Africa provides a brand new opportunity

As companies find revenues squeezed in the West following the 2008 crash, international operators are moving into the huge continent to take up the slack.

Pedestrians pass an advertisement for the Nokia Asha 205 smartphone in Nairobi, Kenya. Trevor Snapp / Bloomberg

For five years, consumer spending in Europe and the United States has dwindled in the aftermath of the financial crisis.

Companies have responded by looking for new markets for their products. Luckily for them, consumer spending in Africa has risen over the same period and the trend is expected to continue.

A recent report by the consultancy McKinsey found even before the financial crisis, less than a third of Africa’s GDP growth was attributable to resources while 45 per cent came from consumer-facing sectors. Boston Consulting Group (BCG) recently concluded a 10,000-person consumer study in Egypt, Morocco, Algeria, Nigeria, South Africa, Angola, Kenya and Ghana that highlighted rising incomes as a cause of higher spending. In 2001, 104 million people had an annual income in excess of US$2,700. By 2011, this reached 184 million and may rise to 257 million by 2020, BCG said.

Spending in Africa’s consumer-facing industries is expected to increase by hundreds of billions of dollars by 2020. This represents a great opportunity for companies from all over the world. By 2040, Africa will have a larger working-age population than China or India. The continent’s vast young population is particularly appealing, as surveys have shown consumers in Africa generally display greater brand loyalty than buyers elsewhere in the world.

Africans tend to be more optimistic about their economic prospects than people in other parts of the world, and this tends to push up spending. BCG has found that to be the case in all the countries it surveys with the exception of Angola.

“I would say that there is a lot of optimism in Africa, except in Angola,” says Lori Spivey, an emerging markets expert at BCG. “The rising optimism in Africa is even stronger than what you see in China and India.”

African consumers typically spend a higher proportion of their budgets on goods in relation to other necessities than other consumers. “People in the US or Europe might spend about 25 per cent of their budget on rent yet it was much less of a percentage [in Africa where] more was spent on cell phones and other status symbols,” says Ms Spivey.

While value for money is an important factor, quality often trumps price, particularly on items designed to last.

“Across all of the consumers you see this willingness not to just go for the cheapest price,” says Ms Spivey. “They want the right trade-off between price and quality … we saw that there is a higher willingness to spend for more durable products such as clothing, mobile electronics, standard electronics and computers – basically, things that last and have status associated with them.

“What people were less willing to pay more for were beverages and food … Typically outside of the food category we saw a high willingness to ‘trade up’.”

The percentage of respondents in BCG’s survey who were likely to spend more on non-grocery categories was 45 per cent, compared with 18 per cent in the US, 29 per cent in India, 22 per cent in Brazil and 34 per cent in China.

About 53 per cent of Africans in McKinsey’s 13,000-person survey said price determined where they shopped for groceries. While consumers were price-sensitive, quality products were still popular, even if they were a bit more expensive. For instance, the Indian motorcycle manufacturer Bajaj Auto entered the Nigerian market with its Boxer motorcycle priced 30 per cent higher than Chinese models already on the market and still became the best-selling motorcycle in Africa.

Price sensitivity is greater in some markets more than others.

“In a wealthier market, like South Africa, only about a third of respondents said they spent a lot of time searching for the lowest price, compared with more than half of respondents in Ethiopia,” BCG says in its report.

To target African consumers, the consultancy advocates building a local presence through local suppliers, product portfolios, distributors and market intelligence. Some companies decide to do this by acquiring a local company and building it up under the firm’s international name.

“To demonstrate its commitment to accelerate growth in Africa, [L’Oréal] purchased the make-up portfolio of Kenya’s Interconsumer Products,” says a spokesman for the French cosmetics group.

“Its products, alongside the existing Soft Sheen Carson brand, help enlarge our portfolio of products specific for African consumers.”

Companies such as car manufacturers have often succeeded when they have identified needs specific to consumers in Africa.

“The climate is very different in Africa. There are big temperature ranges and very resistant cars are needed,” says Liviu Ion, Renault’s director of market and product studies.

“Also, people need very good air conditioning and resistant tyres.”

The vehicle market in the continent is also diverse.

“South Africa is a little more developed so you see more passenger cars,” says Mario Spangenberg, the president and managing director for General Motors Africa.

“Certain parts of North Africa are the same but large parts of the continent use pick-up trucks and buses because the infrastructure is so bad still.”

Some secondary features on products sold in Europe and the US become big selling points in Africa. “While [it] may seem strange to most first-world consumers, one of the most popular features on Nokia phones in Africa is the torch,” says a spokesman for the Finnish mobile maker.

“Something this simple is a major asset when electricity is unreliable. This is the same for long battery life.”

Other examples of companies that have tweaked their products to suit African markets include the British brewer SABMiller. It makes a beer using cassava, a root vegetable widely found in Africa.

Meanwhile, LG removed its “frost-free” capability from its refrigerators for markets where to see frost reassures buyers their is working.

Tailoring the available sizes of luxury goods can also be a good way of drawing a larger market. “Some of the lower-income consumers might want to buy the products but they don’t have enough money so the company can keep the same product but modify the packaging size,” says Ms Spivey.

But with some international brands, customers in Africa are looking for carbon copies of the original products.

“You have some products where the international version is revered and loved and people want it exactly like that,” says Ms Spivey.

“In other situations it does need to be modified somewhat. The marketing might take on an African twist. It depends on the product category.”

Nevertheless, breaking into African markets can be a challenging and costly exercise. And while urbanisation is increasing, a majority of Africans still live in rural areas making distribution and marketing tricky.

“I think the question for a lot of companies is how far do you want to go … and how big is your commitment to Africa?” says Ms Spivey.