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Workers at a cocoa cooperative in the Ivory Coast.
That African nation is the
world’s biggest producer
Cracking the Next
Growth Market: Africa
PHOTOGRAPHY: KAMBOU SIA/AFP/GETTY IMAGES
The continent is home to
many of the world’s biggest
opportunities. The trick is
deciding where and how
to seize them. by Mutsa
Chironga, Acha Leke, Susan
Lund, and Arend van
year ago, when South Africa
hosted the World Cup of football,
a Tswanian phrase, Ke Nako (“It’s
Time”), reverberated across the world like
the cacophony of a million vuvuzelas, announcing that Africa’s moment had come.
Economists, consultants, and executives all
suggested that the African economy, which
had languished during the last two decades
of the 20th century, was finally stirring.
Nevertheless, most companies have
been slow to enter Africa. Many assumed
that the flutter of attention was the reflection of a global boom in commodity prices,
and therefore of relevance primarily to oil
and mining companies. The recent political
turmoil in such countries as Algeria, Egypt,
Libya, Morocco, and Tunisia and the civil war
in Ivory Coast have dramatically reminded
executives of the enormous uncertainty
that businesses must cope with in Africa.
With prodemocracy movements breaking out in some of Africa’s fastest-growing
economies, multinational companies face
a double bind: Some of the most promising
countries present the highest risks.
That’s not all. In Africa the infrastructure
is still poor; talent is scarce; and poverty,
famine, and disease afflict many nations.
Most Western executives, unsure of the
size of Africa’s consumer markets, prefer to
invest in Asia’s dragon and tiger economies
rather than in Africa’s economic lions. “Is it
truly Africa’s time?” they wonder.
So often were we asked the question that
last year McKinsey & Company decided to
analyze Africa’s economies and conduct a
microlevel study of its consumer markets.
Our goal was to identify Africa’s sources of
growth, determine if it would continue over
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In 2008, Africans spent $860 billion on goods and
services—35% more than Indians spent.
time, and size opportunities in key sectors.
(For the full analysis, see Lions on the Move:
The Progress and Potential of African Economies at www.mckinsey.com/mgi.)
The findings surprised us. Over the past
decade, Africa’s real GDP grew by 4.7%
a year, on average—twice the pace of its
growth in the 1980s and 1990s. The surge
cut across nations and sectors. By 2009,
Africa’s collective GDP of $1.6 trillion was
roughly equal to Brazil’s or Russia’s. The
continent is among the fastest-expanding
economic regions today. In fact, Africa and
Asia (excluding Japan) were the only continents that grew during the recent global
recession. Though Africa’s growth rate
slowed to 2% in 2009, it bounced back to
nearly 5% in 2010, and in 2011 it is likely to
While political troubles, wars, natural
disasters, and poor policies could slow
Africa down, the prospects for consumerfacing companies are bright. Africans
spent $860 billion on goods and services
in 2008—35% more than the $635 billion
that Indians spent, and slightly more than
the $821 billion of consumer expenditures
in Russia. If Africa maintains its current
growth trajectory, consumers will buy
$1.4 trillion worth of goods and services in
2020, which will be a little less than India’s
projected $1.7 trillion but more than Russia’s $960 billion.
As Africa’s economies progress, opportunities are opening in sectors such
as retailing, telecommunications, banking, infrastructure-related industries,
resource-related businesses, and all along
the agricultural value chain. Consider that
telecom companies in Africa have added
316 million subscribers—more than the entire U.S. population—since 2000. According
to UN data, Africa offers a higher return on
investment than any other emerging market. For several reasons: Competition is less
intense and few foreign companies have a
presence there, and pent-up consumer demand is strong. Companies that desire revenues and profits, we believe, can no longer
Smart multinational companies are
busy planting their stakes in the ground.
Nokia and Coca-Cola have distribution networks in nearly every African country; Unilever has a presence in 20 African nations,
Nestlé in 19, Standard Chartered Bank in
14, Barclays in 12, and Société Générale
in 15. Homegrown giants are expanding:
Ecobank and South African Breweries each
operate in over 30 African countries, while
MTN and Shoprite are in 16 African countries each. Companies that enter Africa now,
we believe, can shape industry structures,
segment markets, and establish brands.
The Growth Ahead
Busy executives may wonder whether the
African economy’s recent growth is just a
flash in the pan. After all, the economy had
picked up during the 1970s oil boom, but
when oil prices fell, it began to slow. In our
opinion, Africa’s long-term prospects are
strong, because both internal and external
trends are propelling its growth.
To be sure, Africa is benefitting from the
increases in commodity prices. Oil prices
have shot up since 1999, when they were
less than $20 a barrel, reaching more than
$145 a barrel in 2008, and prices for minerals, grains, and other raw materials have
also soared. Yet that trend explains only
part of the African story. Natural resources
directly accounted for just about a quarter
(24%) of GDP growth from 2000 through
2008, according to our calculations. Other
industries, such as wholesale and retail
trade, transportation, telecommunications,
and manufacturing, contributed the rest.
In fact, countries that export commodities
grew just a tad faster, at 5.4% a year, than
nonexporters, which on average grew 4.6%
from 2000 through 2008.
Three factors are responsible. One, several African countries, such as Angola and
Mozambique, halted deadly hostilities,
creating the political stability necessary for
growth. The number of serious conflicts in
Africa—those in which deaths exceed 1,000
people a year—declined from an average of
4.8 a year in the 1990s to 2.6 in the 2000s.
Two, economies became healthier as governments shrank budget deficits, trimmed
foreign debt, and brought down inflation.
Since 2000, African countries have cut their
combined foreign debt from 82% of GDP to
59% and reduced budget deficits from 4.6%
of GDP to 1.8%, which sent inflation rates
tumbling from 22% to 8%.
Three, several governments adopted
market-friendly policies. They privatized
state-owned enterprises, reduced trade barriers, cut corporate taxes, and strengthened
regulatory and legal systems. Nigeria, for
example, privatized more than 116 enterprises between 1999 and 2006; Morocco and
Egypt struck free-trade agreements with
their main export partners; and Rwanda established courts to settle business disputes.
These and other steps helped local companies invest more, achieve greater economies
of scale, and become more competitive.
Africa will continue to profit from the
rising global demand for oil, natural gas,
minerals, food, and other natural resources.
The continent has an abundance of riches,
including 10% of the world’s oil reserves,
40% of its gold ore, and 80% to 90% of its
deposits of chromium and platinum group
metals. To exploit them, African govern-
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Readying for Takeoﬀ
Africa’s growth accelerated rapidly after
2000 and continued even during the global
ments are forging new types of partnerships in which buyers from countries such
as China and India provide up-front payments, invest in infrastructure, and share
management skills and technology.
Long-term growth will get a boost from
Africa’s demographic and social trends.
The population is young, growing, and migrating to the metropolitan centers. In 1980,
28% of Africans lived in cities; today 40%
do—a proportion close to China’s and larger
than India’s. Workers in cities earn higher
pay than those in rural areas and can afford
to buy products and services beyond the
necessities of food and shelter. That expands demand, which leads to a virtuous
cycle of growth and job creation.
Many people picture Africans as subsistence farmers, but there’s a sizable middle
class on the continent. By 2008, 16 million African households had incomes
above $20,000 a year—a level that enabled
them to buy houses, cars, appliances, and
branded products. Another 27 million
households earned $10,000 to $20,000. In
addition, 41 million households reported
incomes of $5,000 to $10,000—the level
at which families start spending more
than half their income on nonfood items.
By 2020 the total number of households
in all three segments will reach 128 million, which should make Africa one of the
fastest-growing consumer markets of this
NOTE GROWTH RATES FOR THE 1970S, 1980S, AND
1990S ARE COMPOUND ANNUAL RATES.
Since 2000, the continent has been the
world’s third-fastest growing region, outpacing Eastern Europe and Latin America.
Categorizing the Opportunities
Corporations must start developing their
strategies by recognizing that Africa isn’t
one economy. It’s home to 50-plus nations,
each with its own policies and attitudes toward multinational companies, as well as
its own languages, currency, and traditions.
Successful companies use filters to decide
which countries to enter and tailor their entry strategies to specific sectors. They focus
their efforts on key markets, but those that
think broadly benefit from greater scale
and diversified risks.
Economists usually group countries by
income level or geography, but we organized them according to their economic
COMPOUND ANNUAL REAL GDP
SOURCES INTERNATIONAL MONETARY FUND,
GLOBAL INSIGHT, MCKINSEY GLOBAL INSTITUTE
diversification and level of exports. As
economies develop, agriculture and natural
resources account for a smaller and smaller
share of GDP, while the share of manufacturing and services grows. That boosts per
capita income, with a 15% increase in manufacturing and services as a share of GDP
usually resulting in a doubling of per capita
income. Exports are the means by which
emerging economies earn hard currency
to pay for imports of capital goods. In most
African countries, capital goods imports account for roughly half of investment, making exports a critical enabler of growth.
Classified by these two parameters,
which together provide a snapshot of how
developed markets are, African countries
fall into four broad clusters. (See the exhibit
“Four Types of Economies.”) This framework can guide executives as they assess
which markets to enter and how.
The diversiﬁed economies. Africa’s
four most advanced economies—Egypt,
Morocco, South Africa, and Tunisia—have
well-developed manufacturing and service industries. They have relatively high
per capita incomes and more stable GDP
growth than most of the other economies,
despite the political risks that have come
to the fore in North Africa. Services, such
as banking, telecom, and retailing, have accounted for more than 70% of GDP growth
in these countries over the past decade.
These countries are also Africa’s largest consumer markets; 90% of households there have some discretionary income. That makes them ideal places for
consumer-facing businesses to anchor
their operations. Walmart, for example, recently struck a $2.4 billion deal to pick up
a 51% stake in one of South Africa’s largest
retailers, Massmart, which has stores in 13
other African countries.
However, these economies have higher
labor costs than China or India and struggle
to compete even in low-value manufacturing industries. They need to expand exports, improve education to create a skilled
workforce, and build infrastructure.
The oil exporters. Africa’s oil and gas
exporters have the continent’s highest per
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capita incomes but are the least diversified
economies. Three of the largest—Algeria,
Angola, and Nigeria—have already attracted the world’s petroleum majors and
have rapidly growing consumer markets.
In Angola, for instance, retail banking is
expected to grow by 6.8% a year through
2020, telecommunication services by 5.2%
a year, and nonfood consumer goods by
4.4% a year. Because of their income levels,
the oil exporters are attractive markets for
high-end goods and services.
Africa’s oil exporters face the same
challenges as many resource-rich nations:
maintaining political stability; resisting the
temptation to overinvest, which would
make them vulnerable if commodity
prices decline; and creating a diversified
economy. Nigeria has already begun the
transition to a diversified economy. While
resources have accounted for 35% of the
country’s GDP growth since 2000, services
have accounted for 37%. The number of
telecommunications subscribers there
increased from practically zero in 2000
to 63 million by 2008, and banking assets
The transition economies. Africa’s
transition economies—such as Ghana,
Kenya, Uganda, and Senegal—have lower
per capita incomes than the countries in
the first two groups but are growing rapidly.
Though their agriculture and resource sectors together account for as much as 35% of
GDP and two-thirds of exports, these countries increasingly export manufactured
goods to other African countries. The penetration of banking, telecom, and modern
retailing is much lower than it is in the diversified economies, but that offers attractive opportunities.
Companies targeting these markets
must tailor products to poorer customers.
Still, early entrants will find less competition here, and the rapid growth is expected
to continue. Several transition economies
are likely to increase their commodity exports in the coming years, which could turbocharge growth. In Ghana and Uganda, for
instance, recent oil discoveries will boost
tax revenues, making it easier for them to
diversify their economies.
The pretransition economies. These
economies are poor, with annual per capita
GDP of just $353 on average. But some of
them are expanding rapidly. The three largest—the Democratic Republic of the Congo,
Ethiopia, and Mali—have grown, on average, 7% a year since 2000. However, their
growth has been erratic in the past.
These pretransition economies differ
greatly, but all of them lack the basics, such
as stable governments, strong public institutions, and sustainable agricultural development. Multinational companies must
track these economies, but only those that
can handle the risks should enter them.
Four Keys to Success
Winning in Africa requires executives to
understand the business environment in
each country they enter and to tailor their
plans accordingly. It demands innovation; the winners are often companies that
tackle complex challenges creatively. In our
work, we have found four other elements
critical to success in Africa.
1. Pick the right entry strategy. Once
a company has identified the countries and
industries in which it would like to have
a presence, it must choose an approach.
Should it start from scratch and grow on
The economies of the Democratic
Republic of the Congo, Ethiopia, and
Mali have grown 7% a year since 2000.
its own? Should it build a presence by acquiring small local players? Should it take
a stake in a Pan-African player?
The answer will depend on the industry.
In relatively well developed sectors such
as retail banking and telecom, it’s probably
too late to deploy only an organic strategy
using traditional business models. African banks, such as Ecobank and Standard
Bank, as well as foreign banks like Standard
Chartered and Barclays, have already spent
decades establishing operations in many
countries. More recently, some have grown
their footprints by buying up local banks.
New entrants will increasingly have to
use M&A as an entry strategy. One option
is to knit together a Pan-African operation
by acquiring regional players. Another is to
buy a stake in a big African company. That’s
what China’s ICBC did, purchasing 20% of
Standard Bank in 2008. The alliance gave
ICBC immediate access to the 17 African
countries in which Standard Bank operates
and enabled it to finance the activities of
Chinese companies all over Africa.
Organic growth strategies are possible
in sectors such as retailing. Formal retailing is limited in most African countries,
and that allows global players to move in.
Zara, the Spanish retailer, has opened 12
stores across North Africa in the past five
years. Shoprite had just one store outside
its home country of South Africa in 1995
but has since become the continent’s largest food retailer, opening 71 stores in other
African nations. Organic growth is also possible in industries where disruptive technologies create new products and services.
Consider Safaricom’s mobile-phone-based
money-transfer service, M-Pesa, which enables customers to deposit and withdraw
money from a network of agents. Launched
in Kenya in 2007, M-Pesa captured 6.5 million customers in just two years’ time, and
it has since been launched in Tanzania and
South Africa as well.
2. Get—and get to—customers. Consumer preferences vary enormously across
Africa, so companies must invest in market
intelligence. Brand-conscious consumers
will save up to buy premium items, but
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Surging Consumer Demand
By 2020, more than half of Africa’s 244 million households will have
annual incomes of more than $5,000, suggesting that they will enjoy
discretionary spending power.
PERCENTAGE OF HOUSEHOLDS IN EACH INCOME BRACKET
>$20,000 A YEAR
CONSUMING MIDDLE CLASS
$10,000–$20,000 A YEAR
$5,000–$10,000 A YEAR
$2,000–$5,000 A YEAR
<$2,000 A YEAR
MILLIONS OF HOUSEHOLDS
MILLIONS OF HOUSEHOLDS WITH
INCOME >$5,000 A YEAR
NOTE ANNUAL INCOME FIGURES IN US$ PPP 2005.
SOURCE CANBACK GLOBAL INCOME DISTRIBUTION DATABASE; MCKINSEY GLOBAL INSTITUTE
most people have low incomes and lack
access to credit. Using imaginative strategies—selling products in small quantities;
offering credit, hire purchase, and layaway
plans; and educating consumers—is essential. Developing innovative, low-priced consumer products and services is often critical. For example, Nokia focuses on phone
models priced from $20 to $50 and adjusts
profit targets to reflect the lower prices instead of adopting a global benchmark.
Reaching customers is arguably as
tough as understanding their needs. Africa’s infrastructure is poor, and more sales
occur through informal channels, such as
vendors and family-run businesses, than
through stores and malls. Companies can
overcome these challenges only by being
flexible. Some foreign companies have a
single national distributor; others over half
a dozen. But all find they need more people
to manage distributors in Africa than they
do elsewhere. In Nigeria, P&G appointed
exclusive distributors for seven geographic
areas and hired employees to support each
one, which it doesn’t do in any other country. You must be patient—building a logistics network in Africa takes time. P&G spent
10 years building its Nigerian network.
Multinationals can hasten the expansion of formal retailing channels by co-
investing in mall development or selling
through multibrand stores. One successful
European retailer has become a mall developer in Africa, which ensures strategic locations for its stores as well as anchor tenants
for its malls. Shoprite is taking a similar tack
as it expands across the continent.
In many African countries informal retail channels account for more than 80%
of retail sales. Companies must find innovative ways to work with them. Coke has
created a network of micro distribution
centers to reach informal retailers in both
rural and urban areas. It comprises 2,800
small businesses that use bicycles and
manual pushcarts to deliver products over
Infrastructure gaps demand creative
solutions from service providers, too. For
example, to ensure that it has continuous
electrical power, Africa’s largest cellular
services operator, MTN, has built generators into each of its 5,000-plus towers in Nigeria. It uses a fleet of trucks to feed them
diesel. By providing better service, MTN
has acquired 31 million subscribers and
built a $4.5 billion business in the country.
Despite the added costs, its profit margins
in Nigeria are routinely above 50%.
3. Fill the skills gap. High-skilled
workers in Africa are similar to those in
other emerging economies. The besteducated attend top universities, often
overseas. Each year 200,000 students
from sub-Saharan Africa study abroad.
At the other end of the spectrum, there’s
also little difference between Africans and
workers from other developing economies.
One study found that factory workers in
Kenya are as productive as those in China
and India, but the overall production costs
in Kenya are higher because of poor regulation and infrastructure—problems that are
likely to go away.
What’s missing is a cadre of midlevel
managers—a shortage that reflects the
weaknesses in Africa’s secondary and tertiary education systems. To fill the gaps as
their operations grow, multinational companies use several strategies:
Bringing in midlevel expatriates. Particularly in the early years, foreign companies
import managers to start operations and
groom local talent. Successful organizations create clear expectations about talent
development; draw up targets; and monitor
progress. One multinational company has
reinforced its middle management in Nigeria with expatriate managers from other
emerging markets, such as India, who have
the skills and experience needed to deal
with the Nigerian environment.
Setting up extensive training programs.
Multinationals usually find that employees
at all levels in Africa need training. Some
invest in the local education system to develop people with the skills they require.
Such programs may also help them win
support from governments; companies
can leverage them to obtain permits to enter markets, get tax credits, or gain access
to land and other resources. A major oil
company in Angola has created a program
to train 14- to 16-year-olds as upstream specialists. It also works with a local university
to increase the number of engineers and
scientists graduating every year and funds
a law program in oil and gas that produced
its first class, of 28 graduates, in 2008.
Insisting on global rotations. Other
corporations rotate senior executives
and emerging leaders recruited in Africa
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Four Types of Economies
EXPORTS PER CAPITA, 2008 ($)
MANUFACTURING AND SERVICE SECTORS’ SHARE OF GDP, 2008 (%)
Africa’s 50-plus nations are at diﬀerent stages of development,
as their widely varying levels of exports and economic diversiﬁcation reveal. They fall into four main categories: oil exporters,
diversiﬁed economies, transition economies, and pretransition
through positions abroad so that they can
bring home an array of skills to share. A case
in point is the financial services firm Old
Mutual, which maintains a constant flow
of talent between its offices in Africa and
Buying talent. Entry strategies that rely
on M&A have one key advantage: the talent
that comes with acquisitions. Mobile Telecommunications Company, for example,
inherited a slew of senior and midlevel
executives when it bought Celtel, then Africa’s leading mobile player, six years ago.
4. Manage risks. Political instability
is one of the two biggest risks foreign companies face on the continent, as the world
is witnessing in North Africa. The other is
adverse actions by governments, such as
reneging on contracts or passing legislation
that hampers operations—which some resource companies have experienced in West
Africa. Abrupt changes in import tariffs and
quotas can also affect operations.
Diversifying across geographic markets
mitigates these risks. In addition, compa-
GDP PER CAPITA
SIZE OF BUBBLE
PROPORTIONAL TO GDP
SOURCES ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT;
WORLD BANK WORLD DEVELOPMENT INDICATORS; MCKINSEY GLOBAL INSTITUTE
nies can create coalitions of stakeholders
that help them detect potential problems
early so that they can head them off or
draw up contingency plans. Companies can
do this in three ways:
Building partnerships. Local businesspeople and politicians usually know the political landscape and learn of changes long
before they hit the news. Such partners can
help foreign companies navigate bureaucracies and foster relationships with official
and unofficial powers.
Wooing the influentials. Smart companies identify key influencers, such as
congressional representatives, regulators,
and mayors, in each country. They take the
time to figure out, say, who among the top
50 influencers are their strong supporters;
who’s indifferent but can be turned into a
supporter; and who’ll never support them.
They actively cultivate the first two groups.
Putting key stakeholders on their
boards. Inviting key public and private
sector stakeholders to join a country board
aligns their incentives with the company’s.
It gives the locals a stake in the company’s
IN MANY ways Africa holds the same potential that China did 20 years ago. A large rural population is moving to the cities, landing jobs with higher incomes, and starting
to enjoy discretionary spending. Demand
is growing, and foreign direct investment
has soared: from $9.4 billion in 2000 to
$46.4 billion in 2009. Just as investing in
China embodies some political risk, so too
does doing business in Africa. Companies
must think carefully about the approaches
they adopt, but it will be worthwhile.
Above all, first movers will have the opportunity to forge strong local partnerships
and capture market share before everyone
wakes up to the buzz around the Bright
HBR Reprint R1105J
Mutsa Chironga is a consultant in
Johannesburg, Acha Leke is a senior partner
in Lagos, and Arend van Wamelen is a partner
in Johannesburg at McKinsey & Company. Susan
Lund is a research director of the McKinsey Global
Institute, based in Washington, DC.
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3/31/11 3:02:40 PM
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