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Picking products for Africa’s growing consumer markets

The rapid expansion of Africa’s consumer class should convince companies to consider entering a region that many have avoided in the past.

June 2010 | byEirini Drakaki, Udo Kopka, and Taro Nordheider

Africa represents a large and growing opportunity for fast-moving consumer goods companies and retailers. In 2008, the combined GDP of African countries was nearly $1.5 trillion—larger than that of either India or Brazil. Africa’s real compound GDP growth, about 5 percent annually between 2002 and 2009, was on par with Russia’s and significantly higher than those of developed countries.

To gain a better understanding of the opportunities Africa presents, we examined its real and anticipated economic growth. We forecast total growth in compound annual GDP per capita of 4.5 percent until 2015, which will boost consumer spending by more than 35 percent. With population growth of 2 percent and continued urbanization, we estimate that 221 million basic-needs consumers will enter the African market by 2015. As a result, the total number of nations with more than ten million consumers and with gross national income exceeding $10 billion a year will increase to 30, from 22 today.

This rapid growth creates an opportunity for suppliers and retailers of fast-moving consumer goods. Using historical category-growth data and knowledge of local markets, we developed what we call the “growth compass” to prioritize product categories by opportunity and to select the appropriate market entry or investment strategy given market conditions and a company’s capabilities. In a diverse, fast-growing region that remains opaque to many companies, this approach provides a roadmap for establishing a presence.

Forecasting category growth

GDP per capita is the single most important driver of global growth in the consumption of fast-moving consumer goods, accounting for an average of around 73 percent of total growth across 60 product categories. While the influence of other factors, such as education and local customs, varies between categories, GDP per capita dominates how much money people spend in Africa because most markets are in the early stages of development. As a result, product-category growth of fast-moving consumer goods typically follows a classic S-curve (exhibit). The exact shape is determined by a country’s growth multiplier—the percentage increase in the category’s sales per capita associated with a one-percentage-point increase in real GDP per capita. When the multiplier is low, the curve is relatively flat; when it’s higher, the curve becomes steeper. The opportunity for sales growth in a category is greatest in the steep part of the curve.

Exhibit

GDP in the driver’s seat

For the fast-moving consumer goods sector in Africa, GDP per capita is the single most important explanatory variable for category growth.

The initial flat part of each curve shows the levels of GDP per capita that make a product too expensive for most potential consumers. At this point, market penetration grows more slowly than GDP per capita—we refer to this period as the “warm-up zone.” But as GDP per capita continues to grow, a product category eventually reaches its takeoff point, which varies by category, depending on the consumer needs it fulfills. After the takeoff point, penetration growth accelerates significantly and often exceeds GDP per capita growth. Since this is where the greatest opportunities lie, we call it the “hot zone.”

At an even higher level of GDP per capita, categories tend to reach a saturation point, which, for instance, can result from physical limitations (such as maximum calorie intake) or time constraints. Finally, in the “cool-down zone,” penetration generally remains flat, despite potential GDP growth, and consumers start to direct their incremental expenditures to different product categories. At this point, other factors have a large impact on category growth and companies must develop a deep understanding of them.

Turning the opportunity into profit

Once a company understands where a product category in a given country lies along the S-curve and the factors that influence the category’s position, the company can make more accurate forecasts of a category’s potential and select the appropriate investment strategy. Successful entry typically occurs just before a market enters the hot zone, when companies can act with speed and scale to take advantage of rapidly increasing consumer spending.

For companies examining a product category in a more established market, a different approach is required. In countries with low GDP per capita, for example, sales of dishwashers are minimal and increasing only slowly. Yet in South Africa, the dishwasher market is in the middle of a hot zone: consumer spending patterns have shifted in recent years as a result of the emergence of a black middle class, high rates of urbanization, and the proliferation of stores offering credit cards. Companies considering entering the market must evaluate the relatively high cost of pushing into an already competitive environment to determine whether a sufficient return on investment is possible. If a category has peaked and is approaching the cool-down zone, the appropriate strategy will likely be to target investments elsewhere.

Africa presents a solid opportunity for producers and retailers of fast-moving consumer goods but requires strategies tailored and executed market-by-market to account for different rates of economic growth and local consumer needs and preferences. In addition, speed is very important. Companies that can quickly establish a foothold or expand their presence will be well positioned to capture the value at stake as the continent’s consumers increase their spending in the years to come.

About the authors

Eirini Drakaki is an associate principal in McKinsey’s Athens office, Udo Kopka is a director in the Hamburg office, and Taro Nordheider is a principal in the Munich office.

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