 1 billion people living in Africa as of mid 2010. That alone means nearly one in every seven people in the world currently lives in Africa. Nigeria, for example, is the eighth largest country in the world, with 158 million residents (compared to 310 million in the US).
In terms of consumer spending power, economists like to break down income brackets which define consumers who satisfy their basic needs, and those with discretionary income. Generally, the $5,000 level in purchasing power is used to define the point where consumers are able to go from satisfying their basic needs to spending on discretionary goods. As you can see (sourced from McKinsey) in 2000 there were approximately 59 million households in Africa with discretionary income to spend. By 2008 that number had jumped to 85 million, and by 2020 it is forecast to rise to 128 million – more than double in merely two decades.
In addition to being a large consumer market presently, Africa also has an incredible amount of opportunity for growth. According to the World Population Bureau, Africa’s rate of natural increase in population is estimated to be 2.4% - meaning that by mid 2025 there will be an estimated 1.4 billion people living on the continent, and 2.1 billion by mid 2050. The chart below (also from the World Population Bureau) shows the ten countries with the highest population under 15 globally as of 2010: all but one are in Africa.
In fact, according to McKinsey, Africa’s workforce will be the largest in the world by 2040 – surpassing even India and China.
Even more surprising is the opportunity for penetration of new markets. Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services , 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.
Thus, population growth and an emerging middle class mean that Africa is a compelling opportunity for consumer goods companies, especially given limited growth prospects in much of the developed world. Many companies have already realized this, and are beginning to capitalize on the trend. As we wrote earlier, the South African retail chain Massmart was recently purchased by Wal Mart, who hopes to use the brand to grow into the continent (read here). Many other companies are making similar strategic pushes.
What does that mean to us, who invest in African markets? Of course we at Nile understand the opportunity for growth in companies that effectively produce goods that suit African consumers’ needs. We see enormous opportunities in retail, food, housing, cellular phones, and financial firms that are well positioned to access the growing consumer market. We also believe that African companies are often uniquely positioned in the market, as they are able to bring local knowledge and branding power to their business model. We actively seek precisely these sorts of firms – ones which pair local knowledge with strong growth prospects and good valuations. In fact, consumer firms are one of our three main ‘themes’ (infrastructure and natural resources are the others) for investing in African markets.
To answer our earlier question – the consumer market is large, growing, maturing, and - in many cases – relatively untapped. Not a bad place for long-term investors to be.
For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or firstname.lastname@example.org.
We know Africa - from Cairo to Capetown.