Picking Stars in Africa

(Vijay Mahajan, 2008, Africa Rising)

Massive unemployment, high levels of poverty, rampant starvation and poor access to basic amenities and services are some of the phrases synonymous with much of what is written about the socio-economic conditions in the majority of the 53 countries on the African continent. However, the continued focus on these fundamental developmental challenges often masks the tremendous potential of the growing consumer markets in Africa from the perspective of companies looking to invest in these markets. In turn, realising this potential through increased investment and improved business conditions is likely to spillover into higher growth rates, and rising gross national incomes per capita – with obviously positive effects in terms of socio-economic development and poverty alleviation.

Vijay Mahajan’s book Africa Rising presents a compelling case in favour of Africa as a continent with massive needs and buying power that is often underestimated. The book describes how many global firms have succeeded on the continent despite its unique political, economic and resource challenges. To date, however, much of the focus of companies, particularly global firms, operating in Africa has been on the top segment of the market (described by Mahajan as ‘Africa One’) – those who have the most disposable income and behave the most like elite segments in other global markets. This segment, however, only accounts for a comparatively small fraction (50 – 150 million) of the continent’s consumer base. In contrast, the segment Mahajan refers to as ‘Africa Two’ represents between 350 million and 500 million people across the continent. This growing emerging middle market – the potential future middle class – is the consumer market where huge potential exists in Africa.

(Vijay Mahajan, 2008, Africa Rising)

One example of the growing African consumer market is reflected in the rise of supermarkets in many countries across the continent. Much of this has been facilitated by several of South Africa’s main retail giants – such as Shoprite and Massmart – successfully expanding their operations into the rest of Africa. According to Dianna Games, South African firms have succeeded across Africa because they “have not been afraid to tackle difficult markets” offering significant long-term investment potential. The expansion of these retail chains has also had spillover benefits for both local companies and suppliers in these economies.

Nevertheless, it is important not to dismiss the extraordinary diversity of countries and economies on the African continent. At present, certain African countries offer considerably more favourable opportunities – reflected in better business environments, infrastructure and governance and greater levels of social capital – and lower risks for successful long-term investment.

But, which African states currently offer the best investment opportunities?

The Star of Africa Index™, recently developed by African Rainbow Consulting, offers one potential source from which to identify those African countries that offer the best opportunities in this regard (see http://www.africanrainbow.or/index.php?option=com_content&task=view&id=35&Itemid=61). The index ranks the continent’s 53 countries in terms of investment potential using a weighted index based on governance and social capital indicators as well as each country’s electricity, water, internet and telecommunications sectors. Using this approach, the index “provides a method of comparing the opportunity set in the electricity, water and ITC sectors in each country in Africa whilst taking account of two dimensions – governance and social capital – that are key to sustainable economic development.”

Somewhat surprisingly, Nigeria tops the index’s rankings, followed by Ethiopia; with South Africa, Mauritius and Tanzania making up the top five, and Botswana, Ghana, Cape Verde, Uganda and Kenya filling positions six through to ten. At the opposite end of the spectrum, Somalia, Eritrea and Chad rank as the countries with the least attractive investment opportunities.

In many senses, while Africa’s lack of development is undoubtedly cause for concern, it also offers significant opportunities for investment. For instance, an estimated 497 million Africans need access to electricity, 600 million potential customers are waiting for access to improved sanitation, 628 million Africans do not have mobile telephone subscriptions and only 6 percent use the internet. The challenge is for investors and businesses to identify and seize these opportunities by picking the brightest stars in Africa.

Neil Balchin
Senior Researcher and Consultant
Mthente Research and Consulting Services