There has been a noticeable improvement in economic growth in Africa since the turn of the century, driven by an improvement in the business environment and investment climate, and a decrease in aggregate political risk. Notwithstanding short-term downside risks, the rise of the African consumer’s wealth profile should continue to draw the attention of luxury brands seeking to unlock emerging and frontier market growth potential as mature luxury goods markets could no longer maintain double-digit growth.
The global luxury goods segment has reached a more mature phase in recent years, with slower but more readily sustainable growth potential. Global macroeconomic headwinds have hurt traditional markets of luxury goods and services, such as the euro zone and Russia, while threatening to stifle burgeoning demand for luxury goods in emerging and frontier markets. Africa has not escaped the brunt of macroeconomic headwinds brought about by global monetary policy divergence and broader commodity price weakness, and key markets for luxury goods may suffer a slowdown in demand as consumers’ disposable income decrease especially in commodity-dependent countries. However, the continent continues to hold strong medium-term economic growth potential, and intra-regional differentiation is increasingly coming to the fore with base commodity importers earmarked as clear winners.
Defining Luxury Goods
At a simplistic level, luxury goods can be defined as products and services not essential to basic needs, for which demand rises more than proportionally than a rise in income. The evolution of consumer demand for retail goods can be visualised as moving upwards within a pyramidal scheme, with the largest and lowest category labelled accessible goods. Progress in personal wealth conditions sees the consumer advancing to aspirational (logo) goods, whilst the highest bracket presents absolute (high end) goods, preserved for consumers with considerable purchasing power. As such, luxury goods have a high income elasticity of demand; in other words, as consumers accumulate more wealth, demand for luxury goods should rise. A simple proxy for the net change in aggregate disposable income is therefore the change in GDP, and GDP per capita levels.
Generally, the demand for luxury goods should be positively correlated with an upward trajectory in economic growth as well as an appreciatory trend in the local currency unit (per US dollar).
African Growth Picture
Africa’s stellar economic performance over the past five years can partly be ascribed to cheap artificial liquidity on the back of dollar-negative quantitative easing (QE) mandated by the US Federal Reserve (Fed), which benefited the continent via both improved capital and portfolio inflows, and artificially strong commodity prices, which buoyed economic expansion. In addition to fundamental drivers, the end of dollar-negative stimulus however rang in broader commodity price weakness, which placed the spotlight on African commodity exporters’ dependence on extractive sector products for the bulk of export receipts. This single commodity dependence warned of the adverse effects of a weaker commodity price environment on numerous countries’ external and fiscal positions, and subsequently threatens a slowdown in economic growth.
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Source: KPMG Africa Blog
