Retail-WheretoInvestinAfrica

Consumer demand and sales volumes have peaked in the developed world, and developing economies are set to account for the bulk of growth in global spending and consumption over the next few decades, especially as African economic growth rates recover.

Figure 3.1. Retail sales growth (annual % change)

Source: EIU

Africa’s demographic landscape remains attractive. However, the pace in the growth of the middle class has been slower than expected. This is due mainly to domestic idiosyncrasies, including the lack of economic diversification, structural skills and labour-market issues, and the lack of access to basic services such as healthcare and education that damps inclusive growth (growth that is distributed fairly across society and creates opportunity for all). But the AfDB believes the potential is still alive and well, expecting the current 350-million-strong middle class to grow to just under one billion by 2040. This growth is already contributing to the modernisation of the retail sector, and many African economies continue to transition to consumption-driven markets. In the same breath, the market remains highly unsaturated, with little competition in most countries. Investors need to remember that although the short- and medium-term returns are unlikely to inspire, the long-term potential for retail is truly exciting.

Essential goods to remain the main target of consumption

Due to Africa’s low-income levels, essential goods make up the bulk of consumer spending (Figure 3.2), with food, beverages and tobacco dominating this consumption landscape (Figure 3.3). The growth in spending in this category is expected to increase due to the steady expansion of distribution services.

Figure 3.2: Essential and non-essential spending patterns for selected African countries (% of total household spending)

Source: Fitch Solutions

Figure 3.3: African consumer expenditure in major retail sub-sectors (US$bn)

Source: EIU

Luxury-goods-spending growth, however, will be slow. Although improving, Africa’s low-income-level status will not change drastically anytime soon, and luxury companies favour stable service economies, rather than volatile commodity exporters. Only a few households in Africa will exceed the US$75,000 per annum income threshold, the level at which Fitch Solutions sees luxury spending taking off over the next few years. South Africa continues to be the premier destination for luxury-goods investment and will maintain this status over the next few years. And, though the country is facing a struggling economic growth environment, income should pick up again — 2.2% of South African households are projected to reach disposable income levels of US$75,000 and higher by 2021

Key macroeconomic variables pertinent to retailers

Consumer spending

The Brookings Institute’s latest analysis on trends and drivers of the African consumer market shows that consumer expenditure has grown at a compound annual rate of 3.9% since 2010 and reached US$1.4 trillion in 2015. This figure is expected to increase to US$2.5 trillion by 2030. The share of Africa’s consumer spending, and hence the largest consumer markets, is dominated by Nigeria (~25%), Egypt (~16%) and South Africa (~13%).

Unfortunately, in relative US-dollar terms, Africa’s household spending remains small compared to other regions globally (Figure 3.4). However, it is important to note that household consumption is measured in terms of revenues of formal retail markets, while most consumer spending in Africa takes place in informal markets, which means that it is overlooked by traditional retail investment.

Figure 3.4: Household spending across the world’s developing regions

Source: World Development Indicators

Income distribution

Income distribution is key for any retailer researching market expansion options. Tables 3.1 and 3.2 highlight Africa’s population size in different income classes in 2019 and 2029, and how that income is distributed within (selected) cities with populations of above 500,000. It is important to bear in mind that annual household incomes of above US$5,000 represent the point at which individuals begin spending more than half their disposable income on items other than food.

Table 3.1: Africa’s income brackets split in 2019 and 2029

Note:
The table highlights selected African countries and their cities, specifically the top performers in the RMB Attractiveness Rankings.

Source: Canback Dangel

Population, GDP per capita, urbanisation levels and population density

The size of a population, its density, the increase in urbanisation levels and wealth are naturally key macroeconomic indicators that retailers or exporters of consumer goods look at to choose favourable investment destinations.

• Current and forecast population size: Most retail companies prioritise the countries with the highest optimal population relevant to their business. Population growth means demand for more goods and services, like food, beverages, access to healthcare services, and education.
• Current and forecast GDP per capita growth: These are often used as measures of people’s material well-being or standard of living.
• Forecast urbanisation rates: Countries that experience high levels of migration from rural to urban areas tend to exhibit greater gains in consumer spending.
• Population density: The higher the population density, the higher the levels of retail activity that can be expected. This will allow businesses to choose a location that is accessible to the largest amount of people.

Table 3.2 summarises these demographic indicators, and we compare Africa with selected developing, emerging and developed economies.

Table 3.2: Drivers of consumption

Source: IMF, UNCTAD, World Population Review

Mixing macroeconomic strength with retail-market intricacies

Macroeconomic indicators alone do not give investors a holistic view of how attractive a retail market is or will be. Therefore, we have combined specific demographic and macroeconomic variables (discussed in the previous section) with the intricacies of the retail market (below) into a single measure to highlight countries ripe for retail-sector investment over the next few years:

• Domestic competition: he intensity of local market competition (1 = not intense at all; 100 = extremely intense).
• Household consumption: The amount of final consumption expenditure made by households to meet their everyday needs, such as food, clothing and durable goods.

Figure 3.5: Retail attractiveness rankings

Note:
Macroeconomic indicators used in the rankings:

GDP/capita (US$bn for 2018 and average annual GDP/capita growth rate between 2019 and 2024).

1. Population (actual for 2018 and average annual population growth rate between 2019 and 2024).
2. Average annual urbanisation growth rate between 2020 and 2025.
3. The rankings do not include the ease of doing business in these economies (please refer to our operating environment rankings in Chapter 1: Overview).

The methodology and calculations are explained in the Appendix. Data unavailable for CAR, Comoros, Congo, Djibouti, Equatorial Guinea, Eritrea, Gabon, Guinea-Bissau, Libya, Madagascar, Niger, São Tomé and Príncipe, Somalia, South Sudan, Sudan and Togo.

Source: RMB Global Markets, AT Kearney, IMF, World Bank, WEF, Oxford Business Group, Fitch Solutions

Table 3.3: Retail attractiveness in numbers (Top ten)

Source: RMB Global Markets, AT Kearney, IMF, World Bank, WEF, Oxford Business Group, Fitch Solutions

In an ideal world, we would have liked to include retail sales data as part of our rankings. In reality, this data is hard to come by. In Figure 3.6, we have highlighted the retail-sales statistics for economies with the available data. Where Nigeria, Egypt and South Africa dominate the sales in dollar terms, countries like Zimbabwe, Mauritius and Egypt’s sales are expected to grow healthily over the forecast period (2019 to 2022).

Ranking developing economies on a global scale

As a counterpart to our findings (of our top retail destinations), AT Kearney’s 2017 Global Retail Development Index (RDI) ranks the top 30 developing countries for retail investment by identifying markets that were not only attractive then, but also those that had the best potential for future investment. It measures market attractiveness; country and business risk; market saturation; and time pressure to enter or expand in the market. The index is limited to eight African countries. The top three economies in the overall RDI are India, China and Malaysia. The only African country that made the top ten rankings is Morocco, in seventh position, and was followed by Algeria in the top 20, at number 14. Countries like Côte d’Ivoire and Kenya emerged as some of the continent’s fastest-growing retail economies due to relatively low market saturation. Nigeria has been at the forefront of e-commerce growth in Africa, but it has been battling with lower economic growth and security threats, which have overshadowed rapid retail growth. South Africa’s market remains saturated with strong local players.

The challenges for retail investment remain high

Admittedly, it has been a tough few years for the formal retail sector in Africa due to lower GDP growth, high inflation and interest rates, and dwindling credit extension. These challenges are cyclical, but Africa’s business environment remains the biggest, and constant, cause for concern. A myriad of difficulties includes logistical bottlenecks, limited investment into distribution systems and challenging regulatory environments.

Apart from the practicalities of doing business in African markets, there is also the global challenge of changing consumer needs, which can only be overcome by companies that make regular adjustments to their business models through agile strategies, operations and execution. Nielsen, a retail data analytics company, highlights that business priorities need to shift to improve growth prospects, and that “changing (market and consumer) conditions require a strong focus on differentiation, innovation and optimisation”. Table 3.4 summarises the changes in retail fundamentals over the past few years and illustrates that route to market (or distribution) is still the top focus, but four additional priorities have emerged in the past four years.

Table 3.4: The evolution of the top five retailer priorities

Source: Nielsen

With challenges, comes innovative thinking

With the many challenges that hinder stronger consumer growth in Africa, retailers need to adopt alternative approaches to leverage the strong demand for consumer goods.

Table 3.5: Innovative responses to challenges in the retail sector

Challenge		Solution
Weak infrastructure	→	Sourcing alternative distribution
Limited consumer access to financing	→	Alternative digital payment methods
Insufficient knowlege of the markets	→	Finding local partners
Protective regulations	→	Free Trade Agreement
Traditional market entry	→	Mobile shopping

Source: RMB Global Markets, Nielsen, Fitch Solutions

Property space for retailers

Regardless of moderating economic growth in Africa in recent years, the formal retail-property space continues to grow, albeit at a slower pace. Figure 3.8 indicates the status of some key retail-property markets in Africa.

Figure 3.8: The status of retail property space of selected African economies

Source: Knight Frank

What will also support growth in Africa’s retail sector is the focus on developing modern logistics spaces, supported by the demand for high-quality space from retailers and consumer-goods manufacturers seeking to expand their African operations. See examples of some of the latest initiatives across Africa in Figure 3.9.

Figure 3.9: Selected logistics-development projects

Source: Knight Frank

Video: Retail sector overview