Growth and opportunity in Sub-Saharan Africa

When looking for investment opportunities, global companies have a number of factors which they have to weigh up. One of these is obviously the levels and rates of growth in a specific region. This is because average rates of growth are a good indicator of how their potential investment can perform. It is therefore, encouraging to know that sub-Saharan Africa is the second-fastest growing region in the world.

According to a recent report by Euromonitor International the real GDP of the region expanded at a compound annual growth rate of 5.2 per cent equating to an increase from US$913 billion in 2005 to US$1,5 trillion in 2015 according to figures it obtained from national statistics, the United Nations, the IMF and International Financial Statistics.

This is not to say that the region is without its share of problems including infrastructure and distribution bottlenecks, inadequate education, rampant corruption and poor political accountability. However, despite these challenges, the outlook is still very positive for the region which is placed second to Asia Pacific.

Sub-Saharan Africa is in the fortunate position of being rich in natural resources and as such has benefitted from the increasing global demand for raw materials. As a result there has been a significant increase in the direct investment inflows, the majority of which has been into the manufacturing and services sectors. The region is also experiencing a surge in population levels. While this has its benefits, contributing to the workforce and as such to the economy of the region, it is also a contributory factor to some of the problems in the region such as higher levels of unemployment and criminality.

Cities play a vital role in the improvement of sub-Saharan Africa’s economic improvement. These areas host key infrastructure assets and educational facilities which relates to more investments and diversified labour markets.

Given the importance of cities, it is small wonder that South Africa is one of the most developed and established retails markets in Africa. It has the highest level of disposable income and its share of modern retail channels in the retail environment is estimated to be about 60 per cent, while the rest of the continent’s average modern retail penetration is estimated at between 5 and 25 per cent. It is not surprising that the outlet presence of leading international brands is the highest in South Africa cities, specifically within Cape Town and Johannesburg.

Despite this dominance by South African cities, growth will also increase elsewhere. While countries such as Kenya, Nigeria and Cameroon, among others, have a low proportion of formal retailing, this offers significant opportunities for growth, albeit coming off a low starting point. Add to this the political and economic instability currently being experienced in South Africa and the opportunities outside of South Africa start to look more inviting.

The report states: Top corporations are already recognising the importance of having a broader mindset and are choosing business locations that align with their priorities. For instance, a sizeable pool of skilled potential employees and a strategic geographic location is what prompted General Electric (GE) to move its regional headquarters from Johannesburg to Nairobi in 2011.

Another factor which is both an advantage and a challenge is the fact that it is the least urbanised region in the world with only 38 per cent of the total population living in cities as of 2015. This region lags behind other emerging regions such as Asia (44 per cent) and Latin America (80 per cent). Sub-Saharan Africa is projected to see its urban population surge by 74 per cent from 2015 to 2030. In real terms, the number of city-dwellers is expected to increase by 268 million.

In 2015, the top five sub-Saharan African cities with the biggest market sizes in terms of consumer spending were Lagos (US$37.5 billion), Johannesburg (US$31.2 billion), Pretoria (US$20.4 billion), Cape Town (US$19.7 billion) and Durban (US$14.3 billion). The cities are home to some of the most sophisticated consumer markets in the region. Only three cities in sub-Saharan Africa recorded more than half of all households in the over $10 000 income bracket, often considered the international benchmark for middle-class households in emerging regions.

While the top five urban consumer markets will remain the prime spots for investment, the saturation of South African cities is becoming visible. From 2015 to 2030, Lagos, Johannesburg, Pretoria, Cape Town and Durban will together account for 53 per cent or US$88 billion in constant value terms of absolute increase in combined consumer expenditure. However the markets of Kenay and Cameroon will feature soaring growth rates.

Other markets which stand out for their fast-paced growth include Nairobi and Abuja, while cities such as Mombasa, Kisumu, Douala and Yaounde will also become attractive for investment. The result will be increasing levels of urbanisation driving further infrastructural growth and increased purchasing power.

The Challenges
Multinational companies must carefully consider three major common challenges in sub-Saharan Africa: growing competition from local providers, severe shortage of shopping infrastructure and transport and logistics bottlenecks. Multinationals need to gain context into the infrastructure of a city prior to expanding. This means being proactive in determining the challenges and finding creative methods of overcoming or circumventing them.

Sub-Saharan Africa is making its way towards a stronger and more diversified economy with plentiful and profitable investment opportunities and higher living standards for the growing population. At the same time, sub-Saharan cities are diverse and it is important to consider profiles as well as the future consumer market trends in each city to capitalise on the positive economic momentum. While the major markets of South Africa have been a driving force in establishing consumer markets, they are also projected to ‘run out of steam’ due to rising saturation.

As such focusing on South Africa urban centres and ignoring the potential in the rest of sub-Saharan Africa represents a short-sighted view in the region. However, one thing the report does not allude to is the fact that many of the other first-tier and second-tier cities in the region find South African cities as aspirational and as such are emulating their models. This bodes well for multinational wanting to use South Africa as a launch pad for their investments. There is the need for understanding of the commonalities associated with cultural similarities.

Companies entering or expanding into the region will have to be certain of the data they use to determine future locations.