frica’s favourable demographics together with its promising outlook in terms of economic growth mean the purchasing power of the continent’s large consumer market is expected to increase significantly over the medium- to long-term. This presents lucrative opportunities for investment in consumer-focused industries, including retail.
Africa is home to more than one billion people, presenting a massive potential consumer market. According to a report by the African Development Bank (AfDB), some 122.7 million Africans are now classified as ‘middle class’ (daily per capita expenditure of between US$4 and US$20), 30 percent higher than in 2000. The AfDB further estimates that there are a total of 190.6 million people on the continent that spend between US$2 and US$4 daily, many of whom will join the middle class over the next decade.
Moreover, population growth remains rapid, so much so that the UN forecasts the continent’s population will surpass the 1.5 billion mark by 2030 and two billion by 2045. By 2071, Africa is forecast to be home to close to three billion people, more than the projected combined populations of China and India at that time.
A swelling working-age population
UN projections suggest that sub-Saharan Africa (SSA) will experience a prolonged period (between 1990 and 2075) during which its working-age population will expand at a faster rate than its overall population. The difference between the two growth rates is expected to reach a peak in 2035. In North Africa, the change started some 15 years sooner, and is expected to last 20 years less. Although declining, SSA’s dependency ratio is still very high due to the large number of young people in the population. But towards the end of the current century, SSA’s dependency ratio is forecast to be lower than that of India, China, and North Africa.
This period will give the region the chance to boost consumption spending power significantly, provided there is sufficient job creation.
In contrast to the developed world where people are getting older and increasingly moving into retirement age while at the same time fertility rates have declined drastically, in Africa and other developing countries, young people still dominate the population; this is expected to continue to be the case for a number of decades to come. Thus, while in Europe and the US private and public funds will have to be directed at supporting the elderly, in Africa resources will be freed up as people go from being dependents to income generators.
Increasing but uneven urbanisation
Africans are increasingly moving to cities, making it easier for companies to target certain consumer groups, since purchasing power in urban areas is usually higher than in rural areas and infrastructure is also of better quality. With this being so, studying urbanisation trends is key to understanding consumption patterns.
In SSA, the urbanisation rate increased from 24.1 percent in 1980 to 36.3 percent in 2010. There are however vast differences within SSA; the urbanisation rate of East Africa is much lower than the rest of the SSA region, and projected to remain lower over the next few decades as well. The fact that East Africa has such a low urbanisation rate is understandable given the importance that subsistence agriculture still plays in the economies of these countries. For SSA as a whole though, the urbanisation rate is projected to continue to increase at a rapid pace, reaching 43.2 percent in 2025.
Steadily growing PPP
Over the next few decades, a more educated cohort of young people will enter the labour market, leading to the rise of a wealthier middle class that will fuel growth in the services industry. Botswana, Mauritius, and South Africa have purchasing power parity (PPP) adjusted levels of GDP per capita that are amongst the highest on the continent, while countries such as Mozambique, Ghana, Zambia, Tanzania, Ethiopia, and Libya are expected to show the highest growth in this indicator over the 2011-17 period. (Libya’s forecast growth rate is the highest due to the sharp fall in income as a result of the uprising at the beginning of 2011.)
We estimate that in 2010, close to 579 million Africans earned $1,000 or less p.a. (expressed in 2000 constant US$ throughout). This is up from 529 million Africans in 2000, even though the percentage of people falling in this bracket declined from 77.6 percent of the total to 67.9 percent over the same period. This trend is expected to continue.
Despite people continuing to move up the income bracket, population growth will ensure that the size of this market increases, reaching 662 million by 2020, and 702 million by 2030. Encouragingly, the size of the $1,000 to $2,500 income bracket is expected to increase at an even faster pace, reaching 228 million (21.6 percent of the total) by 2020 and 304 million by 2030 (23.6 percent) from 183 million (21.5 percent) in 2010.
In summary, we expect Africa’s retail sector will be supported in the coming decades by a growing, youthful population that is rapidly migrating to urban areas. Combined with increases in consumer incomes and improvements in the ease of doing business, it is clear that Africa’s retail sector presents ample opportunities for investors.
Source: KPMG Africa’s Blog