Why cities, not countries, should drive investment decisions in Africa

  

Africa is urbanising at a rapid pace. It is estimated that around 40% of Africans currently live in urban areas, making Africa more urbanised than India, and slightly less urbanised than China.

According to Standard Bank analyst Simon Freemantle “2030 will be the tipping point whereby more Africans will reside in urban than rural areas for the first time in the continent’s history”. By 2050 it is expected that more than 60% of Africans will be urbanised.

This urbanisation is likely to lead to a growing demand for consumer goods, presenting an array of business opportunities for companies looking to tap into the African market.

In a new report, entitled Urban world: Cities and the rise of the consuming class, consulting firm McKinsey notes that “most companies are still not looking at cities as they calibrate strategy”. The firm has found that “less than one in five executives is making location and resource decisions at the city, rather than the country level”.

“Companies that understand the shifting urban marketplaces relevant to their businesses and build an early presence with sufficient scale are likely to benefit from being the incumbent with better market access and higher margins. Looking at cities rather than countries can be eye-opening. Take laundry care products as an example. We expect to see more sales growth of these products in São Paulo than in either France or Malaysia over the next decade,” notes the report.

During this year’s World Economic Forum of Africa, Martyn Davies, CEO of South African-based Frontier Advisory, noted that in the future African cities will compete for investment.

McKinsey says that a large chunk of the world’s urban growth will come from a group of developing market cities, dubbed the Emerging 440. It is expected that these emerging market cities will account for 47% of global GDP growth between 2010 and 2025. Africa and the Middle East together contribute 39 cities to this group, of which 37 are classified as ‘middleweights’ – cities that have populations of between 200,000 and 10 million.

Middleweight cities in Africa include Angola’s capital Luanda, the third-largest Portuguese speaking city in the world; and resource-rich cities as Kumasi, which produces almost half of Ghana’s timber; and Port Harcourt, the centre of Nigeria’s oil industry.

Young, entry-level consumers

Although emerging market cities will experience an increase in demand for consumer goods, the level of adoption for specific products will differ from city to city. Demographic differences will play a large role. Companies that are targeting the African consumer should therefore take note of Africa’s relatively young population.

For example, in “Nigerian cities, one-third of the entire population is aged below 16 and sales of baby food are running at more than twice the global average at similar income levels.”

Of the top 20 cities that McKinsey has identified as growth hot spots for companies targeting young, entry level consumers, 15 are in Africa. The list includes urban centres such as Lagos, Dar es Salaam, Ouagadougou, Kampala, Lusaka and Ibadan.

Infrastructure

Urbanisation in Africa will also lead to an increase in demand for buildings, container capacity at ports, and municipal water. This creates a huge challenge for governments, but is also an opportunity for the private sector.

“The world’s new urban consumers will have an impact far beyond sales of goods and services. To cater to their needs, cities will need to invest heavily in infrastructure,” notes McKinsey.




Related articles:
  • Why attractive African cities are key to lure investment
  • Africa’s ballooning cities – an opportunity for agriculture
  • West African cities to become continent’s consumer hotspots