The following is an excerpt from a Boston Consulting Group (BCG) report, titled African Consumer Sentiment 2016: The Promise of New Markets.
Because the availability of detailed consumer data in many African countries is limited, BCG developed the Market Attractiveness index to provide answers to these types of questions. For consumer products companies hoping to enter new markets or increase their share in existing ones, the index can help identify the most lucrative growth opportunities.
For instance, while the markets for clothes, shoes, and accessories in Ghana and Kenya are of a similar size today, Kenya’s market is projected to grow 18% more quickly than Ghana’s over the next 10 years. Similarly, although South Africa is currently the largest market for beauty care among the 11 African countries included in this report, Ethiopia will be the fastest-growing market for these products over the next 10 years. The index includes estimates of market size – for today and projected forward 10 years to 2025 – for 19 consumer categories across the 11 countries.
In our survey, we asked respondents to indicate which of 17 household-income brackets their families fit into, ranging from less than US$50 per month to more than $7,000 per month. We also asked them to estimate how much money their household spends per month on each of the 19 consumer categories, ranging from recurring expenses such as food and utilities to big-ticket items such as education and health care. We then combined this data, showing how much more – or less, in some cases – households spend on different categories as incomes increase, with 2015 estimated and 2025 projected household-income data by country across defined income brackets. The output is an index that estimates the market size of different categories both today and in the future.
Given headlines such as “Urban Consumers Will Power Africa’s Rise” and “African Cities in Particular Are Booming,” it’s no wonder that multinational corporations (MNCs) are focusing their efforts on Africa’s urban markets. With their expanding consumer bases, rising incomes, and relative population densities, cities are indeed the place to start for most businesses. But the continent’s growing rural markets can offer significant opportunities for companies that already have an extensive urban presence and the capital and know-how required to successfully penetrate new markets. “The next million customers will come from there,” says Zunaid Dinath, chief officer of sales and distribution for Vodacom, a regional telecommunications company based in South Africa.
In terms of purchasing behaviour, our survey showed that Africa’s rural and urban consumers are quite similar. Rural consumers value quality just as much as their urban counterparts do, and are willing to spend more for better cars, electronics, beauty and baby products, spirits, and certain foods. Demand for household appliances, mobile phones, and clothing is particularly strong. However, spending power differs. The average income of rural consumers across the 11 countries we surveyed is 49% less than that of urban consumers.
We currently see rural markets as a niche opportunity for MNCs that have largely captured the urban opportunity – in sectors such as mobile phones, soft drinks, and banking. We recommend that players in other sectors continue to focus on urban markets and reevaluate the rural opportunity as it develops.
MNCs that are ready to enter rural markets should understand that rural consumers are harder to reach than urban consumers, so the cost to serve them is higher. To capitalise on the opportunity, companies will need to rethink how they market and distribute their products. Rural consumers are less exposed to the media and marketing methods, and tend to be less trusting of the unfamiliar. Old-fashioned word of mouth and trust building are still the most effective marketing tools. That’s where “zonal champions” come in.
A concept developed by a marketing agency, The Creative Counsel, as a way to reach rural consumers, zonal champions are members of local communities who are hired to represent a brand and to promote products during their daily interactions. The objective is to persuade friends, family members, and neighbors to try something new.
Distribution and logistics challenges are typically cited as principal barriers to reaching rural consumers. Once again, innovative and tailored solutions are the answer. Some companies make it easy for even the smallest shops to market and sell their products by providing signage for stores, creating shipping cases that become compact displays that fit into a smaller retail footprint, offering small package sizes at the right price points, and using wholesalers and other third parties to expand distribution.
Coca-Cola established micro distribution centers (MDCs) to help its third-party distributors in rural areas that are difficult to reach and serve. Although the company’s preferred model is to have bottlers handle direct distribution to all retail outlets, the MDCs are a way for Coca-Cola to adapt to the rural environment. Each MDC gets an exclusive territory franchise, as well as additional support services such as microcredit and loans for trucks and other assets, in addition to training in advertising, merchandising, accounting, and recruiting.
Ethiopia, the next frontier
A number of macro trends indicate a bright future for this African country. According to the International Monetary Fund, Ethiopia’s GDP grew by 10.2% in 2015 – making it the fastest-growing country in the world. It’s becoming easier to do business there, too. The number of days required to start a business dropped from 46 in 2004 to 15 today, and the cost of starting a business decreased from about $700 to $400. Another good sign: Ethiopia’s government is upping its level of investment, having directed about 15% of GDP toward large infrastructure projects and having doubled healthcare spending since the late 1990s. Global consumer-products companies are starting to take notice – and action.
Although doing business is only slightly more challenging in Ethiopia than it is in other African countries, starting a business is harder. The government requires higher fees and more capital for start-ups relative to other countries and is strict in its oversight of businesses. Since Ethiopia is a landlocked country heavily reliant on access to the Djibouti seaport, trading across borders is also more problematic. Export times are longer and related costs are higher.
Because of these obstacles, MNCs need patience and persistence to make inroads, but many global leaders in consumer products believe it’s worth the effort. Coca-Cola has designated Ethiopia as its fourth-most-important market in Africa. The company has been in Ethiopia since 1959, now owns two factories, and is investing in three new bottling plants worth a total of $500m. Greig Jansen, then CEO of the East Africa Bottling Share Company, explained the company’s ambitious plans in 2013: “Our strategy is to have a cold Coca-Cola within arm’s reach for all our consumers in Ethiopia by 2020.”
Beer maker Heineken is also investing heavily to capitalise on Ethiopia’s emerging consumer demand. Founded in 2011, Heineken Ethiopia has seen the country’s beer market double in five years. The company invested $220m in two bottling plants and launched an Ethiopian brand, Walia. Heineken’s current strategy is to build on its momentum. The company is investing $120m in a state-of-the-art brewery that will be the largest in Ethiopia and will double the company’s potential output. The next step is to launch the Heineken brand and capture the superpremium market. Jean-François van Boxmeer, Heineken International’s CEO, explains, “We are investing ahead of the curve, and with a long-term ambition to create sustainable businesses. The beer category in Ethiopia has huge potential.”
Consumer sentiment among Ethiopians is also positive. Perhaps because the country’s GDP growth is so strong, Ethiopians feel more financially secure than many other Africans. Their savings rate is the second highest in Africa and it is increasing.