Steven Moore for HBR
The retail scene in Africa has undergone a rapid transformation. A few years ago, many staple Western goods were hard to come by in some markets. Now, branded items — from luxury cosmetics to fast food and fast fashion — are becoming widely available at the glittering new shopping malls scattered around the region’s fast-growing cities.
Take the new Two Rivers Mall in Kenya’s capital, Nairobi. Completed in February 2017, it is eastern Africa’s largest shopping venue, housing grocery chains, restaurants, and luxury boutiques. But visit Two Rivers on a weekday, and the vast complex is empty. Why? Locals will tell you the mall is inconvenient to get to, and despite poverty levels in the region falling amid strong economic growth and foreign investment, the products sold there are too expensive for Nairobi residents to afford.
Nairobi’s New Two Rivers Mall Is the Largest in Eastern Africa
The problem points to a larger conundrum facing multinational corporations (MNCs) that had hoped to tap Africa’s one-billion-strong population and its much-vaunted “middle class“: Sales and profits in these markets have not lived up to businesses’ expectations. (Note: When we use “Africa” in this article, we’re referring to the 49 countries south of the Saharan Desert, not the five countries to the north of it, which have different cultural and economic dynamics.)
While the region is home to some of the fastest-growing economies in the world, and while consumer spending power in Africa has risen (from US$ 470 billion in 2000 to over $1.1 trillion in 2016), some MNCs are finding that their business in the region is underperforming. In a survey of 20 senior executives working in Africa whom we work with, six said they struggled to hit revenue targets last year. Others also mentioned disappointing results, in some cases prompting them to deprioritize Africa in their global strategies, while others are keeping their heads down in the hope that business conditions will change and make it easier to hit their targets.
Yet neither of these approaches addresses the real problems at play. Our research shows that MNCs are making three mistakes in Africa:
Companies set unrealistic targets due to misunderstanding the drivers of consumer spending power.
Companies underestimate the extent to which local factors determine how, where, and why consumers make purchasing decisions.
Companies are not considering how the consumer class (which we define as those living on US$ 3.90 and above per day, the point at which people can spend beyond mere survival) is changing across the region.
Realizing the opportunity in Africa demands that businesses rethink their strategies. Despite some markets slowing because of the commodity price downturn (for example, Nigeria), we nevertheless forecast total annual consumer spending in the region to reach US$ 2.5 trillion by 2025. Regarding the first mistake companies make, our analysis uncovers two adjustments they need to make:
Do not rely only on headline economic indicators. Companies’ estimates of the consumer opportunity in Africa tend to be based on GDP and demographic growth data. These are misleading because they do not reflect how wealth trickles down through the economy. In many of the fastest-growing African markets, average purchasing power is very low because economic growth has not created well-paying jobs, but instead has created a small elite class and a large poor population with little spending power. As a better measure of purchasing power, we created the Consumer Class Conditions Index (CCCI), which ranks markets according to how easily wealth filters through society. This tells us whether a broader swath of consumers are able to make purchases on a regular basis. The ranking is based on thousands of aggregated data points, such as a country’s rate of formal job creation, education levels, and welfare provision.
Do not overlook the informal economy. Doing so leads to misunderstanding what drives consumer spending power. For example, our analysis finds that over 50% of working adults in Africa earn their incomes from informal activities that are not reflected in official income statistics, with most earners combining multiple informal incomes. While this means spending power is likely higher than official data indicates, it complicates the task of predicting shifts in consumer demand.
Proxy indicators can help companies better understand people’s dominant sources of income — and forecast sales more accurately. For instance, in markets such as Ethiopia, where farming is the main income source for 80% of people, rainfall quality is a reliable predictor of fluctuations in consumer demand because it determines the quality of harvests, and thus the income people receive.
The second area MNCs need to rethink is what ultimately drives consumer decisions. Here we find that companies’ product, pricing, and marketing strategies are often informed by myths:
Myth #1: Africans are conspicuous consumers. African consumers are often depicted as shoppers interested in luxury brands, a narrative driven by media stories of, for example, rising champagne consumption in Nigeria and Angola. This perception leads MNCs to overestimate demand for status-enhancing products. After all, the average consumer allocates most of their spending (75%) to basics such as food and transportation. Our research also indicates that consumers are generally conservative in how they allocate their money: They value saving and education, and prize durability over flashiness when buying higher-cost items.
Take Kudzai, a hairdresser living in Harare, Zimbabwe, who told us she needed to save for months before being able to afford a microwave. When she eventually could, she made sure to avoid the cut-price models sold at the new Chinese stores popping up in the city. Instead, she opted for a more expensive Japanese brand because she could not take the risk of investing her savings in a product that might break down.
MNCs need to ensure they are connecting with these priorities and offering products and services that align with local consumers’ values and needs. Companies cannot assume economic growth will automatically create demand for flashy goods, or that poorer consumers will accept lower-quality products.
Myth #2: They are adopting Western habits. There is a common belief that as Africa develops, it will become increasingly Westernized. While consumers are acclimatizing to some products that were uncommon only a few years ago (cheese, for example), our ground research points more to continuity than to change. For instance, even middle- and upper-middle-income consumers continue to prefer shopping for staples in open-air markets rather than in malls, believing them to be fresher and to offer better value.
Similarly, traditional ties between individuals and large family networks remain a major feature of life in Africa. Take Kofi, a public relations executive in Accra, Ghana, whom we interviewed: He earns a good monthly salary but sends 20%–30% of his earnings at the end of the month to support relatives living in his home village. While these transfers mean he has less to spend on himself, they increase the spending power of his family members in his rural village. Consumers like them (who tend to lack job opportunities) consequently have more to spend than MNCs typically assume, but they are often overlooked as a target segment. This local reality of pooled and shared resources is often not reflected in standard employment and incomes data. MNCs thus need to refine their assumptions about who their customers are and what their purchasing power is.
Finally, companies need to let go of the idea that Africa will see a China-style consumer “revolution.” While the consumer opportunity is large, growth in the consumer class will be modest. We forecast that the size of this group across Africa as a whole will increase by 4.4%, on average, by 2020, growing the customer base from 250 million people to 290 million — a steady but certainly not revolutionary expansion — by the end of the decade.
Each of the countries in Africa will evolve in diverse ways. Some, such as the Democratic Republic of Congo, will continue to perform poorly on our CCCI and see limited consumer class growth, because wealth is poorly distributed throughout the population. Others, such as Kenya, will keep performing well, though consumers there will continue to spend cautiously due to cultural attitudes prioritizing saving and support for extended family networks.
In short, to succeed in the continent, MNCs need to understand how these markets are changing, expand access to broader groups of consumers, and provide offerings that are tailored to specific countries.