Wal Mart Stores (NYSE:WMT)
Historical Stock Chart
5 Years : From May 2011 to May 2016
--Consumer-goods companies that want to grow in Africa should take a focused rather than a broad approach
--Africa's consumer-focused industries are likely to grow by $410 billion by 2020 from 2011
--McKinsey & Co. says consumer companies should approach growth in Africa with a focus on urban centers
By Devon Maylie
JOHANNESBURG--Consumer companies that want to grow in Africa should take on a focused approach rather than trying to reach the whole continent at once, according to a new report by consultancy McKinsey & Co.
Africa's consumer-focused industries such as banks, mobile-phone companies and retailers are likely to grow by $410 billion by 2020 from 2011, which would account for more than half the total revenue increase that all businesses are expected to generate in Africa by the end of the decade, McKinsey said.
However, to tap into that growth, companies need to become more urban-focused and understand their consumer better, the consultancy said.
Already, 40% of Africa's population lives in cities, more than India's 30% and close to China's 45%. By 2016, more than 500 million Africans will live in urban centers, and the number of cities with more than 1 million people is expected to reach 65, compared with 52 in 2011, McKinsey estimated, on par with Europe and higher than in India and North America.
"The urbanizing trend is strong and continues to be strong," said Bill Russo, a director at McKinsey and lead author of the report, "The Rise of the African Consumer."
"The approach [by companies] should focus on urban centers to get scale," he said.
McKinsey said consumer goods companies started to pay more attention to Africa after the global financial crisis that escalated in 2008. While many developed countries weren't growing much at this time, Africa was posting higher growth figures, albeit from a low base. That growth largely has been driven by the discovery of natural resources, including major oil finds. However, many countries in Africa still are struggling to develop much-needed infrastructure and services, while cross-border conflicts threaten the region's stability.
Nonetheless, Africa's improving outlook already has lured investment from global consumer companies and spurred the development of local businesses. Wal-Mart Stores Inc. (WMT) this year closed a roughly $2.4 billion deal to buy 51% of South Africa's Massmart Holdings Ltd. (MSM.JO), with plans to use the discount retailer as a foothold for continental expansion. The company is targeting large cities for growth across the region.
Yum! Brands Inc. (YUM) said it plans to double the number of KFC outlets in Africa by 2014, while clothing companies Gap Inc. (GPS) and Spain's Zara, owned by Inditex SA, opened outlets in Johannesburg this year, their first entry onto the continent.
Further luring retailers to the continent are projections that by 2020 more than half the households in Africa, home to a billion people of which more than half are under the age of 20, will have discretionary income, rising to 130 million households from 85 million currently, McKinsey said.
McKinsey said consumer companies should approach growth in Africa with a focus on the urban centers to build up their brand and get a following. McKinsey found that 55% of consumers in sub-Saharan Africa are loyal to a grocery brand and 70% are loyal to a small group of brands. Their report also highlighted that urban Africans use the Internet as much as people in Brazil and China. In 2010, there were 43% more Google advertisement clicks in Africa than in Western Europe, the report noted.
"The more granule, targeted the approach, the more successful you can be," Mr. Russo said.
Write to Devon Maylie at email@example.com