Ignore Africa at your peril

2010-10-23 10:04

Richard Twesigye says he shops at Massmart’s Game store in Kampala, the Ugandan capital, because the quality of the products is better than at the local market.

Like millions of other Africans, he can afford it if the prices are a little higher.

“These stores are high class,” Twesigye, a 61-year-old businessman, says while shopping at the chain store.

“In ordinary stores, there are a lot of counterfeits, but these big stores care about their reputation.”

It’s people like Twesigye, members of Africa’s burgeoning middle class, who prompted Wal-Mart last month to propose purchasing Massmart, the continent’s third-largest retailer, for $4.6?billion (R32?billion).

With 288 stores in 14 African countries, purchasing Massmart will enable Wal-Mart to profit from one of the world’s fastest-growing retail markets.

Africa’s population reached 1 billion last year and, after economic growth averaging 4.9% from 2000 to 2008, the number of families with an income of more than $20?000 a year has exceeded India’s, according to a report by consultancy McKinsey. With China investing in the continent to exploit its mineral wealth, and the population rising by more than 2% a year, that market is set to expand.

Celeste Fauconnier, Africa analyst at Rand Merchant Bank, the investment banking arm of FirstRand, says: “It will be to their own detriment if companies ignore Africa. We are seeing massive growth in the population, an increasing middle class and people having more access to money.”

Consumer spending in Africa rose at a compound rate of 16% between 2005 and 2008, driven by economic and population growth, and migration to cities, McKinsey said in its June report.

McKinsey estimated that the number of consumers earning more than $1?000 a year would rise by 221?million within five years.

Sub-Saharan Africa’s economy will expand by 5.5% next year, two and a half times faster than developed countries, according to the International Monetary Fund.

Per capita income in sub-Saharan Africa was $1?096 last year, according to the World Bank.

South African companies have spearheaded retail investment on the continent. Shoprite Holdings, the largest retailer by market value, began expanding outside its home market in 1995 and now has 71 stores in 16 African countries, according to the company’s website. Rivals Pick n Pay and Woolworths both announced plans this year to expand their African operations.

In Mozambique, Anita Guambe, a 45-year-old housewife, stopped asking her husband, a taxi driver, to buy food for the family on his regular trips to South Africa after Shoprite opened a store in the capital, Maputo.

“The big chains are welcome because most of their products are of a high quality and they are well packaged,” especially compared with the unhygienic street markets where the poor have to shop, Guambe says.

But Wal-Mart will face challenges in the world’s poorest region. It will need to maintain a supply chain on a continent where roads and railways are unreliable, property rights are often weak and security isn’t guaranteed, says Paul Theron, managing director of asset management firm Vestact.

Poverty remains rampant in Africa, with 50% of the population living on less than $1.25 a day, according to the World Bank. And each of the continent’s 53 countries has its own tariffs, laws and regulations.

Retail analyst for Old Mutual Jeanine van Zyl says: “One must not forget that Africa is made up of lots of different countries, with different cultures, different languages and different ways of doing business.

“They’ll fail if they try to do it too fast. You have to step away from markets that are not ready to be entered. The process can’t be rushed.”

Wal-Mart was lured by the potential of markets. Nigeria, Africa’s most populous nation, has 140?million people.

Andrew Kingston from Sanlam Investment Management says: “The focus has shifted towards these oil-based economies and commodities-based countries where people have more purchasing power.”

The purchasing power of Nigerians earning between $1?000 and $5?000 a year doubled to $20?billion between 2000 and 2007, McKinsey estimated. Massmart has plans to increase the number of its outlets in Africa’s largest oil producer to 20 from one over the next two years.

Wal-Mart International chief executive Doug McMillon told investors at a presentation this month that rising income levels in South Africa made Massmart a “tremendous opportunity”. South African consumers are “going to want more general merchandise. They’re going to want more food,” he said.

Over time, he said, the stores outside South Africa would “pay benefits” as the retailer learned what it was like to operate in those countries.

Kola Oladapo says the Game store in Lagos “is cleaner and not as chaotic as the market”. Adds the accountant who earns 500 000 naira (R22 864) a month: “You never have to fear that by the time you walk out your wallet is missing.”

Wal-Mart, the world’s largest retailer, offered to bid R148 a share for Massmart, a premium of 9.8% over its share price at the time. The company is examining Massmart’s finances.

For Twesigye, the Game shopper in Kampala, the important thing remains quality.

“Some things may appear expensive, but considering their superior quality, prices remain good,” he says. “At such a big store, one can avoid the pickpockets.”

– Bloomberg

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