‘The cost of entry into Africa will be higher in the future’

Over the past decade, the number of middle-class consumers in Africa has expanded by more than 60% to 313 million, according to the African Development Bank. This growth is coming off a very low base, setting the table for what could be years, or even decades, of rapid economic progress. The International Monetary Fund projects that 7 of the 10 fastest-growing economies in the world from 2011–15 will be in sub-Saharan Africa, and it expects Africa to take from Asia the title of the world’s fastest-growing region.

Gerald Mahinda

Gerald Mahinda

Such reports form part of an increasing body of evidence demonstrating the existence of a fast-growing consumer class across the continent. Despite this growing evidence, there remains a lack of insight about the reality of doing business in Africa. Many investors and business people still see Africa as a high-risk proposition, which has prevented them from venturing into the opportunity and the potential that this region offers. This has been propagated by media keen on outlining the less-favourable aspects of the continent.

Despite these perceptions, the reality of Africa is quite different. Economists expect to see US$1.4 trillion in spending by African consumers in 2020. Over the next five years, the average African economy will outpace Asian counterparts. The continent is extraordinarily rich in minerals, energy resources and uncultivated land. Although less than half of its land has been surveyed, Africa is thought to hold more than half of the world’s gold, more than 40% of its platinum and vast deposits of copper, diamonds and iron ore.

Large new oil and natural gas fields are being discovered across the patch. According to the United Nations, Africa also holds more than 60% of the world’s uncultivated land, yet only 10% is currently planted. Greater disposable income, a developing consumer banking infrastructure and the sponsorship of entrepreneurs mean more Africans are getting richer; South Africa alone has 71,000 dollar millionaires. The African consumer is not only a reality, but is increasingly empowered to spend.

I am often asked who the African consumer is. It would be short-sighted to qualify consumers as one generic type, such is the great diversity of Africa and Africans. However, the one factor that is common to all is the need to demonstrate new-found economic and social status through quality branded products, and to aspire to brands that reflect inherent values. At Brandhouse, our brands satisfy these needs.

At the recent Ernst & Young Strategic Growth Forum, it was pointed out that consumer segmentation is critical to driving business on the continent. Segmentation is highly pertinent, given the diversities that exist across regions and individual countries, and allows us to market, innovate and create brand experiences across a broad range of consumer segments.

While segmentation is a first step, to be profitable, companies must understand the consumer insights and act upon them with pace. Indeed, every consumer segment is different and, at the Ernst & Young Strategic Growth Forum, delegates were reminded not to forget rural consumers or rule out those at the base of the economic pyramid. These consumers are increasingly enfranchised into the formal sector and offer companies such as Diageo opportunities to participate in this segment.

Critical to building scale among lower-income consumers is to provide products that are accessible and affordable, and therefore routes-to-market and flexible supply chains are crucial. A case that comes to mind is that of Senator Keg, which, through innovation in supply and distribution, along with viable tax structures, has led to a strong performance of the brand in East Africa. I believe that our success can be attributed to a match between the product, a social need and the consumer desire for a quality branded product.

The African consumer is a reality. Many investment opportunities on the continent are under-researched, underappreciated and, consequently, undervalued. African investments are currently cheaper relative to their growth potential. Businesses that choose to ignore this fact do so at their own peril, because the cost of entry into Africa will be higher in the future.

Gerald Mahinda is managing director of Brandhouse, a joint venture in South Africa between international beverage companies Diageo, Heineken and Namibia Breweries. Born in Kenya, Mahinda was MD of East African Breweries before taking up his current position. This article first appeared in Ernst & Young’s 2013 Africa attractiveness survey.