More Middle Class Means Money

Published 10 years ago

Consumer services and industries are overtaking resource extraction as the most attractive investment area in Africa, a trend that is being overlooked by many global investors.

According to the African Development Bank (AfDB), consumer spending amounted to $680 billion in 2008 – up from $150 million in 2000 – and comprising nearly a quarter of the continent’s gross domestic product. It is set to nearly quadruple to $2.2 trillion by 2030, with sub-Saharan Africa making up the lion’s share of spending.

This puts the region on course to become the world’s fastest-growing consumer market over the next two decades, says UK-based research company Capital Economics. Spending will be driven by the continent’s rapid population growth, rising real incomes, increased urbanization and better access to financial services.


Africa’s population is currently estimated at one billion and is expected to more than double to 2.4 billion by 2050, making it bigger than India and China combined. The key question is whether the continent’s strong pace of economic growth and development can create the employment and living standards necessary to support the anticipated surge in consumer demand. So far, the omens are good.

The AfDB believes that Africa’s middle class – those earning between $2 and $20 a day – will climb to 1.1 billion, or 42% of the population, by 2060. That compares to 350 million, or 34%, at present.

“Consumerism in Africa is a really big opportunity over the medium – to long-term – there are lots of people looking to buy lots of things. Huge parts of Africa are under-represented in terms of daily items – this is underplayed to some extent,” says Simon Venables, deals leader for Africa at PricewaterhouseCoopers.

Nonetheless, rapid growth of investment into consumer products and industries on the continent has already begun, according to Ernst & Young (EY). In 2007, extractive industries represented 8% of foreign direct investment (FDI) projects and 26% of capital invested in Africa; in 2012, it was only 2% of projects and 12% of capital – despite the booming oil and gas sectors.


In comparison, services accounted for 70% of projects in 2012, up from 45% in 2007, while manufacturing activities accounted for 43% of capital invested in 2012, up from 22% in 2007. In an EY survey of 500 business leaders last year, mining and metals was still perceived as the sector with the highest growth potential in Africa, but the number who believe this, dropped to 26% from 38%. In contrast, interest in African infrastructure projects is increasing rapidly, with 21% of respondents identifying this as a growth sector versus 14% in 2012 and only 4% in 2011.

“These changing perceptions of relative sector attractiveness in Africa reflect the changing fundamentals of many African economies,” says Mark Otty, EY’s area managing partner for Europe, the Middle East, India and Africa. This included “the diversification of sources of growth – the increasing contribution of services and the growing consumer class – and of the actual FDI flowing into these economies.”

Overall, Africa’s appeal as an investment destination has been growing in recent years, in step with its average annual pace of growth of 5% during the past decade. FDI flows to Africa increased by 5% to $50 billion in 2012, while global FDI fell by 18%, according to the United Nations Conference on Trade and Development. The global financial crisis placed the continent on investors’ radar screens as its economic performance outshone many other global regions.

Global consultancy firms such as PwC, EY and KPMG have all reported a significant increase in enquiries about Africa’s investment potential in the past year.


KPMG Africa chairman Yunus Suleman says that telecommunications remains a big growth area as the continent still has the lowest teledensity rate. Financial services offer another opportunity – there are four bank branches per 100,000 people on the continent compared with up to 18 in other emerging regions. Health care is attractive, as is agriculture, since the continent has 60% of the world’s unused arable land.

Africa’s poor infrastructure is both a challenge and an opportunity for investment – the AfDB estimates that it needs $93 billion a year, mainly in transport and power generation. This has already taken off. In 2012 there were 800 infrastructure projects worth an estimated $700 billion in Africa.

Nonetheless there are other big barriers to investment on the continent, with negative perceptions still globally entrenched. The EY survey showed that 86% of businesses in Africa rate the continent as the second most attractive regional destination after Asia, while those with no business presence rank Africa as the least attractive.

“We are seeing some realism creeping in but distant and uninformed investors with no knowledge of emerging markets will find it difficult to get the risk/reward balance right,” says Venables.