The third edition of Nielsen’s Africa Prospects Indicator (APi) report shows that for Africa, 2016 is proving to be ‘the year of change’ with a fair degree of re-forecasting required from a growth point of view due to the at-times volatile nature of the 26 African markets under review.
Nielsen’s Emerging Markets Thought Leadership head Ailsa Wingfield comments, “Africa must still be viewed as a long-term prospect and companies who enter its markets need the stamina to weather both good and bad market conditions. This is vital because despite the continent’s obvious potential over the next 10, 20 and 50 years, it seems that investors have to a certain degree been seduced by short-term numbers.”
This is apparent given that six of the top nine countries have shifted in position over the past six months. These include Nigeria, which dropped four places due to the rebasing of its currency and commodity price volatility; Zambia, largely due to a spike in its inflation over the last six months from 6% to 23%; and South Africa, as it fell one position from seventh to eighth in the overall rankings.
On the plus side, Cote d’Ivoire, Kenya and Tanzania maintain first, second and third place on the latest prospects ranking and currently provide more stable investment destinations than the larger economies of Nigeria, South Africa and Angola.
Overall ranking indicators for nine of Africa’s leading markets
Looking at the specific reasons why Zambia has plummeted from fourth place to ninth position, the country’s worsening consumer and retail prospect indicators are due to sky-rocketing inflation, electricity shortages and a poorer macro-economic environment which is heavily reliant on the resources sector. Zambian retailer confidence in terms of growth outlook also declined substantially as consumer spending fell sharply due to food inflation which increased from 7.8% in quarter three, 2015 to 26.4% in quarter one, 2016.
In sharp contrast, there is a positive shift in Ghana due to improvements in power supply, exchange rates and a stabilisation in inflation. With a stable growth outlook, business views are at their most favourable levels since quarter two, 2014.
Cote d’Ivoire’s top position on the APi ranking is backed by the International Monetary Fund’s (IMF) forecast of it being Africa’s fastest-growing economy in 2016, with the country benefitting from government policies and structural reforms, which have resulted in strong inclusive growth. In the hot spot positions of second and third ranking respectively, both Kenya and Tanzania also feature highly for business-focused growth opportunities.
Nigeria topped the inaugural list in quarter one, 2015, but has since dropped to fourth position in the second half of 2015, and currently falls a further three places to seventh position. Its retail, macro and business prospects have deteriorated, following the slump in commodity prices, in particular oil, along with power supply issues, the foreign exchange crisis and the naira devaluation.
South Africa’s decline to eighth position sees economic uncertainty, political tension and lower business and consumer confidence slowing investment in what is known as Africa’s most industrialised economy. This is exacerbated by rising food inflation due to severe drought, high unemployment, a weakened currency and increased lending rates putting a squeeze on disposable income. Despite an overall depressed economic growth figure of –0.2, retail spending has kept favourable momentum.
Business prospects and growth expectations
The markets topping the Business Prospects list in terms of overall country growth expectations are Ethiopia, Ghana and Namibia, with Ethiopia’s leading position remaining unchanged for the third successive survey.
Businesses rank their own growth prospects highest in Botswana, followed by Ethiopia and Namibia/Mozambique. This measure represents the ability to which businesses can execute in-market and achieve sustainable growth, considering the various country conditions.
South Africa has the biggest divergence in country growth versus own business expectations, where own business potential is scored as fair to good at 5.6 (out of 10); whereas business views on the overall country growth is scored at a more moderate 4.1. In terms of country growth expectations, South Africa dropped eight places from 14th to 22nd position, but still ranks a more favourable 12th for own business potential.
Ghana has seen one of the biggest recoveries in overall business outlook, moving up six places to fifth position.
Consumer prospects and confidence levels
The Nielsen Consumer Confidence Index reflects a fall in consumer confidence levels for both Nigeria and South Africa. In Nigeria, favourable outlook for job prospects dropped eight points to 65%, with sentiments towards personal finance dropping three points to 79%, and immediate-spending intentions dropping eight points to 42%.
In contrast, the South African consumer psyche is more pessimistic. As in Nigeria, all three confidence indicators dropped versus the previous quarter. The positive outlook for job prospects sits at 19%, favourable personal finance sentiment at 49% while only 22% of South African consumers currently view it as a good time to buy the things they want and need. Despite the cautious consumer sentiment, the South African retail spend does not reflect a picture quite as pessimistic, with annualised retail growth at 9%.
The greatest improvement in the outlook for consumer spending is in Côte d’Ivoire and Ghana where 23% (up eight percentage points) and 20% (up six percentage points) respectively, view spend increasing.
Retail prospects and in-store spend
The mounting pressure on consumers’ wallets has constrained consumer spending in-store. In quarter one, 2015, on average, 29% of sub-Saharan Africa retailers felt that spend in their stores was increasing; by quarter three, 2015 this had dropped to 26%; and currently has fallen to less than a quarter (24%) of retailers who view spend on the increase.
Although the positive sentiment for increasing consumer spend is highest in Nigeria at 30%, the outlook has declined from 43% a year ago.
In tougher times consumers are less likely to try out new products; currently 39% of retailers feel that consumers are increasingly willing to try new products versus 44% a year ago, and 54% two years ago. Consumers are instead, making purchasing choices rooted in familiarity, trust and previously tried brands, outstripping choices based on affordability alone.
In-store brand performance is the most indicative measure of success for brands in the market. In cash-strapped times, brands often rationalise investment in marketing, sales and distribution to maintain profitability. In modern, branded retail environments such as South Africa, however, promotional intensity increases in an effort to maintain sales velocity. Consumers implement a combination of coping mechanisms such as reduced shopping frequency, switching to cheaper brands or smaller sizes, eliminating non-essential products from their basket and delaying replenishment.
Tactical adjustments required for volatile markets
The recent volatile growth outlook and returns require a large dose of resilience, especially in the larger, headline markets of South Africa and Nigeria. Investors must plan for both the short and long term, and adapt to changing market cycles by understanding and integrating all the dynamics determining success.
Wingfield adds that, “Perhaps those seeking to do business in Africa would be wise to ‘test the waters’ by investing in smaller markets like Uganda, Zambia or Tanzania and master the ‘on the ground realities’ in those countries, before jumping into the big league economies that are often buffeted by strong commodity and currency trade winds.”