How commerce is evolving in Africa: A conversation with Aubrey Hruby
This article was produced and first published by P&G’s Signal360.
Africa has long been a complex market for many global businesses. Trade and commerce have been fragmented across its 54 countries, with currencies, consumer insights and regulations specific to each. At the local level, consumers have often bought and sold things in open air markets, with cash or even barter of mobile phone minutes.
But a recent pan-African trade deal has begun to streamline the African market, and technologies are giving consumers and businesses new on-ramps. The result? The continent and its 1.5 billion are more accessible than ever.
Aubrey Hruby has advised companies in and out of Africa for the past two decades and is a senior fellow at the Africa Center at The Atlantic Council, a member of the Council on Foreign Relations and the co-author of an award-winning book, The Next Africa.
In this month’s Signal Conversation, Hruby shared insights on how commerce is evolving and the many opportunities for businesses to engage in what is now the world’s fastest growing region.
Welcome to another Signal Conversation. I’m very excited about this one. We have with us Aubrey Hruby, who is an advisor to companies with interest in African markets, working mainly with African policymakers and Fortune 500 companies across 20 distinct African markets. She’s a senior fellow at the Africa Center at The Atlantic Council, a member of the Council on Foreign Relations and the co-author of an award-winning book The Next Africa. Welcome, Aubrey. So good to have you here.
Thank you, John. It’s a pleasure to be here.
So let’s start with your book, The Next Africa, which helps companies understand why Africa is an opportunity to seize and that it’s open for business. Given that – what’s your high-level view on what that means? What makes the African market a great opportunity right now?
There are four megatrends that are really driving that opportunity. The first is demographics. And some say demographics are destiny. It is a large market by people size. So we’re talking today about 1.5 billion, but it is going to 2.5 billion by 2050, where you’ll have one in four people globally be African. And it’s not just that these are any people, they’re young people, so, very young. The median age is somewhere between 17 and 18, which when you compare that to Europe, or to parts like Japan, you see that those regions are shrinking, and rapidly aging. Even China’s rapidly aging. So this is a very young population.
The second trend is that it’s urban. So now, you know, people have these images of Africans as defined by villages and rural life. But in reality, 50% of Africans live in cities, and many of them live in mega cities, cities with 20 million people, like Lagos or Cairo.
The third trend is that they are increasingly connected. So no longer is it a disconnected place where it’s separate from global commerce or global culture. But rather, the smartphone has really connected these young urban Africans to the global market. So you have something like 850 million mobile subscriptions, and something over about 650 million smartphones.
And then, lastly, is this economic resilience. The continent is showing much stronger economic resilience. There are setbacks because growth is neither linear nor smooth, as we know. And so there are setbacks, but the continent bounces back from those setbacks much faster. It’s no longer just dependent on commodities, like we saw in the 1970s or 1980s, but has greater diversified economies. So that growth line is positive over time, and it’s staying more positive. So that’s what makes the market of interest to companies.
That’s some pretty extraordinary growth. And that youth demographic is, I would imagine, culturally, we’re going to see some pretty big impacts over the next 10-15 years with that many young people kind of coming of age, and into the workforce, and as consumers. I’m curious about innovation in the region. At Signal we have focused on several continents and large regions like China or Latin America, where there are some specific innovations happening. Are there innovations specific to Africa, or particular geographic regions of Africa that you might note?
Coming back to that issue of smartphones and connectivity, the smartphone has made a platform for all kinds of innovation. I mean, our lives are defined by them. And that is the same for individual Africans. But it makes, for example, fintech platforms a reality. So financial inclusion is happening over the phone. And you see that because half of all mobile money subscription or mobile money accounts in the world are in African markets. And so mobile money has been a huge innovation. You see the majority of the venture capital that is going from the US to African markets being focused on fintech players. Being able to move money across borders with less friction. And you see that overall, innovation with things like telehealth, and education, and gaming, and all of that kind of venture-backed asset-light industry is really built on the back of this connectivity. So the biggest hubs for it are Nigeria, Egypt, South Africa – large markets where there are many, many entrepreneurs and the venture capital hubs are focused in those places.
Is that also true for the consumer market? From a large company point of view, how does the African continent break down in terms of understanding it as a consumer market? I imagine it’s not just one large market. There’s probably sectors. How do you think about it?
Well, the consumer class is spread across the continent, but you can see it concentrated in some of the largest markets. So you have two-thirds of the African consumer class really split in five markets, South Africa, Nigeria, Morocco, and Algeria, and Egypt. And those large markets really are home to some of the larger cities. You know, when you think about consumer bases, you want to think about cities because your cost of reaching the individual consumers is lower when they’re denser. Your last-mile costs are not as high. So when you think about the city approach, Cairo has the most consumers on the continent by both GDP per capita and size of city. Lagos is next, Johannesburg next, and then Kinshasa. So you’re really seeing the importance of city approaches to doing new market entry for large corporations. They no longer just think about a country and say, I’m going to go to Ghana, they think about going to Accra, and maybe when they’re doing business in Accra, the next place is not Kumasi in Ghana, but rather Abidjan, Côte d’Ivoire. So they’re thinking about city-based market strategies, rather than national strategies, because the consumers are concentrated and easier to reach.
Interesting. Are there specific consumer behaviours that seem to be emerging, or might be indicative of what all these young people in Africa are going to be doing over the next 10 years?
We’re slowly seeing the emergence of e-commerce, slowly, but it’s still a narrow fraction of the consumer base. Many African markets are still defined by a very large informal sector. The informal sector constitutes something like 50% of GDP in some countries. And that’s buying and trading in an open-air market. You can think about the person who’s, you know, you’re stuck in traffic in Lagos and someone’s selling plantain chips between the cars, or they’re selling Coca-Cola between the cars. So you can buy things out your window. And in a way, it’s more real-time commerce than even Amazon can deliver to you, because people are right there. But it’s multi-layers, wholesalers, distributors, super agents, you know, breaking down products into smaller and smaller bundles, and then being sold all over. That’s the informal market. You look out, you see people doing business. Usually, it’s done in cash, and somewhat inefficiently, because there are all these small players operating and they don’t get to scale.
What’s exciting is that there’s a lot of innovation in trying to digitise informal trade. So instead of always buying your pens from the same pen supplier, now, you could probably get on your phone and look at 10 different pen suppliers, even if you’re a little merchant. And now you can price compare and make sure you’re getting the best prices. Before, you always called the cousin who had a truck and he was your delivery guy, but maybe he wasn’t the most efficient delivery guy. Now you can look on your phone and find other delivery guys. So there are these companies that are emerging in this space that are digitising trade. So Sabi is one in Nigeria, Sokowatch is one in Kenya that are expanding across the continent into new markets and making digital trade more efficient by taking it digital. And so that’s an interesting innovation that’s going to open up a lot more consumers.
Often when you enter a new market, you say, who am I? What’s my competition? Who’s competition? And you expect them to be other companies. But often what your competition is in African markets is the informal market. So when you think about Walmart and Massmart, when they went to Nigeria and they’re trying to figure out where to put stores, their biggest competition is not other retailers, their biggest competition is people going to the open air market and buying their products there.
Thinking about how to engage the informal sector is very critical to market success. So there are various options. One, the large players could invest in these start-ups, they can be part of the growth of them as a strategic investor. Secondly, they can have partnerships because they want distribution. So with a P&G Nigeria who wants distribution down these channels, and they want visibility into their distribution. Because right now, what might be happening is they sell to a distributor or a wholesaler, let’s say, detergent, and then they know what happens in that transaction. But then they don’t know what happens in the 10-15 transactions down the line, where their product is actually reaching the individuals. And they don’t actually have a lot of transparency into how that market demand is changing in real time from the individual, they kind of have to rely on the distributor or the wholesaler to tell them that and to do their own survey data here and there. But these new companies will eventually give them real-time data on the activities and behaviours of that end consumer through these informal distribution chains. So I think they will have a relationship with them in some way. But they can also be a strategic investor.
There is an agreement known as the African Continental Free Trade Area that I am not too well versed in, but I’m wondering if you can tell us what that is, and how that might change business in Africa.
Sure, so one of the biggest investment obstacles in the region has been the fragmentation of the market. So while it is 1.5 billion people, and the size, we’re talking in the billions like India, or China, but it’s divided into 54 countries, which have different regulatory regimes, they have different currencies. They have different, you know, rules and regulations. And because of that, it can make it costly to do business throughout the region. And so there’s been an effort to recognise that these small, fragmented markets make it difficult for large companies to invest and we need a larger market. So African governments have come together. And in 2019, they signed on to a continental free trade agreement that would diminish those barriers between the countries and essentially begin to integrate into more of a common market. I think the analogy is, you can think of it more like becoming like the EU, so that goods can move freely between countries, people can move freely between countries, and capital can move freely between countries. Because all in all, we’re trying to reduce the cost of doing business across the whole region. And you need to reduce friction in moving capital and reduce friction and moving goods.
Makes sense. And I’m wondering if you could just as we sort of round the corner here towards home, pull back a little bit. As an observer who reads The Economist or The Wall Street Journal, my understanding of how other regions and large developed countries interact with Africa, it strikes me that most of the headlines over the last few years have been about China really investing in Africa, but not the United States. I may be missing something, but you’re the expert. Is the United States missing an opportunity here in terms of a more focused investment? And is China running away with relations in the region?
Well, first of all, the US is a major investor still, and we’re an investor through American companies. There are some American companies that have been in the region for over 100 years. Coca-Cola and GE come to mind. Then there are a group of companies, P&G is one of them, some of the oil companies are among them, J&J – they came around independence. So that’s almost 50 years ago that they’ve been in the region. So there are many diversified American companies that have been investors. In African markets, the Chinese have come in pretty aggressively since 2000 and the core of it has been financing infrastructure projects. So I don’t necessarily think it’s comparing apples to apples because the US doesn’t finance infrastructure the same way that China does. But what has happened, in addition to the Chinese financing of infrastructure, is that Chinese companies like Transsion, which owns TECNO phones, for example, have invested and they’ve aggressively invested in the continent. In fact, they’ve engineered TECNO phones to be more attuned to market needs to essentially be better, for example, at taking pictures of black faces in low light. So they really focused on building out the market, some of the Chinese companies, and then they’ve also had a lot of small and medium sized Chinese companies come into investing in African markets.
So what I think has happened is that the US hasn’t evolved its commercial footprint, as quickly as the Chinese have, over the last 20 years. We’ve been kind of resting on our laurels, built on the base of a lot of US large company investment. But we are seeing more American tech companies invest so look at what Google, Facebook, they’re putting down billion dollars in undersea cables. Amazon is investing in new facilities in South Africa. So you do see big tech stepping up because they see the demographics. They see that young, urban and connected population, and they know they have to be a part of that. But I would love to see more evolution and speed acceleration of the American commercial footprint.
Well, good advice. And I think that carries over to companies looking to increase business there as well. Aubrey Hruby, thank you so much for lending us some of your wisdom today and appreciate you being part of the Signal360 conversation.