AFRICA S CONSUMER STORY. kpmgafrica.com

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1 AFRICA S CONSUMER STORY kpmgafrica.com

2 2 FULL SECTOR REPORT CONTENTS OVERVIEW 4 DEMOGRAPHICS 5 MACROECONOMIC DRIVERS AND SPENDING PATTERNS 6 RETAIL MARKETS IN SELECTION OF KEY ECONOMIES 8 Algeria 8 Angola 9 Egypt 9 Ethiopia 10 Ghana 10 Kenya 10 Morocco 11 Nigeria 11 Tanzania 12 CONCLUSION 15 SOURCES OF INFORMATION 15 CONTACT DETAILS 16

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4 4 FULL SECTOR REPORT OVERVIEW Africa is home to more than one billion people, presenting a massive potential consumer market. Moreover, population growth remains rapid, so much so that the UN forecasts the continent s population will surpass the 1.5 billion mark by 2030 and the two billion mark 15 years later. In addition, Africans are increasingly moving to cities, making it easier for companies to target certain consumer groups. Although the demographic make-up of the continent is extremely favourable, success is not guaranteed. Firstly, there are vast differences across countries North Africa is for example far more developed than sub-saharan Africa, while the retail market opportunities in (say) Nigeria will be very much different from that in Tanzania due to differences in consumer tastes, culture, income, and demographics. Secondly, it is important to distinguish between opportunities at the national and at the city level. Data at the national level can often be misleading, as a city s GDP per capita can vastly exceed the national average due to the greater concentration of wealth in urban areas. Finally, simply because a country has favourable demographics does not mean that this will necessarily translate into higher levels of economic growth and consumer spending. The crucial deciding factor will be economic policy, reforms, and job creation. In theory, an increase in the proportion of the working-age population relative to the total population (the so-called demographic dividend) is potentially beneficial for consumer spending as it frees up resources. But this will not happen if there is a high unemployment rate in the working-age population. Thankfully, apart from Africa s favourable demographics, there is also a favourable outlook for economic growth, despite the current challenging global environment. As a result, the purchasing power of the continent s large consumer market is expected to increase significantly over the medium- to long-term. This presents lucrative opportunities for investment in consumer-focused industries, including retail. According to a report by the African Development Bank (AfDB), some million Africans are now classified as middle class (daily per capita expenditure of between $4 and $20), 30% higher than in The AfDB further estimates that there are a total of million people on the continent that spend between $2 and $4 daily, many of whom will join the middle class over the next decade. The aim of this study is to analyse the key drivers of the retail market in Africa, including key demographic and macroeconomic factors. In addition, we consider the broad outlook for the sector and highlight the countries we expect will have the biggest growth rates in the sector over the forecast period.

5 FULL SECTOR REPORT 5 DEMOGRAPHICS Africa is home to more than one billion people, and with population growth remaining rapid in contrast to many other regions in the world where it is declining the continent s potential consumer market will become ever more relevant and impossible to ignore. According to projections from the United Nations (UN) Population Division, Africa s population size will exceed 1.5 billion by 2030 and two billion by By 2071, Africa is forecast to be home to close to three billion people, more than the projected combined populations of China and India at that time. The accompanying table highlights some of Africa s key demographic indicators compared to China, India, Europe, and the US. It is self-evident that a large population size is beneficial to the development of retail. However, while a high population growth rate increases the future size of the consumer market, it also lowers consumption per capita, ceteris paribus. Hence, the important indicator to monitor is income per person. Unfortunately, a perfect proxy for this is lacking due to inequality distorting per capita indicators such as GDP or consumption per head. We believe that, across the board, Africans will continue to get richer over the next decades, setting forth a trend that gained traction in the 2000s. This will be driven by demographics, resources, improved macroeconomic policies, and lower political risk. Africa s Demographics vs. Other Regions Country / Region Population 2011 Population growth, Urbanisation rate in 2010 Urbanisation rate forecast for 2025 Population aged between 15 and 64 (2010) million % p.a. % % % % South Africa Sub-Saharan Africa North Africa Africa 1, China 1, India 1, Europe United States Sources: UN Population Division Population aged between 15 and 64 (2020F) UN projections suggest that sub-saharan Africa (SSA) will experience a prolonged period (between 1990 and 2075) during which its working-age population will expand at a faster rate than its overall population. The difference between the two growth rates is expected to reach a peak in In North Africa, the change started some 15 years sooner, and is expected to last 20 years less. Although declining, SSA s dependency ratio is still very high due to the large number of young people in the population. But towards the end of the current century, SSA s dependency ratio 1 is forecast to be lower than that of India, China, and North Africa. This period will give the region the chance to boost consumption spending power significantly, provided there is sufficient job creation. In contrast to the developed world where people are getting older and increasingly moving into retirement age while at the same time fertility rates have declined drastically, in Africa and other developing countries, young people still dominate the population; this is expected to continue to be the case for a number of decades to come. Thus, while in Europe and the US private and public funds will have to be directed at supporting the elderly, in Africa resources will be freed up as people go from being dependents to income generators. Billions Source: UN Population Division Total Population Central and West Africa Franc Zone North Africa East Africa Southern Africa China & India 1 The dependency ratio is defined as the proportion of the total number of dependents in the country (i.e. those younger than 15 and those aged 65 and older) in relation to the working-age population. The higher this ratio, the more demands there are on the resources of the productive portion of society, and the less discretionary income people will have to save, spend, or invest.

6 6 FULL SECTOR REPORT Total Dependency Ratios Averaged (unweighted) by Country Source: UN Population Division SSA North Africa China India Since purchasing power in urban areas is usually higher than in rural areas, while infrastructure is also of better quality, studying urbanisation trends is key to understanding consumption patterns. From 1990 onwards, there was a rapid increase in China s urbanisation rate, rising from 26.4% in 1990 to 49.2% in 2010, and projected to increase to above 65% by In SSA, the urbanisation rate increased from 24.1% in 1980 to 36.3% in There are however vast differences within SSA; the urbanisation rate of East Africa is much lower than the rest of the SSA region, and projected to remain lower over the next few decades as well. The fact that East Africa has such a low urbanisation rate is understandable given the importance that subsistence agriculture still plays in the economies of these countries. For SSA as a whole though, the urbanisation rate is projected to continue to increase at a rapid pace, reaching 43.2% in MACROECONOMIC DRIVERS AND SPENDING PATTERNS Africa s economic performance has improved greatly since the turn of the century, leading to large increases in GDP/ capita and lower levels of poverty. From 2001 to 2011, the SSA economy grew at an average rate of 5.7% p.a. in real terms. This meant that GDP per capita rose from $461 in 2001 to $1,219 in 2011 after having declined during the previous two decades. During , six of the 10 fastest growing economies in the world were in Africa. The improvement coincided with an improvement in business environments and a reduction in political risk, although a commodity boom also played a significant role in the increase in real GDP. Several African countries are expected to be among the fastest growing in the world over the next decade. Over the next few decades, a more educated cohort of young people will enter the labour market, leading to the rise of a wealthier middle class that will fuel growth in the services industry. Botswana, Mauritius, and South Africa have purchasing power parity (PPP) adjusted levels of GDP per capita that are amongst the highest on the continent 2, while countries such as Mozambique, Ghana, Zambia, Tanzania, Ethiopia, and Libya are expected to show the highest growth in this indicator over the period. (Libya s forecast growth rate is the highest due to the sharp fall in income as a result of the uprising at the beginning of 2011.) Spending patterns are determined by disposable income per capita. There is generally quite a strong negative correlation between the proportion that is spent on food and overall prosperity levels. Currently, food dominates African consumers spending, but this will gradually change as incomes rise. The African population presently remains heavily dependent on cheap staple foods, while the increased inclusion of meat in the diet has barely begun. For the large majority of the African population, the nutritional transition is still focused on quantity increases rather than quality increases. For these reasons, the fast-moving consumer goods (FMCG) sector on the continent presents retailers with lucrative opportunities, with a wide range of products expected to see a sharp increase in demand over the next few decades as African consumers continue to move up the food curve KCAL per person per day ,100 2,900 2,700 2,500 2,300 2,100 1,900 Real GDP & GDP Per Capita in SSA Source: IMF Real GDP, % change p.a. (lhs) GDP per capita PPP, $ (rhs) GDP per capita, $ (rhs) Africa Regional Per Capita Calorie Consumption Population Weighted 2, , , , Sources: NKC Research, IFs Data 1, sub-saharan Africa North Africa 0.0 Recommended Minimum KCAL Intake 2 Countries such as Libya, Equatorial Guinea, and Gabon also have relatively high GDP per capitas, but due to this being mainly the result of oil wealth, income is very unequally distributed, and as a result average GDP per person is not a good proxy for wellbeing.

7 FULL SECTOR REPORT 7 Apart from food, another product category that is likely to see strong growth in Africa over the next few decades is alcohol. Given that more than half of SSA s population falls in the lowest income category, not surprisingly, alcohol consumption per capita in SSA is still much lower than in other regions. African beer consumption was estimated at 108 million hectolitres in 2011, with three countries South Africa, Nigeria, and Angola accounting for 51% of this. As people move up the income ladder, per capita spending on beer rises significantly. There is a very high growth rate in per capita spending on beer in the $1,001 - $2,500 category. In this bracket, informal trading still dominates the market, but a gradual shift from traditional beers (such as sorghum-based beers) to clear beer starts occurring. Given the large number of people in Africa still earning less than $1,000 p.a. combined with the expectation that economic growth on the continent will be much higher than in most other regions over the forecast period, implies that there is massive potential in the alcoholic beverages market (especially beer). We estimate that in 2010, close to 579 million Africans earned $1,000 or less p.a. (expressed in 2000 constant US$ throughout). This is up from 529 million Africans in 2000, even though the percentage of people falling in this bracket declined from 77.6% of the total to 67.9% over the same period. This trend is expected to continue. Despite people continuing to move up the income bracket, population growth will ensure that the size of this market increases, reaching 662 million by 2020, and 702 million by Encouragingly, the size of the $1,000 - $2,500 income bracket is expected to increase at an even faster pace, reaching 228 million (21.6% of the total) by 2020 and 304 million by 2030 (23.6%) from 183 million (21.5%) in The accompanying graph shows the six countries in Africa that we expect will have the highest real GDP growth rates over the following two years out of a sample of 30 countries 3. Other countries in the sample that are expected to post high growth rates include Tanzania, Ethiopia, Angola, and Uganda. If SABMiller s expansion plans are anything to go by, the African beer market definitely presents profitable opportunities. One of the company s key strategies on the continent has been to provide beers at lower cost in order to target the lower income consumers. In order to lower production cost, the company uses locally produced sorghum and cassava in the production process rather than more expensive imported barley. According to SAB, the prices of sorghum-based beers have to fall to 80% of that of the mainstream brands in order to get the required boost in demand to justify the investment. In Tanzania, this strategy has not worked very well since the country has a more moderate excise tax regime than some other countries in the region, which implies that the price differential between the sorghum-based and mainstream beers is too small. On the other hand, the tactic has paid off in countries such as Uganda and Mozambique Top Economic Growth Rates in Africa Source: NKC Research Libya, 16.8% Zambia, 8.1% Mozambique, 8.0% Rwanda, 7.5% Ghana, 7.3% Nigeria, 7.0% Libya, 9.0% Zambia, 7.6% Mozambique, 7.6% Rwanda, 7.3% Ghana, 7.0% Nigeria, 7.0% 2013F 2014F 3 The sample consists of Algeria, Angola, Benin, Botswana, Cameroon, DRC, Egypt, Ethiopia, Gabon, Ghana, Kenya, Lesotho, Libya, Malawi, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Rwanda, Senegal, South Africa, South Sudan, Sudan, Swaziland, Tanzania, Tunisia, Uganda, Zambia, and Zimbabwe.

8 8 FULL SECTOR REPORT RETAIL MARKETS IN SELECTION OF KEY ECONOMIES The accompanying table summarises the African countries that in our opinion are the most promising ones for retail development over the next two decades. The opportunity for expansion in these markets is discussed in more detail below. Country African Countries Most Likely to See Strong Growth in Retail de (excluding South Africa) PPP GDP per capita 2011 Real GDP growth F Population 2011 Population growth, Urbanisation rate in 2010 Urbanisation rate forecast for 2025 Current level of development of formal retail $ % p.a. million % p.a. % % Scale 1-5 where SA = 5 Algeria $7, % Poor Angola $5, % Poor Egypt $6, % Poor Ethiopia $1, % Poor Ghana $3, % Good Kenya $1, % Good Morocco $5, % Good Nigeria $2, % Improving Tanzania $1, % Average Sources: IMF NKC Research UN Population Division UN Population Division UN Population Division UN Population Division NKC Research Economic Policies - NKC Research Algeria Motivation: Large population; high urbanisation rate; high GDP per capita Not only does Algeria have a large population, it is also still growing at a fairly rapid rate of about 1.4% p.a. Population growth is however slowing and is expected to fall to below 1% p.a. during the early 2020s. Still, by that time the population is projected to be around 41 million. As such, Algeria provides a large potential consumer base. Algeria also has an Association Agreement with the European Union. According to the agreement, a free trade area will be established by 2017 if all goes to plan, so this could further broaden the potential market for companies operating in Algeria. Something that should be kept in mind, though, is that Algeria does not have an established tourism industry. Therefore, while neighbours Morocco and Tunisia receive 9.3 million and 6.9 million tourists p.a. respectively, Algeria attracts two million, most of which are Algerians living abroad. As such, Algerian retailers do not benefit much from wealthy European travellers visiting their shores. The median age of Algerians has increased significantly over the past three to four decades from an extremely low 16 in the 1970s to 26.2 in This, in turn, is due to a sharp decline in the share of children in the population, partly as a result of massive improvement in healthcare; for example, the under-five mortality rate for Algeria decreased from 134 deaths per 1,000 births in 1980 to 32 deaths per 1,000 births in Algeria has a very high GDP per capita by African standards, although wealth is distributed very unequally because the oil and gas sector, which directly benefits only a few, accounts for 40% of GDP. Poverty is not much of a problem in Algeria: according to the African Economic Outlook (AEO), only 0.5% of the population lived in extreme poverty in This is significantly better than in 1988 when 1.9% of the population lived in extreme poverty. Considering the demographic factors discussed above, combined with the benefits of high oil prices and government subsidies, Algeria certainly does offer massive opportunities for consumer goods companies in theory. In practise, there may be numerous stumbling blocks, like a government adamant on dominating economic activity, unwilling to allow the private sector to develop, and often opposed to allowing foreign companies to operate. Retail sector snapshot - The sector is dominated by informal operators. Numidis a notable domestic retailer operates supermarkets and hypermarkets across the country with products ranging from food to cosmetics, clothing, and appliances. Another domestic retailer, Blanky, was quite successful as a grocery retailer, but was closed in 2008 due

9 FULL SECTOR REPORT 9 to limited product availability. This is an important lesson for retailers that wish to enter Algeria s retail scene: make sure that distribution networks are established for the products you wish to sell. This is crucial in a country such as Algeria, which imports most of its food requirements, where forex controls are in place, and government policy opaque. The difficulty of operating in Algeria is clearly illustrated when looking at what happened with French retailer Carrefour. The company entered into a partnership with Algerian group Arcofina in 2006 to open hypermarkets in the country. The partnership was ended at the beginning of 2010, as Carrefour had only managed to open one store out of a planned 18. The failure was ascribed to difficulties in getting access to available land to build shops, a weak distribution chain that made it impossible to ensure product availability, and fierce local competition. Algeria s third regional shopping centre was inaugurated in July While Algeria offers opportunities in its consumer market, the chances of succeeding is lowered by poor government policies and the weak distribution network. As soon as these issues are resolved though, the growth potential is massive. Angola Motivation: High population growth; urbanisation fairly high; high GDP per capita and strong growth prospects The rise of the Angolan economy over the past 10 years has been nothing short of spectacular. From an economy plagued by hyperinflation and suffering from the consequences of decades of civil war in the early 2000s; today, the southern African economy is one of the fastest growing in the world and continues to attract billions of dollars in foreign investment. Robust economic growth and the resultant escalation in GDP per capita have led to a consumer boom in recent years, and consumers are well positioned to continue benefiting from high oil sector earnings. Angola has a relatively high urbanisation rate, estimated at 58.4% in 2010 and projected to increase strongly to 68% by Its population size is the smallest in our group of nine countries, but its population growth rate is still relatively high at a projected average of 2.7% p.a. during , second only to Tanzania s 3.1%. As a result, the population size, which was roughly equal to 19.6 million in 2011, is expected to be close to 25 million by the end of this decade, and more than 30 million by Angola s dependency ratio is still quite high, estimated at 96.3 dependents per 100 workingage people in 2010, due to the large number of children in the population. This will slowly change though as more people move into the working-age category. Retail sector snapshot - The retail sector in Angola is still very under-developed. Formal retail in the grocery segment accounts for only around 5% of the total. Product categories that are poised to perform well over the next number of years include various food items, and beer. Angola s per capita beer consumption is relatively high in an African context at around 45 litres p.a., but there still remains scope to increase this further. As is the case in Algeria, a key stumbling block in unlocking the country s potential is inhibitive government policies. For example, in 2006 the government restricted small retail businesses to Angolan citizens. Foreigner investors are however allowed to build large supermarkets and shopping malls in the country, but in this, they are restricted by the limited availability of land. For this reason, property rental rates in Angola are extremely high, and the city is among the most expensive in which to live in the world. Knight Frank estimates Angola s prime retail rent at $100/m2 per month, compared to $45/m2 in Cape Town and Lagos. Belas Shopping Mall opened in 2007 as the country s first modern shopping centre, anchored by South African retailer Shoprite. Egypt Motivation: Large, young population that is highly concentrated along Nile; large cities; high GDP per capita Egypt has an estimated population of more than 82 million, which is the third largest in Africa and the largest in the Arab world. The bulk of the population is highly concentrated along the banks of the Nile; as a result, more than 95% of the population live on just 5% of the land, so de facto population density is extremely high. Egypt s urban population growth is forecast to accelerate over time as an increasing number of rural inhabitants move to the more prosperous cities. The urban population is forecast to increase from 34 million in 2010 to 41.7 million in 2020 and almost 52 million by So by 2030, urbanisation rate should be close to 50%, up from 43.4% in About 63.4% of the population fall within the working age group of 15-64, with the proportion forecast to increase to 65.5% by As such, the dependency ratio is set to decline from 58 dependents per 100 working age people to 53 during the period. It is worth noting though that Egypt s youth unemployment rate is very high, eroding much of the benefit of having many young people in the population. Egypt has a PPP adjusted GDP per capita of around $6,500. This is amongst the highest in Africa, but is low by international standards. High inflation has been a persistent problem for Egyptians, eroding their purchasing power and making saving and investment decisions more difficult. Years of large fiscal deficits, low interest rates, a dependence on food imports, and rising international commodity prices have contributed to high consumer price inflation. However, with the International Monetary Fund (IMF) recently having reached a preliminary agreement with Egyptian authorities, there is scope for economic policies to improve, especially as the $4.8bn loan will not be disbursed immediately, but over a period of 22 months. The Egyptian authorities have vowed to reduce wasteful expenditures, and to reform its costly fuel subsidy programme.

10 10 FULL SECTOR REPORT Retail sector snapshot - Egypt s retail sector is fragmented and dominated by small, independent shops and street markets. The sector is modernising and offers immense opportunity for investment. Currently though, formal retail accounts for only around 2% of total retail trade. In the food and beverages market, mass retailers account for 8.6% of retail sales. Retail chains are however still in its infancy and there are only a few companies that operate more than five stores in Egypt. The fragmented nature of the sector and relative lack of large Western-style retailers means that the Egyptian retail market is far from saturation. The food retail sector is highly competitive, consisting primarily of small family-run enterprises. There are over 500,000 food and beverage retailers, but only a handful of these are mass retailers. The government is encouraging the development of supermarkets and shopping centres. Egypt s large and youthful population, combined with the expansion of the middle class, a thriving tourism industry and the emergence of a number of large shopping centres, will provide the basis for a boom in retail sales. The entry of more women into the workforce will also support growth in grocery shopping as women increasingly look for more convenient and quicker ways to prepare food. Business-friendly reforms (especially since 2004) have contributed to the growth in the retail sector. In particular, significant reductions in tariffs and customs, the lifting of an import ban on clothing, lower tax rates, and privatisations have encouraged foreign retailers to enter the market. Ethiopia Motivation: Large market size; strong economic growth Much like Nigeria, although on a smaller scale, Ethiopia is included in the list of promising countries purely due to the combination of its large population size, and good prospects for economic growth. The country s population size stood at 84.7 million in 2011 and is expected to expand at a rapid pace of some 2.1% p.a. over the next five years. The urbanisation rate is still low at less than 20%, and the pace of migration to cities is expected to be slower than elsewhere on the continent, with the proportion of people living in cities still being below 40% by The fact that people in Ethiopia are more spread out is an important factor that makes the country less inviting for retailers than some other countries on the continent. It is simply more difficult to reach customers, with infrastructure being much better in cities than in rural areas, while farm dwellers also do not have enough income to justify the entry of large retailers in those areas. Despite this, Ethiopia is included for a number of reasons. Firstly, the UN s forecasts are just that forecasts. Forecasts are subject to a large error margin, which increases as the forecast horizon get longer. There is every possibility that the UN could be wrong and that the pace of urbanisation in Ethiopia would be faster. It could be a very costly error if a retailer decides not to enter Ethiopia simply because the UN wrongly projected that the country would have a slow rate of urbanisation even a small error can have significant effects on the eventual outcome. There are also other reasons for including Ethiopia. Firstly, a company might consider basing itself in Kenya, and then eventually expanding into other East African markets such as Ethiopia and Tanzania. Secondly, despite the country s low urbanisation level, Addis Ababa is still home to close to three million people, expected to reach 4.7 million people by This provides retailers with a large concentration of people. Because poverty levels are high, the focus for retailers would initially have to be on supplying people with the necessities. Retail sector snapshot - The country s retail sector is still very under-developed not surprising considering that the sector is closed to foreign investment, along with a host of other industries. According to the World Bank s Investing Across Borders, foreign direct investment (FDI) in Ethiopia is closed in 13 sectors, including retail, telecommunications, financial services, and transport. Needless to say, this acts as a major drag on the attractiveness of the country s retail sector for foreign investors. However, the country is still discussed here as certain segments of retail have recently been opened to foreign investment, while the possibility that others might follow necessitates that Ethiopia must at least be on retailers radars, even if not with the view of entering the country in the short- to medium-term. One sector that has been opened to foreign investment is beverages. After SABMiller was not allowed by the government to buy a brewery in the country, the company acquired a 67% stake in the Ambo mineral water factory (the government retained the remaining share) in 2008/09. The water is sourced from a thermo-mineral spring that is rich in minerals. Apart from local sales, the company also exports the water to the Middle East, Europe, and North America. Furthermore, Diageo has acquired ownership in the Meta brewery in Ethiopia, while Heineken has acquired two local breweries (Harar and Bedele) and plans to open a new one. Operating in Ethiopia is not easy; its poor ranking on international indices like the World Bank Doing Business is testament to this fact. However, for companies that are willing to take on the risk, the reward could well make the investment worthwhile. Johann Krige, managing director of Ambo Mineral Water (SABMiller) notes the following: You ve got to separate the working environment from the opportunity, and don t let one scare you from the other We feel we can see a way through the minefield. The food retail sector is still dominated by informal vendors although supermarkets are slowly starting to gain prominence. The main supermarkets include Bambis, Fantu, Friendship, Felix, and Novis. According to a report by Regoverning Markets, Novis is Italian-owned, Bambis 4 According to the UN, there will be only nine African countries with urbanisation rates of below 40% by 2050; apart from Ethiopia, these countries are Burundi, Rwanda, Uganda, Sudan, Swaziland, Malawi, Niger, and Chad.

11 FULL SECTOR REPORT 11 Greek-owned, Felix Israeli-owned, while the remaining supermarkets in the country are domestic companies. Bambis was established in the 1960s before being nationalised in 1975, and privatised and re-acquired by its original owner in But one is yet to witness the entry of a true international retailer on the Ethiopian scene. It was reported during April 2012 that British retailer Tesco was negotiating with the Ethiopian government to open a mega store in the country, while Wal-mart has also been involved in discussions with authorities, though no deals have yet been reached. Apart from the obvious challenges of operating in the Ethiopian market restrictive government policies and the difficulties associated with the sourcing of products a number of other factors can potentially dilute the opportunity that the country offers. One of the most notable of these is an unstable macroeconomic environment, including a high inflation rate that erodes consumers purchasing power. In addition, the private sector has to deal with price and import controls, pervasive corruption, red tape, and a lack of access to financing. Furthermore, although we think Ethiopia s level of political risk has declined following the death of Meles Zenawi and the subsequent smooth transition of power, there is as of yet no signs that the new government will be any less autocratic. Ghana Motivation: Strong economic growth prospects; growing population; increased urbanisation Ghana, already a large gold and cocoa producer, commenced with oil production from its offshore Jubilee field in mid- December This helped the country to register one of the highest economic growth rates in the world in 2011 of 14.4%. Moreover, despite some unexpected delays occurring in the ramp-up of oil production this year, by the end of 2012, crude production at the Jubilee field is expected to register in excess of 90,000 bpd, with a further increase to plateau production of 120,000 bpd expected in Ghana s newfound oil wealth will contribute to a significant increase in consumer spending power, although as in other resourcerich countries, the extent to which this benefits the domestic population could be limited. However, the economy s expansion is not coming from oil alone, with other sectors of the economy also performing well. Ghana s population is the second smallest in our list of countries after Angola. However, the pace at which the population is expanding is currently still relatively high. Furthermore, Ghana s urbanisation rate is already quite high by African standards, estimated at 51.2% in 2010 and projected to reach 60.2% by Retail sector snapshot - Ghana s modern retail sector is restricted mainly to Accra. There are currently only a small number of international retailers on the scene. The size of the middle class is still small, but is growing at a rapid pace, thereby providing the base for the demand for the convenience and variety that is offered by super- and hypermarkets. Although Ghana might not have quite such a favourable demographic profile as some other countries in our list, to a large degree, it makes up for this by having a more accommodative and less restrictive business environment and better macroeconomic policies. Ghana is ranked 64th on the World Bank s 2013 Doing Business index the only SSA countries above Ghana in the survey are Botswana, Rwanda, South Africa, and Mauritius. Due to Nigeria s much more complex operating environment, many investors view Ghana as the gateway to the West African region. For this reason, it is also less of a problem to source products in Ghana than it is in some other African countries. Companies that have set up manufacturing facilities in the country include Unilever, PZ Cussons, and Denmark s Fan Milk Group. Retailers can therefore buy products locally rather than import them. Accra Mall, Ghana s first world-class shopping centre, was opened in 2008, and is conveniently located close to the Kotoka International Airport and near the Tema Motorway, which makes the mall accessible to neighbouring countries as well. SABMiller opened a new beer factory in the capital city through its Accra Brewery subsidiary in March SABMiller had also acquired a majority stake in bottled water company Voltic in One of the beer brands sold in the Ghanaian market is Chibuku, aimed at the lower end of the market and brewed from locally produced sorghum and maize. The success of this brand relative to other premium, more expensive beers is indicative of Ghana s current position on the beer consumption curve. The informal beer market still dominates the market in the country. This will slowly change though on the back of higher incomes, and as people s preferences change in line with an increase in the proportion of non-discretionary spending as a percentage of the total. Ghana s beer consumption was estimated at only seven litres per capita in 2011, lower than in Tanzania. Kenya Motivation: Gateway to East Africa; rapid population growth; good economic growth prospects Kenya plays a central role in East Africa as the largest economy and a gateway into the region. The population is growing rapidly and has more than tripled from 10.9 million people in 1969 to 38.6 million in 2009 according to the findings of the 2009 Population Census published by Kenya s National Coordinating Agency for Population and Development (NCAPD) in October The country s population growth rate rose steadily from about 2.5% p.a. in 1948 to around 3.8% p.a. in the 1980s according to the NCAPD. As of 2010, 42% of Kenya s population were aged below 15, while some 55% of the total population were in the (working age) bracket. By 2025, 59% of the population is forecast to be in the working-age category.

12 12 FULL SECTOR REPORT Retail sector snapshot - Almost 90% of national grocery sales in Kenya are still generated in the traditional and informal sectors. Still, the Kenyan retail sector is seen as one of the most developed in sub-saharan Africa, while Kenya s Vision 2030 the government s blueprint for the economy aims to increase efficiency in the retail sector, which it hopes will raise the market share of products sold through formal channels to 30% in the next few years. Retailing is also fairly open to foreign capital inflows with no restrictions on foreign investment as well as the repatriation of profits or capital while the importation of most foreign products is fairly easy. Nairobi is home to most of the modern shopping malls in the country, though the cities of Mombasa and Kisumu have also witnessed an increase in retail developments over the past few years. The increasing popularity of mobile banking and mobile purchases has led to a notable shift in shopping trends, with Kenya seen as taking the lead on the continent in terms of the use of mobile money. Nakumatt is currently one of the most prominent companies operating in Kenya s retail space. Furthermore, it is also the biggest supermarket chain in East Africa, with outlets in Kenya, Uganda, and Rwanda, while the company is also looking to expand to Botswana, Burundi, Democratic Republic of Congo, Malawi, Nigeria, South Sudan, Tanzania, and Zambia. Other major food retailers in Kenya are Tuskys, Uchumi, and Naivas. East African Breweries Limited (EABL) is the leading beer brewery in Kenya, holding an estimated 83% volume share in 2011 according to Euromonitor International. Lower-priced brands that are available across the country (e.g. Tusker, Pilsner, Tusker Malt, and Guinness) are generally seen to be more popular than their (pricier) imported alternatives. There is still massive room for expansion in Kenya s alcoholic beverages market. The strong opportunities for the expansion of Kenya s retail sector have to be viewed in the light of the following risks: Poverty levels are still high; Kenya s export base remains narrow; and Consumption per capita is relatively low and dependent on the agricultural sector, which in turn is exposed to unpredictable swings in the weather. Morocco Motivation: Large GDP per capita; high urbanisation rate; retail landscape is slowly starting to change Morocco s population of 32.3 million is young and growing (though at a slower rate than in the past), while more and more people are migrating to urban areas. The population of working age (15-65) totalled million in 2010, or roughly two thirds the total population. Morocco had a dependency ratio of 50.4 dependents for every 100 people of working age, which is low in an international and African context. Furthermore, the dependency ratio is expected to decline to 47.5 by Another positive is that the economically inactive population s impact on disposable income will diminish over time thanks to increasingly sophisticated pensions systems. Urbanisation has been a major driver of demographic change in Morocco. The High Planning Commission (HCP) currently sees the urban population as growing by 1.8% p.a. The ratio of the urban population to the total currently stands at 57%, having passed the 50%-mark in the early 1990s. Although Morocco s GDP per capita is relatively high in comparison with most African countries, it remains low in an international context, and is for example lower than that of Egypt, South Africa, Algeria, and Angola (in PPP-adjusted terms). The difference between Morocco and some of these countries though is that the country s economic growth prospects are much more favourable; hence, GDP per head will rise at a much faster pace. In addition, Morocco has a well-established upper class that has always driven development in the retail sector, and currently a prominent emerging middle class is providing new impetus to retail development. Changes in the banking landscape are contributing to the phenomenon consumer credit and credit cards are a relatively new appearance on the economic landscape, boosting the retail sector while playing a large part in making it possible for increasing numbers of Moroccans to live a middle-class lifestyle. Retail sector snapshot - Although consumption patterns are slowly changing with consumers starting to favour the convenience and variety of hypermarkets traditional neighbourhood stores still dominate the Moroccan retail scene. However, in contrast most other countries in the above table, the opportunities in Morocco s retail sector might perhaps be more lucrative in areas such as vehicles, appliances, and clothing than in FMCG categories such as food and beverages. The upper middle and high-earning income groups present interesting opportunities for retail due to their demand for brand names and quality products. Nigeria Motivation: Massive population; rapid urbanisation; strong economic growth prospects With its population of more than 160 million, Nigeria simply cannot be ignored, almost irrespective of the sector. Moreover, population growth is still rapid, and as a result, the size of the population is forecast to amount to close to 204 million by 2020 and 258 million by 2030 the latter is only some 16.5 million fewer than the entire population of North Africa at that time. With urbanisation progressing at

13 FULL SECTOR REPORT 13 about 3.5% annually, significantly higher than the country s annual population growth rate, more than 60% of Nigerians are projected to live in cities by Very strong economic growth rates, a favourable demographic profile, and some acceleration in the pace of economic reforms will ensure that the retail sector offers lucrative opportunities for investors although admittedly, the business environment is perhaps a bit more tricky than some other countries in the table, especially if one does not have local knowledge / experience. Nigeria is still very poor on a per capita basis and, as is the case in a number of other oil-rich economies, the income distribution is very uneven. Nevertheless, domestic demand potential is enormous, with consumer spending supported by strong investment into the non-oil economy. Even if one considers only the number of people in cities that earn higher than a certain threshold of income, the size would be substantially larger than in many countries with much lower poverty headcount ratios due to the sheer size of the population. That said, owing to the country s considerable infrastructure shortfall and particularly low incomes, much of the rural consumer base remains out of reach for most retailers. Retail sector snapshot - The Nigerian retail scene remains dominated by informal trade, although this is quickly starting to change. Notably, the lifting of the textile importation ban in Nigeria has meant that a number of international clothing retailers now show interest in entering the country. The knock-on effect is that this makes it easier to secure tenants, which in turn supports the construction of malls in the country. Given the size of the population, potential for economic expansion, and under-served retail market, retailers are increasingly targeting Nigeria, while most companies expanding into West Africa see Nigeria as the gateway to the region. On average, Nigerians spend more than 70% of total earnings on food, which leaves little for discretionary spending. The US Department of Agriculture (USDA) notes that the major traditional foodstuffs consumed by the majority of the population are predominantly unprocessed and/or semi-processed (including maize, sorghum, tubers, and fish). However, changes that are occurring with regard to demographics, lifestyles, and consumer preferences are resulting in increased demand for a wide range of other products. Testament to this is the fact that high-end Italian menswear company, Ermenegildo Zegna, plans to open a store in Lagos. The company already has outlets in Egypt and Morocco, and after Nigeria, it plans to enter Angola and Kenya as well. Another Italian clothing company, Gucci, is looking to open stores in Nigeria and Angola. Nonetheless, luxury goods companies have been quite slow to expand into Africa, with the exception of North Africa and South Africa. According to Bain & Company, there are more than 120,000 millionaires (expressed in US$) in Africa, more than Russia s 95,000. However, the problem in most African countries is that there is not a large enough concentration of wealth to justify the opening of a luxury goods store. However, Nigeria s massive population combined with strong economic growth is ensuring that this is quickly starting to change. Even if only a tiny proportion of Nigeria s population has enough money to spend on luxury goods, a small percentage of more than 160 million is still a sizable market. To illustrate, 5% of million people is 8.1 million more than the entire population of Libya, and almost four times the population of Botswana. The fact that Nigeria s population is increasingly concentrated in urban areas is further adding to the country s appeal for retailers. One retailer that is not yet falling over its feet to enter Africa is French luxury group Hermes International. The company s managing director, Guillaume de Seynes, said that they have not yet found any opportunities to open a store in Africa. We ve looked at Egypt, Morocco, South Africa These markets are maybe not yet mature enough to welcome a Hermes store. South African based food retailer Shoprite entered the Nigerian market in 2005, yet still only operates a small network of five stores in the country. Following some operational difficulties in its early years, related to local administration, staff recruitment, and finding suitable retail property, the company is however now in the position to expand its interests in the country. Shoprite chief executive Whitey Basson told Reuters in an interview, [e]ven if you have 60% of the population living in poverty, 40% of the Nigerian population is still bigger than the South African population. A sixth store was due to be opened by the end of 2012 in Ilorin, the capital of Kwara state. Shoprite plans to spend more than $200m on property development in Nigeria in order to overcome a shortage of infrastructure. Apart from the relative lack of property and other infrastructure constraints, other risk factors for companies deciding to expand in Nigeria include security concerns, corruption, difficulties associated with finding local partners, the country s dependence on oil, and high income inequality. These risks are offset by a number of opportunities, including a large and growing middle class, the fast pace of urbanisation, liberalisation in trade and other policies, and the prospect of a number of new shopping malls that should ease access to retail space. Many segments of the Nigerian retail market are projected to expand in high single-digit or even double digit territory over the medium- to long-term. For example, Nigeria s beer industry is expanding at a rapid pace and may be Africa s most promising. Nigerians consume about 10 litres of beer per capita p.a., while South Africans consume 60 litres per capita on an annual basis. In addition, all Nigeria s soft drink segments are yet to saturate. Nigeria s per capita consumption of Coca-Cola products was estimated at 27 in 2011, expressed in the average number of 8-ounce servings people consume of the company s beverages. This is very low when compared to the global average of 92, and the 247 in South Africa, 88 in Morocco, 53 in Egypt, and 40 in Kenya.

14 14 FULL SECTOR REPORT Tanzania Motivation: Strong levels of economic expansion; rapidly growing population Population Growth Rates (% p.a.) UN Population Division Nigeria Ethiopia Egypt DRC South Africa Tanzania For companies that choose to open a store in Kenya, Tanzania would often be one of the first other East African countries looking to expand to, given its large and growing population. Tanzania s population is estimated at 46.2 million in 2011, and thanks to rapid population growth, is expected to surpass that of South Africa as soon as 2015 and to surpass the 60-million mark by 2020, and the 70-million mark by From having the ninth largest population in Africa in 1980, Tanzania had the sixth largest in 2010, and is expected to move up to fifth place by 2020, fourth by 2050 (surpassing Egypt), before leapfrogging Ethiopia and the DRC in the following decade to be the second largest in Africa by population size. This is due to the fact that the UN statistics department expects the deceleration in Tanzania s population growth rate to be much slower than in the other countries with large populations on the continent, as is illustrated in the accompanying graph. The proportion of the population that falls into the workingage category is expected to increase from 52.1% in 2010 to 57.7% by This change is occurring slower than in most other countries on the continent, precisely because of the high population growth rate, which ensures that the proportion of children in the population remains high. As a result, Tanzania s dependency ratio is expected to remain above 80 for the next 15 years, before starting to decline gradually. The country s demographic profile is such that it will only truly start to be beneficial for economic growth in the long-term, i.e. 30 years or more from now. Given the high population growth rate and the high dependency ratio, it is even more important for Tanzania than for other countries that it achieves high rates of economic expansion to ensure that wealth per person increases. The country s real GDP is expected to expand at a fairly rapid pace, forecast at an annual average of 6.8% over the period. The growth rate could potentially be a lot higher if structural impediments that limit the productive capacity of the economy are removed. In particular, economic activity is constrained by severe supply bottlenecks, which are in turn caused by the unavailability of basic services such as water and electricity, and poor quality infrastructure. Moreover, according to the World Bank, the lack of inclusive growth threatens to undermine Tanzania s goal of becoming a middle-income country by Rather than minor adjustments, fighting rural poverty requires a major policy shift that involves agricultural commercialisation, diversification and urbanisation, the Bank said. Other issues that require improvement are the slow pace of economic reform, and the high level of corruption in government. Retail sector snapshot - Tanzania s low GDP per capita level implies that retailers wishing to profit from the market would have to focus on basic goods, such as food, beverages, lowcost beers, and household essentials such as toothpaste and washing powder. Business Monitor International expects that per capita food consumption in the country will increase by 25.8% in 2012 when expressed in Tanzanian shillings, while mass grocery retail sales are projected to increase by 30.1%. Double-digit growth rates are also forecast for the next four years. One of the main impediments to expansion in the retail sector is the inefficient and inadequate product supply chain, exacerbated by the generally poor state of transport infrastructure. Tanzania s beverages sector has significant room for expansion. Tanzania Breweries Limited (TBL, a unit of SABMiller) currently has the largest share of the beer market in Tanzania at around 70%. In November 2010, EABL acquired 51% of Serengeti Breweries Limited (SBL), the second largest brewer in Tanzania, giving the company control of the domestic Premium Serengeti Lager brand. SBL more than doubled its production capacity in November 2011 following the opening of a new brewery in Moshi. TBL s four breweries in Tanzania currently have combined capacity of 350 million litres p.a., which it hopes to boost to 650 million litres p.a. over the next decade. The company also plans to start exporting beer to Kenya. A main risk for breweries and other companies in the industrial sector is unreliable and erratic electricity supply. According to Robin Goetzsche, the managing director of TBL, rolling blackouts last year increased the company s operating costs by some 20%. Beer consumption per capita is still relatively low in Tanzania at nine litres p.a., compared to 60 litres annually in South Africa, and 12 litres p.a. in Kenya. There is therefore still significant scope for the market to expand in line with growth in real private consumption per head.