Global business looks to African consumers
With these levels of economic advancement, Africa will soon be courted by global corporates from more mature developed markets. With profits static at best and likely to remain so following the effects of the global financial crisis, foreign companies will be seeking to tap into this hitherto virgin market. With 900 million consumers on the continent, the problems and pitfalls in doing business in Africa are quickly being outweighed by the promise of a market clamouring for goods and services.
The signs are already there. Foreign service providers in the retail, telecommunications and financial services sector are fast realising that Africa holds the key to new consumers and will provide an ever-increasing component of bottom-line profit as spending cuts, reduced retirement funds and decreased social benefits take a toll in the West. In Kenya, a battle between units of Britain’s Vodafone Group and India’s Bharti Airtel has driven down the consumer’s cost of a text message to just a few cents. Yum Brands of the United States recently said it wants to double its kfc outlets on the continent over the next few years to 1 200[13]. Indeed, the rate of return on foreign direct investment in Africa is higher than in other developing countries, outstripping even Asia.
The desire by US consumer giant Wal-Mart to enter Africa via a $2 billion controlling stake (51 percent) in South Africa’s Massmart is one of the most noteworthy steps thus far in the recognition of the African consumer as a global player to come. This is all the more significant because Wal-Mart has historically had little or no exposure in Africa.
Wal-Mart’s growth in the United States is slowing. In its 2010 annual report, the company reported net sales of about $260 billion in the United States, which is a 1.1 percent increase from net sales in 2009. In contrast, US net sales in 2009 increased 6.9 percent from the year before[14]. Looking to developing markets has long been a feature of Wal-Mart’s Chinese expansion, but Africa always seemed a rather distant – and perhaps feared – alternative.
While in the medium term African consumers may become the big winners because Wal-Mart has impressive if not controversial global expertise in bringing low-cost basics to lower-end markets, another big winner will be South African business. Long seen as service leaders on the continent, the plethora of outstanding corporate entities in critical service industries are likely to make South African companies the flavour of the decade and ripe for foreign takeovers. We can therefore expect a battle between the country’s forthright, often aggressive trade unions and private capital keen on becoming part of a global enterprise.
It is worth noting what all the fuss is about statistically. For decades, the African consumer has been dormant, struggling to survive. Now, from Lusaka to Abuja, demand for commercial property developments and new shopping precincts can no longer be ignored. The African consumer is coming of age both in numbers and in spending power capacity.
Some 40 percent of Africans now live in urban areas, a figure that approximates that of China. Suddenly, the vision of poor Africans barely eking out a dollar-a-day living is shifting. For the first time, some 130 million Africans are going to enjoy a discretionary income to spend on goods and services beyond the bare essentials. McKinsey suggests that middle-income earners in Africa have now exceeded the numbers of their Indian counterparts. It predicts consumer spending will reach $1.4 trillion in 2020, from about $860 billion in 2008.[15] African absolute growth in consumption is now greater than in India or Brazil. Add the fact that half of the continent’s population is under the age of 24 and you can see that they are likely to create huge purchasing demands in future.
Africa’s gdp per capita stands at $1 630 in 2010; by 2015 this will have increased to $2 200 at a real annual growth rate of 5.7 percent. This increase in gdp per capita will result in a 30 percent rise in the continent’s spending power. Take a projected future middle class of some half a billion people, together with almost a billion to be added in population growth over the next 40 years, and you have a fine recipe for consumer growth.
If these trends aren’t enough, then look at the creation of wealth in the new expanding urban centres. In the next decade alone, Africa’s top 18 cities will have a spending power of some $1.3 trillion. Africa now has 52 cities with more than a million residents in each, more than double the number in 1990 and equivalent to Western Europe today. Private final consumption in Africa’s ten largest economies will more than double – from around $730 billion today to over $1.5 trillion – in the next five years alone.
An agricultural revolution
Foreign investment in Africa clearly has a positive effect on the corporate bottom-line and it will also extend affordable services to millions who had little chance of access before. But there is another much more dangerous trend that Africa has yet to acknowledge adequately.
A key global trend has been the growth of middle classes across the developing world (outside of Africa) and the demands on agriculture or food security for these millions. With limited arable land in China or Saudi Arabia, for example, these and other countries are looking to African agriculture as a panacea for their looming problems.
For years, Africa has grappled with the potential to create a ‘green revolution’. Developing high-yield crops, training experts in agricultural science, increasing government budgets for the sector and building agricultural markets have only been partially successful.
The domestic approach has had patchy success. Now the influence of foreign interest threatens to undermine this further.
Since 2007, 20 million hectares of farmland in Africa – an area as big as France’s sprawling farmland and worth $20–30 billion – have already been quietly handed over to capital-exporting countries such as Saudi Arabia, Kuwait and China. They buy or lease millions of acres to grow staple crops or biofuels and ship them home. The countries doing the selling are some of the world’s poorest and least stable, including Sudan, Ethiopia and Congo[16].
Although exact figures are often in dispute, reports suggest that up to 50 million hectares of land – more than double the size of the United Kingdom – have been acquired or are currently in the process of being negotiated by foreign governments and wealthy investors working with state subsidies[17].
What is significant about these deals is their scale. In Sudan alone, South Korea has signed deals for 690 000 hectares, the United Arab Emirates for 400 000 hectares, and Egypt has secured a similar deal to grow wheat. An official in Sudan says his country will set aside for Arab governments roughly a fifth of the cultivated land in Africa’s largest country, traditionally known as the breadbasket of the Arab world[18].
It is not just Gulf States that are buying up farms. China secured the right to grow palm oil for biofuel on 2.8 million hectares of Congo, which would be the world’s largest palm-oil plantation. It is negotiating to grow biofuels on two million hectares in Zambia, a country where Chinese farms are said to produce a quarter of the eggs sold in the capital, Lusaka.
As food security becomes more critical, expect nations with deep pockets and parallel sovereign funds to be signing deals. Unless African leaders leverage their land and enter into mutually beneficial agreements,