Private consumption grows significantly in Africa

Retail sales are increasing significantly due to favourable demographics and a growth spurt in retailers entering the African market.

Private consumption is growing significantly in Africa due to strong population growth and a young and emerging middle class - 27 African countries have already attained middle-income status and, with the current growth rates 40 countries could reach that status by 2025, according to professional services firm, EY. McKinsey’s report on the African consumer market, The rise of the African consumer, puts private consumption in Africa higher than in India or Russia - it increased by US$568-billion from 2000 to 2010. McKinsey expects consumer-facing industries to grow by a further US$410-billion from 2012 to 2020, with consumer goods and food anticipated to account for US$185-billion (45%) of that.
It is worth noting that the global retail terrain has changed dramatically since the turn of the decade. Developing nations continue to lure formidable global retailers, with smaller untapped markets providing new profit frontiers, less international competition and greater pricing flexibility.
Africa’s top 10 retailers 2012 - banner sales (US$m)

Retail sales are increasing significantly in Africa due to favourable demographics and a growth spurt in retailers entering the market.
A macro view of factors influencing retail markets
Economic factors driving consumption: GDP growth and inflation impact consumer demand. In periods of economic expansion, disposable income rises, increasing the demand for finished goods. However, inflation is like a vice on spending as it has the potential to squeeze retailers’ profit margins and erode consumers’ disposable income.
Socioeconomic factors: Demographic trends are a key factor affecting global retailers. The current population, forecast population growth rate, estimated escalation in per capita GDP and rate of change in urbanisation provide a useful indication of the size of the consumer market, potential purchasing power and levels of shopper concentration. Urbanisation, more specifically, is an important indicator of the ease in accessibility for a retailer. McKinsey estimates that urban per capita incomes are on average 80% higher than those of countries as a whole. An example is Ghana, where 29% of households have disposable income of more than US$5,000, compared to 55% in Accra alone.
Nigeria, Ethiopia and the Democratic Republic of Congo (DRC) have the most favourable macroeconomic backdrops for consumption spending growth.
Income brackets
Income elasticities, which measure the change in the quantity of goods demanded in response to a change in real income, affect the type of goods that can be sold in different markets. Food products are usually highly inelastic, while demand for durable items are more elastic. Importantly, annual household incomes of above US$5,000 represent the level at which individuals begin spending more than half their disposable income on items other than food, according to McKinsey. Therefore, food products are likely to dominate consumer spending in income brackets less than US$5,000, while durable goods such as clothing and apparel will be more popular among individuals earning above this level. Growth in discretionary income should result in greater demand for hard goods like electronics and furniture.
Most developed retail markets in Africa: A comparison with India
India, South Africa, Kenya and Nigeria, with their fast-growing consumer markets and increasing affluence, present lucrative investment opportunities for retailers. They are already the targets of multinational companies pursuing the first-mover advantage in new growth markets as a means to offset sluggish demand in developed economies. These four markets share an important characteristic - their retail sectors are rapidly growing their share of GDP. The increasing prominence of the India-Africa trade corridor will, in our view, lead to brisk investment by retailers.
If we equally weigh the four variables under the socioeconomic factors section, India seems to offer the most attractive consumer market. However, the sheer size of its population tends to skew the findings. When this is excluded, India ranks below Kenya and Nigeria but is above South Africa primarily due to its faster GDP/capita growth rate. Notwithstanding its population size, Kenya is top in the remaining categories. Interestingly, Deloitte identifies Nairobi as a prime destination for modern retailing in its report on the next generation of retail markets. It is important to note that while South Africa has a sizeable population, its population growth rate, pace of change in GDP/capita and urbanisation levels are forecast to be relatively low.
Know your consumer
There are a few factors to take into consideration when assessing the most attractive consumer environments in Africa, including a good local management team, strong local partners, local competition, alternative distribution methods, population density, infrastructure, acquisition opportunities, and branding. But, it is probably most important to understand the African consumer, which has been addressed by McKinsey’s African Consumer Insight Centre. Some of the key findings of the centre’s survey include the following:

• Contrary to popular belief, consumers across the continent attach significant importance to both quality and brand
• Brand loyalty averages around 58% in Africa.
• In North Africa, international brands are preferred, but sub-Saharan Africa is more accepting of local brands.
• Price and promotion sensitivity is high.
• Of the urban consumers surveyed, 70% have access to a bank account, while 75% of the respondents say they save monthly.
• There are distinct consumer segments in Africa, with each placing importance on different areas like price, brand, and quality. 

This article is extracted from the 2013-2014 issue of Rand Merchant Bank's ‘Where to Invest in Africa’ report.