Overview of African market as an investment opportunity

Africa, once the richest continent in the world has a painful story to its part. It has been the most dominated continent and even the most exploited one. Centuries of foreign rule left the African population to shackles. Poverty, starvation, unemployment, political disturbance are still the problems rampant in most of the African countries like Congo, Zimbabwe, etc. Most of the African countries got freedom in the late 1950’s and the new unstable governments lacked impetus and confidence to help the ailing population. As a result African population went deep and deep in the vicious circle of poverty.

Africa is the world’s second largest continent it is also the most populous continent just after Asia. The population of Africa is more than 1 billion. With such a massive population even if more than 35 % of the entire population is living below the poverty line it is very clear that African market is one which has one of the most highest potential for growth. What is lacking in Africa today is infrastructure but companies from countries like India, China and other mostly Asian countries have started realizing the worth of a market like Africa and have realized the actual potential.

The actual GDP per capita in Africa is around 1200 dollar. It varies between different countries with Equatorial Guinea leading with a PPP GDP of $ 36,000 and countries like Democratic Republic of Congo having a GDP per capita of mere $ 300. This shows highly unequal distribution of income in Africa. To see from a company’s point of view this distribution is one which can be of most help for a company as this is the easiest way to select the target market. Companies investing in Africa have an edge of making a first move and catering to a large market. Also other advantage that foreign companies get is relatively less expenditure on research to find out the market potential. Need and income availability are the signals for a potential market.

I would specifically take examples of two products/services which have been successfully launched by the foreign companies in Africa. The first will be of the telecom sector and second of FMCG sector.

As regards telecom sector, Africa has the highest growing telecom sector in the world with an average growth rate of more than double of the fast growing Asian markets. Countries like Nigeria have a growth rate of more than 100 %. Africa is a home to huge population and it is a fact that less than 5 % of the world’s telecom lines are there in Africa. Thus it can be very rightly said a totally untapped market by the multinationals. The fact that multi nationals are being mentioned is because the amount of infrastructure required to mobilize telecom industry is not present in Africa both in terms of technical labour, technology, etc.

Companies like Zain from Kuwait, Etisalat from Dubai, Bharti Airtel from India have made some aggressive take over moves in the recent past showing clear interest in the African telecom market. Chinese companies are also coming as they are looking for markets which are in great need for telecom infrastructure.

We take the case of Bharti Airtel from India buying the African operations of Zain Africa in 2010. It became the biggest ever take over by an Indian telecom company in a foreign country. Airtel now operates in 19 African countries and has the largest customer base in the continent. As said by the executives of Airtel that it was becoming increasingly difficult to survive in the highly saturated Indian market they were forced to look for alternate options. While DTH and other services did the support work but the core competency needed to be employed somewhere and this led to desperate search for a market. Africa is a promising market due to a wide range of factors and also it is a market which can be tapped easily due to supportive governments. This was a true enthusiasm for Airtel to tap this lucrative market.

FMCG sector in Africa shares almost the same story in Africa just the difference is the type of market targeted and the situations that are faced by the FMCG companies. While telecom is a sector which can be defined under the head of development of basic infrastructure, FMCG is not a sector which can be categorized in this form. This is a sector which thrives on the presence of basic infrastructure like roads, railways, telecom, etc.

FMCG sector requires the basic infrastructure to reach the ultimate consumer. Until sometime in the past African market was not receptive or was not growing at a pace at which the multi nationals wanted it to grow at. The problem with this sector is huge income disparities among various African countries. The product which may work for Nigeria and Egypt may not work for Congo or Ethiopia.

For instance companies like SABMiller have to offer different types of drinks in different markets. Basically a brewer it had to offer various other drinks like cassava beer and also drinking water. SABMiller agrees that government support is something which helps it to grow continuously in Africa though the beginning was very bad due to non receptive African market but finally SABMiller has acquired a place in the market and is expanding now.

One more benefit that the African market offers to the retailers is price setting. Price can be set seeing the paying capacity of the market and a price higher that the price charged in non African countries is set. The basic reason for this phenomenon is lack of information and lack of competition in the market. While local players have limited powers as to attract public, multinationals are also scattered thus offering opportunities for charging a higher price.  Though problems are there which are slow growth of this sector and also the bureaucratic hurdles being faced but this didn’t stop companies like Walmart and Nestle to enter in the market and explore its huge potential.

Indian companies are also not behind in the race to tap Africa. Companies like Dabur and Godrej are already leaders in African hair care market. Taking the case of Dabur, it has significant presence in Nigeria and Egypt with manufacturing facilities in both of the countries. Two more factories in Kenya and South Africa will become operational soon. Dabur executives agree that Africa is the epicentre for their growth in future. They agree that infrastructure is a big problem in distribution but are also hopeful that in the coming years the growth story of African FMCG market will be completely different.

Also another example can be taken of Rasna squash. The Ahemdabad based company has accumulated substantial revenue by entering Africa again taking Nigeria as a base. The company is planning to set up manufacturing unit in Africa so as to cater the wide market there. Rasna chairman also says that Africa is a special market where cola drinks are preferred unlike India. India remains the top most priority but the untapped market of Africa is an asset in itself for the company.

Thus we saw the strategies various multinationals of the world are taking to tap African market. We stressed on mainly the Indian companies but the western multinationals are even more aggressive when it comes to service Africa. It all depends on a company choice. While for Indian companies to expand the obvious choice is Africa but the western multinationals have choices in Asia particularly India and China and also Africa which at present doesn’t provide return as good as these developing nations.

The gradual change in attitudes of the African citizens followed by government interest and intervention in the life of ordinary people to help them come out of poverty will be a great impetus to the multinationals that are desperate to work in Africa. Also there presence can help improve infrastructure in the continent and improve standard of living of the people there. Africa is the continent which is the future of growth, full of opportunities and promises success. With western markets saturated, Asia being growing towards saturation only Africa is the nation which can change fortunes. Not only telecom and FMCG other sectors also like banking and financial service sector, food and other service sector have a bright future in Africa. The only thing to be observed now is when do these companies realize the actual worth of such a market and start reaping the benefits.