Is the Africa Consumer Opportunity Falling Short?
Faced with ongoing challenges, investors find that consumer opportunities in Africa are harder to realize
While disposable income is certainly rising in Africa, not all consumer sectors have benefited. That’s why some large consumer companies like Nestlé have decided to scale back their operations on the continent.
“We thought this would be the next Asia, but we have realized the middle class here in the region is extremely small and it is not really growing,” Cornel Krummenacher, chief executive for Nestlé’s equatorial Africa region, told the Financial Times last year.
So which consumer sectors should private equity target in Africa and which sectors should be avoided?
“There are a number of sectors poised to get a bigger share of the consumer wallet—like education and healthcare, where people will spend more if their disposable income rises,” says Hurley Doddy, managing director of Emerging Capital Partners (ECP), a Pan-African PE firm that has raised more than $2B for growth- capital investments in Africa. “You’re also seeing more malls being built in some countries and that leads to opportunities in new concepts like quick-service restaurants and eyecare chains.”
But Doddy notes that Africa should not be considered as a whole, but rather as a continent of hugely varying nations with hugely varying markets and opportunities. Some economies have a growing middle class, others don’t. And in those that do, consumer spending fluctuates broadly depending on the sector.
National variations also abound. Nigeria, one of the largest economies in Africa, is very near a recession due to the sharp fall in oil prices and devaluation of the naira. Political troubles have hit South Africa’s economy. Meanwhile, economies in Francophone West Africa and East Africa are growing at a good clip, with consumer spending on the rise.
Food & Beverage Plays
ECP’s headline investment is Java House, the largest coffee chain in East Africa. It had 12 restaurants when Doddy’s firm bought it, in December 2011, and has since expanded its locations more than fourfold. ECP is now mulling an exit and has received a good deal of interest in Java House.
“One reason for our success there has been our ability to deliver a product of international caliber,” says Doddy. “As African consumers have more disposable income, they also have more information, more Internet access, more ability to travel, so they know what a good restaurant chain is supposed to look like. More and more we’re investing in companies that can deliver a high-quality service to consumers.”
ECP has also invested in Atlas Bottling, a PepsiCo bottler in Algeria, to capitalize on the nation’s young population. Coke and Pepsi don’t yet dominate those markets, so there is room for growth. There is also opportunity to import new technologies. “It’s just a matter of bringing more current business models into Africa,” says Doddy.
Of course, challenges to investing in Africa are numerous. In many sectors, like fast food, supply chains must be created from scratch. “China has thousands of KFC restaurants, while a big chain in Nigeria might have only 20 restaurants,” says Doddy. “The problem is not the demand. The problem is getting enough chickens of the right quality to serve to customers.”
Another hurdle is that aforementioned diversity. Africa is not one massive market like, say, China, so scaling here means building a platform across multiple countries, which is time-consuming and expensive.
And then there’s that all-important consumer class so often mentioned in coverage of emerging markets. In Africa, the size and growth of that class has proved to be a disappointment to some.
“Having a few dollars in disposable income in Africa does not mean there is the same kind of middle class or demand for goods that you would find in other emerging economies like China,” says Doddy. “It’s true that investing in Africa can be difficult.”