Eye on r

Eye on Africa

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Special issue | December/January 2011

How to write yourselfinto the African growthstory

101011 African Growth Story BR v2:Layout 1 12/1/10 2:43 PM Page 2

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After decades of false starts and turmoil, most African countries experienced steady reform, growth anddevelopment over the past 15 years. Strategic resources, a growing consumer base and generally positiveeconomic prospects are all contributing to rapidly growing interest in Africa as a business and investmentdestination. However, investing and doing business in Africa is challenging and, amongst other things, requiresboth careful planning and imagination.

In this paper we provide some ideas about how to begin developing a growth strategy for Africa. The analysis ismost relevant to consumer-facing sectors such as telecommunications, financial services, pharmaceuticals, retailand consumer products. It demonstrates the significant growth potential that exists among Africa’s one billionconsumers, but also the need to first move beyond general analysis of the ‘African’ market to a far more granularlevel of market-specific detail and second to deepen conventional country-based macro-analysis by using othermarket lenses such as regional trading blocs, urban corridors and cultural or socio-economic groupings.

To support this process we provide some useful frameworks that illustrate relative potential in different Africanmarkets, using a combination of different lenses. The intention is not to reach definitive conclusions, but ratherto provide ideas to enrich and expand strategic thinking and dialogue about how to develop a market entry orexpansion strategy for Africa.

Executive summary

AlgeriaLibya Egypt

MauritaniaMali

Cote-d'Ivoire

Gabon

Equatorial GuineaCongo

Central AfricanRepublicCameroon

Nigeria

NigerChad

Sudan

Eritrea

Ethiopia

Somalia

KenyaDemocratic

Republic of CongoRwanda

Burundi Tanzania

Seychelles

Comoros

MalawiZambiaMauritius

Mad

agas

car

Reunion

Zimbabwe

Angola

Namibia

Botswana

South AfricaLesotho

Swaziland

Guinea

Sao Tome

Djibouti

Moroc

co

Burkina Faso

Gha

na

Ernst & Young office

No Ernst & Young office,but support available

No offices, no support

Uganda

Togo Benin

Tunisia

Cape Verde

GambiaSenegal

Liberia

Western Sahara

Sierra Leone

Guinea Bissau

Mozambique

Our footprint


How to write yourself into the African growth story 2

The African growth story: fact or fiction?

Africa’s challenges are well documented. International televisionor print reports about Africa are almost invariably negative, andusually focus on natural disasters, civil wars, political instability,famine and disease. For decades, the default response ofdeveloped nations has been aid programmes; investment forgain has seemed misguided and exploitative.

However, there has been a steady shift over the past few yearsand today more positive messages are filtering through.Business news pages are publishing a growing number offoreign investment stories reflecting interest from within andoutside the continent.

Underpinning this attention is a story of sustained growth anddevelopment. For example, GDP per household across thecontinent has more than doubled in the last 15 years.

Foreign direct investment into Africa nearly quadrupled between1998 and 2008 alone.

The sustainability of this economic improvement is shored up bya range of human development and governance indicators. TheIbrahim Index of African Governance, for example, whichprovides a comprehensive analysis of the quality of governanceand development, shows steady improvement across most ofthe continent, with marked progress in countries like Angola andTanzania.

These developments have not appeared out of nowhere. Whilethe global economic crisis may have provided a ‘tipping point’for Africa, the fundamentals underpinning this positive shifthave been laid over a longer period of time. With the end of theCold War, armed conflict across the continent decreasedsignificantly and Africa entered into a new era of economic andpolitical reform. Inflation was brought under control, foreigndebt and budget deficits reduced, state-owned enterprisesprivatised, regulatory and legal systems strengthened, andmany African economies were opened up to international trade.A considerably improved business environment, combined witha sustained commodity boom and infrastructure investment, allcontributed to an average annual growth rate of approximately6% in sub-Sahara Africa between 2002 and 2008.

Although the global economic crisis has certainly impactedAfrica, particularly those economies more integrated into theglobal economy, most economies seem to have weathered thestorm reasonably well. Commodity prices in particular haverebounded strongly (primarily on the back of strong demandfrom the growing Asian economies) after an initial dip, and theWorld Bank forecasts a growth rate of between 3.8 and 4.5% forthe sub-Saharan region through 2011.

Africa’s role as an exporter of strategic minerals and energysources will continue to grow, but Africa’s economic potentialalso extends well beyond commodity exporting.

0.0

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Djibouti Tanzania Angola Niger Congo - Kinshasa African average

Figure 3 - Trends in the Ibrahim Index of African Governance

Source: Mo Ibrahim Foundation

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Figure 2 - Foreign direct investment into Africa

Source: UNCTAD

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Figure 1 - GDP growth across Africa

Source: World Bank


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The telecommunications and banking sectors, for example, aregrowing rapidly, as is infrastructure spending, and theagricultural sector is likely to boom.

Ernst & Young analysis of consumer market growth in the last15 years illustrates a profile of a market with both short- andlong-term potential; each segment of the African market showsa slow-down among the very poor, high growth for the massmarket and moderate growth among the middle class andaffluent segment.

This upward growth trend is likely to accelerate over the nextten to 15 years; as a result of a combination of populationgrowth, urbanisation, and continued economic development,consumer-facing sectors such as financial services,telecommunications, retail and consumer products, are likely toexperience significant growth. Rising domestic consumption,growing intra-African trade and the increasing diversification ofkey economies should provide a multiplier effect in terms ofincreasing domestic growth. In short, most African countriesand consumers will continue to become steadily more affluent.

Figure 4 - African household income targets

0

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“The best time to plant atree is 20 years ago. Thesecond best time is now.” African proverb



Making your growthpart of the Africanstory

The forward looking story for Africa may be positive, but whereto write yourself into the narrative? Despite numerousopportunities for long term growth, there are still very realchallenges to doing business across the continent. Africa’s sizeand diversity are an immediate stumbling block. In terms oflandmass alone, Africa is staggering: China, the United States,India, Europe, Argentina, and New Zealand could fit within it.

Its 53 countries share borders which were, in many instances,carved arbitrarily by colonial powers; however nationalsovereignty is often jealously guarded. Africa’s one billioninhabitants are culturally, ethnically and religiously diverse andspeak numerous languages and dialects.

United States of America

NewZealand

Argentina

China

India

Europe

Figure 5 - Landmasses which fit within the African continent

Source: EY

Figure 6 - World map warped to reflect number of non-mainstream languagesspoken in each country

Source: www.worldmapper.com


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Similarly, economic growth and business prospects aremarkedly different from country to country, and region toregion, and require a very careful and thorough due diligenceprocess.

Considering potential markets for entry into or expansion acrossAfrica is therefore a complex exercise, requiring a kaleidoscopicanalysis - one which allows you to interchange different lensesonto the market so as to build up a richness of perspective, andto provide scope to define what, in the African context, areoften undeveloped or even latent markets.

There are two basic types of market lens that we recommendconsidering:

• groupings of markets, like regions, individual countries,trading blocs and countries with cultural affinity

• dimensions such as sector view, demographics and socio-economic bands

We also recommend not reducing market analysis to a closedmodel in which various indicators are combined in terms of theirweighted importance. Such models give the misleadingimpression that there are absolute answers in searching formarket potential. In reality, there will be different answers forpeople with different priorities, and as priorities change overtime for any given organisation, so will the answers. Forexample, a consumer products company will have a differentway of measuring potential to a financial services or oil and gascompany; each individual company will have a different appetitefor investment risk; and as the process of investment proceeds,some preconceptions will be undermined by new analysis.

Starting with more conventionalanalysisConventional macro-indicators are a useful starting point in thisprocess: they can help in reviewing commonly-held conclusionsabout the relative maturity and potential of countries. There arenumerous indicators and indices that one can use (and whileaccess to reliable data can be problematic, extensive open datasources, such as those provided by the World Bank, areincreasingly available). However, one can also get lost in anexercise of this nature, so we recommend selecting a relativelycontained but balanced set of indicators that can begin toprovide some direction.

For illustrative purposes, the set of indicators in Figure 11 canallow some tentative hypotheses to be developed from a RetailFinancial Services perspective. In applying these indicatorsacross all 53 African countries, one would probably immediatelydiscount a fairly large number based on a combination ofdemographic factors, unattractive economic growth prospectsand the relative difficulty and risk of doing business.

On the face of it, it may be difficult, for example, to justify afocus on countries like Somalia, Eritrea, the Central AfricanRepublic, Guinea-Bissau and Niger. (There are others, such asthe Democratic Republic of Congo and Zimbabwe that clearlyhave potential, but are not being viewed positively.)

Alternatively, there are those that are more obviously worthconsideration:

• South Africa, Tunisia, Egypt and Morocco are all relativelymature, diverse and (more or less) open economies, withrelatively positive growth prospects. Botswana, Namibia and,increasingly, Mauritius would also fall into this category,although their relative population sizes are small.

• Many commentators predict that Nigeria will be thecontinent’s future powerhouse. Despite current challenges ofdoing business, regulatory reforms are having a positiveimpact, and sheer population size (over 150 million, almosthalf of which is urban), oil wealth, and the strong economicgrowth trend (real GDP growing at an average of 7% over aten year period to 2013, and GDP per capita over the sameperiod at over 15%) make it a market that is difficult toignore.

• Angola’s is another market with clear potential. While itsEase of Doing Business and Governance rankings are low(indicative of the current challenges of the market), itsforward looking growth prospects are very strong (ten yearReal GDP growth of 11% and GDP per capita growth of25.7%).

• Ghana performs relatively strongly across a range ofindicators, reflecting strong institutional and policyfundamentals, as well as a strong Governance ranking andeconomic development prospects (ten year GDP growth of7.6% and GDP per capita growth of 20.4%).

Some of the emerging economies that stand out as having goodprospects in an exercise of this nature include:

• Kenya’s population is 38 million, labour force 17 million, GDPgrowth 4.8% and GDP per capita growth 12.6%. It also scoresreasonably well in the Ease of Doing Business Index (in thesame category as Ghana).

• Tanzania has a population of 42 million people and a labourforce of 20 million (the fifth highest on the continent).Although current GDP per capita is very low ($532), tenyear GDP growth of 6%, combined with GDP per capitagrowth of 10% and a relatively high ranking on the IbrahimIndex (12), makes it look like a market for the future.

• Mozambique, after many years of civil war, is promising toemerge as a real success story. A relatively large populationof 22 million (labour force of 10 million) and ten year GDPand per capita growth of 7.1% and 21.1% respectively makesthis a market with obvious potential.



Moving beyond conventional analysis This kind of analysis is useful to a point, but can also provide limited answers and a limiting strategic horizon(starting with national boundaries as the limiting unit of analysis).

To move beyond commonly-held assumptions, less conventional market groupings can be a lot more usefulin helping to progress thinking. Urban corridors, for example, are viable markets are often missed instraightforward country-based comparisons. These corridors develop in parallel with transport infrastructureand trade routes, and are often the backbone of national and even regional economies. So, for instance,while Nigeria and the broader West African region may look daunting in terms of market development, theGreater Ibadan-Lagos-Accra (GILA) urban corridor has a population of about 25 million consumers, and isreally the economic engine of West Africa (see Figure 8).

UN-Habitat predicts rapid urbanisation for Africa, with much of the growth in medium-sized conurbations(see Figure 7), and this is where much of the economic growth and development will happen.

Thinking beyond geography, culture can also suggest unconventional but useful groupings. For example, theMuslim population of Africa is often underestimated. At 470m people, one third of the world’s Muslimpopulation lives in Africa (see Figure 9 which shows a distortion of the world map to represent relative shareof the world’s population of Muslims).

Figure 7 - The GILA urban corridor

Figure 8 - African urbanisation statistics

Figure 9 - Country sizes distorted to represent Muslim population

Source: UN-Habitat

Source: www.worldmapper.com

Source: UN-Habitat

Size >10m 5-10m 1-5m 0.5-1m <0.5mNumber 2 2 48 60 UnknownPopulation (thousands) 23,076 14,238 102,418 41,057 231,404Percent of urban population 6.18 3.81 27.43 10.10 52.48Trend for 2025 3 8 73 84 Unknown


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A common assumption is that most of these people are in North Africa. Surprising to many is the fact thatlarge Muslim populations reside in sub-Saharan Africa. Nigeria, for instance, has over 60m Muslims, thesecond largest Muslim population in Africa. Tanzania has 19m, Senegal 11m and Mozambique 4m. This is asignificant and underserved consumer market.

Household income can be another useful indicator of market potential. For example, it can be illuminating tocompare the growth rates of different income segments. The bar charts in Figure 10 enable some workinghypotheses about the overall consumer development trajectory of African countries.

The growth patterns of consumer groups within African countries conform approximately to eight differentpatterns (see Figure 12), on the basis of which some assumptions can be made.

Where the poorest segments of the market are growing most rapidly and the most affluent are shrinkingconcomitantly, one could assume that the country’s economic development is in retreat. Conversely, sharpgrowth in affluent segments and a decline in households falling into the poorest segments suggest a societywhich is becoming richer. If, for example, your target market is towards the lower end, but with somedisposable income (earning, for instance, between $5k and $20k annually as a household), the fourth andfifth type of market in Figure 12 look most attractive, which implies a focus on countries like Cape Verde,Equatorial Guinea, Liberia, Libya, Gambia, Namibia, Sao Tome & Principe, Senegal, South Africa andSwaziland. Alternatively, a company looking for a population tending towards greater affluence in the nearterm would perhaps focus on the eighth pattern, which includes Egypt, Mauritius, Morocco, Seychelles,Sudan, and Tunisia.

However, the countries identified by such a selection are obviously very different. Combining the analysiswith absolute market size, for instance, the likes of Cape Verde and Sao Tome & Principe are tiny incomparison to, say, South Africa or Libya. On the flipside, Sao Tome & Principe has significant offshore oilreserves which could increase the importance of this country for certain companies, despite its small size.The point here is that analysis must combine multiple indicators to provide a reliable view of the market.

As a result we encourage a focus on a manageable set of indicators for any given analysis but shuffle thedeck to work towards a framework which asks the right questions given a particular organisation’s priorities.For example, Figures 13 and 14 provide one such framework, facilitating a comparison between two

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Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon

Figure 10 - 15 year growth rates of a sample of African countries spilt by $5k increments of annualhousehold income


0-5000 5000-10000 10000-15000 5000-20000 20000-25000 25000-30000 30000-35000 35000-40000 40000-45000 45000+



different consumer segments in African countries –the $5K – $20k annual household income segmentand $20K – $45k, but factoring in the relative easeof doing business in different markets as well. Theywork across four indicators to arrive at a view ofrelative potential:

• The % of the whole market represented by thesegment under consideration in order to provide aview of the relative maturity of that segment andtherefore the theoretical room for growth (yaxis)

• The growth rate of that market segment over the1995 – 2010 period, as an approximate indicatorof potential

• The absolute size (i.e. number of households) inthe market segment

• The ranking of the whole country in terms of theWorld Bank’s Ease of doing business index

Combining these indicators enables one to form ajudgement as to the relative potential of markets. Inthis example, we have simplified the process bylaying down gridlines, within which tentativeassessments can be made about different markets;the positioning of the gridlines is a subjectiveprocess, and should be considered part of makingdecisions about the criteria for market potential.

So, for example, in Figure 13 (the $5k-$20ksegment), markets with a low growth rate and highsaturation rate are considered ‘Saturated’ (CategoryA) and would therefore be a less desirableinvestment destination if the focus is on thisconsumer segment. Such markets include Egypt,Morocco, Tunisia and North Africa generally. SouthAfrica is also moving into this territory. At thediagonally opposite end of the grid, markets with ahigh rate of historical growth and a low level ofsaturation are considered ‘Underdeveloped butgrowing fast’ (Category H) and should therefore berelatively attractive investment destinations. Suchmarkets include Rwanda, Ethiopia, Mozambique,Angola and, more generally, the Portuguesespeaking nations. The majority of African markets sitbetween these two extremes in the ‘Evolved but stillgrowing’ part of the grid, where growth has beenrobust and saturation is moderate.

By contrast, the majority of markets in the $20k –$45k consumer segment (Figure 14) fall into the‘underdeveloped but growing’ category. There is,however, a long tail in the ‘underdeveloped butgrowing fast’ category: East Africa looks particularlypromising with close to 8% growth and a significantcombined size.

The analysis can be enriched by plotting some of thedifferent market groupings referred to earlier on thechart; for illustrative purposes we have includedIslamic countries, North Africa, SADC countries, andthe GILA urban corridor, among others. Because it isill-advised to target individual countries out ofcontext of surrounding or related markets, thesealternative market groupings allow for discussionabout the most attractive sets of markets on whichto focus.

To evolve this analysis to a meaningful stage does, ofcourse, require the inclusion of industry-specificindicators. For example, Figure 15 is an example ofanalysis for a Life Insurance company in which wecompare the growth rate of the $5k – $20kconsumer segment over 1995 – 2010 with lifeinsurance premiums as a % of GDP in the country asa whole (i.e. insurance penetration), and theabsolute size of the market segment in terms ofnumber of households. In this case, we have appliedthe framework across a number of emergingmarkets across Africa, Latin America and Asia. Sometentative conclusions that can be drawn:

• Markets with low insurance market penetration(under 2%) and positive segment growth are‘markets to make’: countries in which the marketentrant will have to cultivate consumers’understanding of the services they are offeringand wrestle with costly bureaucracy.

• Markets with insurance market penetrationbetween 2 and 5%, and positive segment growthare ‘markets to develop’ in the sense that there isalready an immature market for life insurance andtherefore an opportunity to fight a fragmentedcompetition for market leadership.

• Markets with high insurance market penetration(over 5%) and positive segment growth are‘markets to win’: countries in which marketleadership must be prised away from anestablished and consolidated competition.

• Markets with negative segment growth are hereconsidered ‘markets to avoid’.

A life insurer focused on the $5k – $20k marketsegment would therefore probably avoid Mexico andTurkey in this analysis. Furthermore, they might alsoavoid ‘markets to win’, like South Africa in this case,because these are already highly contested, and thecost of dislodging established competition would betoo great. They would instead build a portfolio ofopportunities within the remaining two categories ofmarket, based on more detailed analysis.


We are convinced that any multinational organisation with serious long term growth ambition should be factoringAfrica into its strategs. Now is the time to invest in understanding markets, identifying partners, developingopportunities, configuring industries, building brands, and establishing local credibility.

However, one should also not lose perspective. There is a feverish tone to the media coverage of emerging marketsgenerally, sometimes redolent of the 19th century gold rush era. Just like then, it takes more than luck andresourcefulness to sustain success; despite all the positive developments across most parts of Africa over the past 20years, one should not lose sight of the very real challenges of identifying viable markets and of doing business acrossthe continent.

Whether entering or expanding into Africa, it is therefore critical to develop a structured and meaningful frameworkfor assessing different strategic options; one that helps configure markets not only as they are in more conventionalterms, but also as they might be. While our analysis in this paper is not intended to provide such a framework (whichhas to be organisation-specific), we do hope it has at least offered some useful ideas and guidelines for gettingstarted.

Initial conclusion

9



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South Africa 49 18 60.74 5,884 3.8 13.6 92.43 34 N/A 5 5

Nigeria 151 46 48.36 1,333 7.0 15.4 41.63 125 N/A 35 57

Angola 18 8 56.70 4,219 11.0 25.7 37.59 169 2.5 42 N/A

Botswana 2 0.69 59.58 6,481 3.6 3.8 77.99 45 N/A 4 47

Ghana 23 10 50.02 635 7.6 20.4 49.55 92 4.0 7 59

Mozambique 22 10 36.84 840 7.1 21.1 20.22 135 3.5 26 118

Tanzania 42 20 25.52 532 6.6 10.0 30.62 131 4.0 12 74

Kenya 39 17 21.60 892 4.8 12.6 42.13 95 3.5 22 37

Namibia 2 0.69 36.84 4,451 4.9 2.3 49.76 66 N/A 6 31

Algeria 34 14 65.22 3,842 3.8 11.1 81.42 136 N/A 14 132

Egypt 82 25 42.72 2,507 5.2 12.4 50.62 106 N/A 11 84

Morocco 31 11 56.02 2,939 4.2 8.5 73.06 128 N/A 16 96

Tunisa 10 4 66.50 3,703 5.1 6.6 82.98 69 N/A 8 87

Figure 11 - Macro indicators for a sample of African countries

Figure 12 - Patterns of growth in household income for African countries

Source: World Bank, Business Monitor Internation, Mo Ibrihim Foundation, World Economic Forum


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Remaining roughlystatic

Generally gettingmore affluent

Markedly gettingmore affluent

Growth of the workingpoor/middle market

Working poor andaffluent growth

Remaining roughly staticwith a tendency to

greater poverty

Remaining roughly staticwith a tendency towards

greater affluence

Market segments ($Householdincome)

Algeria, Burundi, Chad, Congo,Eritrea, Gabon, Guines-Bissau,Zimbabwe

Coté D’Ivoire, Madagascar,Sierra Leone, Somalia

Democratic Republic of Congo Cape Verde, Equatorial Guinea,Liberia, Libya

African average, Gambia,Namibia, Sao Tome & Principe,South Africa, Swaziland

Benin, Cameroon, CentralAfrican Republic, Comoros,Djibouti, Kenya, Lesotho, Mali,Niger, Senegal, Togo, Zambia

Angola, Burkina Faso, Ethiopia,Ghana, Guinea, Malawi,Mauritania, Mozambique,Nigeria, Rwanda, Tanzania,Uganda

Egypt, Mauritius, Morocco,Seychelles, Sudan, Tunisia









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Africa Business CenterTM

Doing business in AfricaHelping companies navigate the opportunities and challenges ofdoing business across the African continent

Our presence in Africa

Africa interactiveTM

To further support our activity on the continent and instrategy co-development with businesses, we havedeveloped a dedicated, interactive Africa BusinessCenter™ software, for doing business in Africa.

This map based interactive software, provides a view of Africafrom region, country and even municipality highlighting keyinformation a business needs to make an informed decision.Our interactive map-based software is a key tool that enablesclients to map their issues and footprint across Africa,intersecting with key variables relevant to their businesses.

email: [email protected]

Africa is receiving unparalleled attention from largeglobal companies, with substantial opportunities in oil &gas, mining and agriculture closely followed byconsumer driven demand in the areas of consumerproducts, telecoms, financial services, informationtechnology and others.

A key element of our Africa Business CenterTM is our ability tocoordinate our resources across Africa in a manner thatprovides the client with a ‘single point of contact’, and connectour clients to opportunities, from a transaction viewpoint.


Ernst & Young

Assurance | Tax | Transactions | Advisory

About Ernst & Young

Ernst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide, our141,000 people are united by our shared valuesand an unwavering commitment to quality. Wemake a difference by helping our people, ourclients and our wider communities achieve theirpotential.

For more information, please visitwww.ey.com/za

Ernst & Young refers to the global organisation of member firms ofErnst & Young Global Limited, each of which is a separate legalentity. Ernst & Young Global Limited, a UK company limited byguarantee, does not provide services to clients.

The Ernst & Young organisation is divided into five geographicareas and firms may be members of the following entities: Ernst & Young Americas LLC, Ernst & Young EMEIA Limited, Ernst & Young Far East Area Limited and Ernst & Young OceaniaLimited. These entities do not provide services to clients.

© Ernst & Young South Africa 2010/2011.All rights reserved.

Studio ref. 101201. Artwork by Jonesry.

ContactsMichael Lalor

Phone: +27 21 443 0400Mobile: +27 83 611 5700e-mail: [email protected]

Luke Davies


Victor KgomoeswanaAfrica Business CenterTM



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