Analyzing global business in Africa

This essay investigates whether Canadian small-time investors should expand their businesses into Africa. Threats and opportunities to the economies of Africa are looked at in order to give the needed response. The risks that Canadian investors must take into account include political unrest, extreme poverty, and unemployment. As a result of the continent’s rising population, GDP, and technological advancement, on the other hand, Africa has emerged as the next big thing. Africans now have easier access to internet services, such as mobile banking, which affects their spending, thanks to more affordable Internet and smartphones. While the risks posed by African economies are real, the argument in this paper demonstrates that Canadian retailers need to look past these threats and seize opportunities associated with the African Retail industry.

Introduction

The retail industry in Africa is slowly growing. Currently, as economies rise and a culture of shopping is emerging, the retail opportunity in Africa is increasing now compared to past decades (AT Kearney, 2015). According to the 2016 KPMG report on African consumer and retail sector, demographic, macroeconomic, and spending patterns are key drivers to the growth of Africa’s retail sector. The continent has also emerged as one of the continents with a significant number of people (more than 1 billion), a factor that presents retail companies with a massive opportunity (KPMG, 2015). A report by the United Nations on population growth provided that by 2026, the population of Africa will hit the 2 billion population (KPMG, 2015). The gross domestic product (GDP) of Africa’s economies has also increased substantially. Between 2005 and 2010, Africa’s economies GDP grew with a rate of 4.7% (AT Kearney, 2015). Yet, while Africa, and specifically Sub-Saharan Africa is being described as the “Next Big Thing”, there are still doubts on whether to invest in this region. The report by The Economist Intelligence Unit has identified various factors which cause doubts in the minds of investors when it comes to investing in Africa. The report identifies the need for investors to go beyond demographic, economic growth and population growth when making decisions to invest in Africa. This is because while GDP has a strong growth, the growth originates from low base (The Economist Intelligence Unit, 2015). In addition, Africa is still regarded as a home of poor consumers and income inequality (The Economist Intelligence Unit, 2015). As such, poverty in Africa is still a significant issue, as well as an issue that can deter the growth of any business. In view of the concerns, this paper considers whether Canadian investors should increase their investment in the retail space in Africa.

Canadian Investors Increase the Investment in the Retail Space in Africa

A significant number of economists have questioned Africa’s economic development. Writing for McKinsey & Company, for instance, Bughin et al. (2016) consider as to whether Africa’s economy is running out of steam. According to Bughin et al. (2016), a significant number of investors, business leaders, and policy makers are observing the effect that lowers resource prices and higher levels of sociopolitical instability have on the GDP of the continent. As described by Bughin et al. (2016), the picture of African economy is more complex when compared to the 2010 McKinsey and Company’s report on African Economies, Lions on the Move: The Progress and Potential of African Economies. A report by Kimani et al. (2016) also provides a critical perspective of African economy. In their perspective, Africa economic growth has not been given the recognition it requires. If the projected statistics are true, Africa is expected to generate more than 1 billion consumers by the year 2020 which, according to Kimani et al. (2016), will be more than the population of North America and Europe combined. Furthermore, the income of African economies has grown significantly in recent years, and is expected to continue increasing in the future. Affluent customers in Africa will be twice as many as UK’s affluent customers with most of them eager to spend money (Kimani et al., 2016). This presents an opportunity for foreign investors, especially Canadian investors hoping to expand their investments in the retailing sectors.

BCG Analysis of Africa Retail Industry

Diop et al. (2015) argue that despite external challenges that affect Africa’s economies, Africa has the ability to end the commodity super cycle and achieve growth that is more sustainable and inclusive through economy diversification. As a result, African economies will be able to boost their productivity and reduce their poverty level. This also means that, African economies will increase the dispensable income of their populations, an economic factor that improves the spending power of consumers. This concept is well explained using the BCG matrix which, according to Enz (2009), is based on two factors: relative market shares and business growth rate. Business growth rate considers the rate of growth of the industry a particular business unit is involved in, whereas relative market share is the ratio of business unit’s size compared to the size of the industry’s largest competitors (Enz, 2009). In order to understand the growth of Africa’s economy and its relation to the growth of the retail industry, Kimani et al. (2016) considered a number of factors: consumer pulse check, connection of African consumers, market switch, and channel insights. In terms of consumer pulse check, results obtained from Kimani et al. (2016) show that approximately 88% of African consumers are optimistic about the future of the continent. Optimism of consumers is regarded as an important economic factor since it drives consumers towards spending. In countries like Nigeria, Kenya, and Egypt, consumer optimism was found to be 90% which means that consumers in these nations are likely to increase their spending in the near future (Kimani et al., 2016).

Kimani et al. (2016) were also critical about brands and the value they receive from Africa. In their perspective, brands are highly valued in Africa, with some brands having more value than others (Kimani et al., 2016). In addition, the purchasing power of consumers in Africa is largely influenced by the value that a brand seems to possess. For some customers, a brand like Nike is more valuable, while other customers will value Adidas more. As a result, retailers in Africa have been forced to diversify their products in order to acquire maximum profits from consumers. The connectedness of African consumers has also emerged as an important factor to the growth of the economy. The access to the Internet in Africa is growing at an expedited rate. In 2016, more than one third of people in sub-Saharan Africa had access to the Internet (Rice-Oxley & Flood, 2016). Access to the Internet in African has been expedited by cheap smartphones and Internet providers and has emerged as an important incentive for business development. In countries, such as Kenya, mobile banking has influenced consumer buying behavior significantly. Currently, consumers are capable of purchasing very cheap to very expensive products using their phones (Rice-Oxley & Flood, 2016). According to statistics projections by Rice-Oxley and Flood (2016), there will be more than 700 million smartphone connections in Africa by 2020 which is twice the number of smartphone connectivity in Europe and North America.

The BCG market attractiveness index as used by Kimani et al. (2016) also shows why African economies are projected to grow in the near future. According to Kimani et al. (2016), retailers hoping to expand their operations in African economies should look upon the BCG market attractiveness index for accurate data regarding various African economies and the commodities that tend to sell more in these economies. One of the example provided by Kimani et al. (2016) is the clothing market which is projected to increase by 18% in Kenya compared to Ghana, even though Ghana and Kenya have had a similar market for cloths. As such, while the purchase of consumer products seems to increase in Africa, some nations are more likely to increase the consumption of some products compared to others. Retailers in the beauty products, that are eyeing South Africa need to consider projected statistics which considers Ethiopia as market with the most consumers of the products come 2025 (Kimani et al., 2016). Agyenim-Boateng, Benson-Armer, and Russo (2015) argue that for retailers to succeed in Africa, they need to understand the consumer goods that are mostly consumed on a particular market. According to Agyenim-Boateng, Benson-Armer, and Russo (2015), major retailers have failed to succeed in Africa because of their failure to evaluate the consumer market, which resulted in provision of products which are not wanted by most consumers

Precautions/Limits

The Economist Intelligence Unit (2015) has clearly pointed out that while Africa remains to be the next big thing, it is critical that investors approach their investments in African economies with caution. According to Bughin et al. (2016), the growth of African economies was accelerating five years ago with most regions diversifying their economies, but recently their paths seem to have diverged. While some countries seem to develop faster, development in other countries has stagnated. However, as Agyenim-Boateng, Benson-Armer, and Russo (2015) argue, a significant number of people in Africa are entering the consumer class with a significant number emerging from poverty.

Threats of Investing in Africa

A major threat that most retailers need to note is political instability of African economies. Ibrahim and Cheri (2013) argue that for fifty years now, the quest for development in Africa has been met with a marginal success. While countries like Egypt, South Africa, Libya, and Morocco seems to have recorded significant development, most countries in the sub-Saharan Africa are worse off compared to how they were before. Political instability in nations such as Sudan and Somalia have created other problem,s including health and nutrition problems, eroding infrastructure and ethno-religious conflicts (Ibrahim & Cheri, 2013). In nations such as Kenya political instability has led to increased poverty, corruption, and unemployment (Ibrahim & Cheri, 2013). These issues have contributed to poor development of various industries in African regions and have resulted in very few foreign investors in the continent, especially in sub-Saharan Africa.

Another significant threat foreign investor should be aware of is linguistic diversity. Communicating with African consumers can be a problem due to the number of languages used in the continent. According to Agyenim-Boateng, Benson-Armer, and Russo (2015), retailers will need to present their marketing messages in a plethora of languages in order to communicate effectively with consumers in African regions. In Nigeria, for instance, while English is considered as the common language, that are more than 500 local languages used in the nation (Agyenim-Boateng, Benson-Armer, & Russo, 2015). In countries such as South Africa with more than 10 official languages, communicating the marketing message may prove to be more difficult (Agyenim-Boateng, Benson-Armer, & Russo, 2015). In Tanzania, English has been dumped as one of the official languages with the nation opting for Swahili (Mohammed, 2015). Removal of English as one of the official languages means that students in the Tanzanian education system will be given instructions using Swahili. This also means that foreign investors will need to learn the language in order to create value for their commodity in Tanzania.

In addition, it is also important for investors to consider the fragmented retail market in Africa. African consumers have specific areas where they purchase their products. For instance, a significant number of customers in sub-Saharan Africa get their groceries from a neighboring kiosk (Agyenim-Boateng, Benson-Armer, & Russo, 2015). In countries such as South Africa, retailers need to tailor some of their product categories, especially groceries, to attract consumers (The Economist, 2013). In other countries like Kenya, consumers prefer second hand clothes coming from foreign countries to new clothes being sold in retail stores (Daily Nation, 2013). These consumer behaviors are mostly driven by quality. Despite being well advertised, African perceive products obtained in a retail store as either being of low quality for clothing or genetically modified for groceries. As a result, this has created a complex retail environment so that even retailers with the right products are likely to fail (Nielsen, 2015).

Opportunities

Despite the numerous threats associated with African economy, the continent is currently experiencing an increase in young and urbanized population with a quest to spend on consumer goods. Agyenim-Boateng, Benson-Armer, and Russo (2015) project that by 2025, more than two thirds of households in Africa will have unrestricted income. According to research, this will fuel Africa’s GDP growth to 6.2% from 4.9%, and will outpace the 3.7% world’s GDP growth rate (Agyenim-Boateng, Benson-Armer, & Russo, 2015). With an increase in dispensable income, African consumers will be willing to spend. It is projected that in the next decade a total of $400 billion consumption growth will be experienced in Africa (Agyenim-Boateng, Benson-Armer, & Russo, 2015). Increase in consumption and consumers willing to spend has created opportunity for foreign retailers hoping to expand their operations in Africa. Furthermore, while world seems to be aging, Africa presents foreign retail investors with an advantage of a young and growing population, as well as, a continent that is willing to develop fast.

Another opportunity is the larger retail landscape offered by African countries. sub-Saharan Africa provide retailers with remarkable diversity. The diversification of consumers is one of the main reasons why retail industry in Africa is considered as one of the most competitive industries. In Nigeria, for instance, retailers have positioned themselves in such a way that they are able to meet the needs of many consumers (AT Kearney, 2014). Despite the country’s growing number of middle class consumers, retailers generate significant profits from low and higher-class consumers (AT Kearney, 2014). Diversification of consumers is one of the reason why in South Africa, there were more than 200 shopping malls (AT Kearney, 2014). Diversification of consumers means that foreign investors have an opportunity to locate in African countries and generate significant income by offering different product categories. Consumer diversification is one of the reasons why retailers are able to stock products from different brands and manage to generate sales from all these product brands. It is because while some consumers will consider quality as the reason to buy a product, other consumers will consider cost.

Conclusion and Recommendation

The question as to whether Canadian retailers should invest in Africa is one that needs careful examination. This is because, while Africa is identified as the next big thing, there is still a number of threats that Canadian retailers need to consider. Africa is still hampered by issues of political instability while poverty is still very high. Other issues which might affect consumer spending are little dispensable income, unemployment, and the general cost of living. Political instability is the main reason why corruption is looming in African countries. It is also the reason why a number of countries in Africa are still experiencing ethnic clashes. Despite that, Africa is experiencing significant growth in terms of its economy. With an increase in population, Africa has seen the number of young consumers who are willing to spend on consumer goods increasing. The buying behavior of African consumers is also influenced by connectedness of consumers, which is being driven by cheaper and affordable technology. Mobile banking has made it possible for consumers to access their funds with much ease, while the Internet has made it possible for consumers to compare products offered by different retailers. Canadian retailers, therefore, need to consider the fact that despite the threats associated with Africa’s economies, the retail industry in Africa presents significant opportunities. Companies such as Coca-Cola, P&G, and Nestle have managed to look beyond the threats of doing business in Africa and have managed to generate significant profits from the continent. Canadian retailers are, therefore, recommended to seize the opportunities provided by Africa’s retail industry.

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