Africa's Business Revolution

How to Succeed in the World's Next Big Growth Market

Acha Leke, Musta Chironga, George Desvaux

• Publisher: Harvard Business Review Press
• Year: 2018
• Print ISBN:
  9781633694408
• eBook ISBN:
  9781633694415
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

The definitive book on doing business in Africa.

• Demystifies a large, complex, poorly understood market.
• Builds on McKinsey's in-depth research base and the extensive personal experience of the authors, to deliver the most trusted and insight-packed advice for launching and growing successful companies in Africa.
• Contains numerous case studies on the growth stories of some of the continent's largest and most profitable companies.
• Draws on exclusive interviews with leading Africa-based CEOs.

Audience:

• Senior executives considering or already doing business in Africa.
• Consultants advising companies on Africa strategy.
• Policy makers and anyone concerned about economic development in Africa.
• Business courses on Africa.

Announced first printing: 20,000
Laydown goal: 4,500

WHY AFRICA, WHY NOW?

CHAPTER 1

A GIANT AWAKES

One of our objectives in writing this book is to prompt business executives and entrepreneurs from the Americas, Asia-Pacific, Europe, and the Middle East to take a fresh look at the business opportunities in Africa—and while you’re at it, to spend some time exploring our beautiful continent. One must-do activity is a game drive in one of Africa’s remarkable nature reserves—perhaps the Serengeti in Tanzania, Kruger National Park in South Africa, or Namibia’s Etosha National Park. As you bump along the rutted savannah on the back of a Land Rover, however, you’ll discover that some of Africa’s most magnificent animals can be hard to spot. A leopard, for example, might be perched still and silent on the branch of a marula tree, its coat a natural camouflage under the dappled shadows of the leaves. The untrained eye is likely to see only the tree; but those who know what they’re looking for will pick out the leopard a mile away.

That’s a fair analogy for the business world. Executives with on-the-ground experience in Africa sometimes manage to spot opportunities that are hidden from the view of global observers. Just look at the story of SABMiller. The beer maker started as South Africa’s national champion, snapped up global brands such as Pilsner Urquell, Miller Lite, and Peroni, and ended up on the London Stock Exchange’s FTSE 100 list before being acquired by rival Anheuser-Busch InBev for $103 billion in late 2016. It was SABMiller’s success across the African continent, along with its operations in Latin America, that made it such a growth star and justified the eye-watering price tag for its takeover.

From 2007 to 2016, the brewer saw its African sales outside of South Africa climb from $280 million to $1 billion. By 2016, SABMiller had brewing operations in around forty of Africa’s fifty-four countries. Mark Bowman was the managing director of SABMiller’s Africa region during that decade. He told us, “We spotted a huge opportunity in Africa’s beer market, and we seized it at the right moment. In the early part of this century, most global firms saw Africa as unattractive, so we had limited competition.”

SABMiller knew otherwise. The continent’s population was growing by around 2.5 percent a year, much faster than most other regions. Seventy percent of the population was under the age of thirty, most countries were increasingly urban, and their economies were growing—all bullish signs for beer consumption. SABMiller’s insight was simple yet powerful: like consumers the world over, Africans like beer. When they can start spending a portion of earnings on nonessentials, one of the first luxuries they turn to is an upgrade from home brews to commercial brands. “We realized that, if we acted early, we could become number one or two in many African markets,” Bowman said. “We recognized that if we established a leading position, even if it was small in the beginning, it could grow into quite a big business. Even so, I don’t think we ever fully appreciated that African markets would generate the value that they did.”

SABMiller began acquiring existing African breweries in 1993, starting with a 50 percent stake in a money-losing operation in Tanzania. With its local partners, it quickly turned that brewery around, tripling production and generating healthy profits within three years. That whetted its appetite for more. “We more or less tried to buy anything that was for sale, had a reasonable brand and had reasonable prospects,” recalls Bowman. He says the deals were often complex, burdened by poor bookkeeping and questionable tax-avoidance schemes practiced by the acquired breweries, but SABMiller pushed ahead as long as there was some prospect of generating a positive return. “With hindsight, what we thought was expensive was actually cheap,” he says.

The company started with a conservative strategy, using secondhand equipment in its new breweries to save money and cycling in end-of-career executives to manage them. Bowman recounts, “As we developed confidence in the business, Africa became a much bigger priority. We completely transformed our philosophy and approach and developed a much bolder long-term vision of what Africa could deliver.” One element of that new strategy was an aggressive program of brewery building across the continent. With its equipment-supplier partners, SABMiller developed a standardized “brewery in a box” that it could quickly assemble. A second element was to hone its marketing insights: using the brand-positioning approach it had developed globally, SABMiller created a diverse portfolio of African brands tailored to local markets.

In Nigeria, for example, SABMiller developed a new brand, Hero. “Our head of marketing in Nigeria convinced us that this was the right name, because people saw themselves as everyday heroes, heroes of their own story,” Bowman told us. SABMiller wanted the new beer to come across as local, not the product of a multinational. It designed the label with a rising sun, a favorite symbol of the Igbo people, an ethnic group native to Nigeria. And in a country where it can take up to six hours to earn enough to buy a half-liter of beer, SABMiller priced the brew 25 percent below the market-leading Star brand. Bowman recounts the launch of the Hero brewery, an event attended by Nigeria’s then-president, among other luminaries. “Three or four distributors came up to me and told me the history of the Hero brand—even though it was totally new! They’d completely bought it in their minds. It turned out to be one of the most successful brands we ever launched, and our production was never able to keep up with demand.”

SABMiller’s approach to brands also took into account the huge differences in spending power among African consumers. By the time it was acquired by Anheuser-Busch InBev in 2016, SABMiller had begun to extend its portfolio beyond its traditional mainstream beer offering. In its drive to appeal to low-income consumers, it acquired a small brewery in Zambia that specialized in a commercial version of the local home brew made with sorghum and maize. SABMiller would eventually market the brew as Shake Shake (you really do have to shake the brew before drinking because of the sediment) in a dozen countries. At the same time, SABMiller also made a strong play for consumers higher up the income pyramid. It launched Castle Lite, a South African beer brand, in multiple African markets, targeted at “upper mainstream” consumers at a price premium. “We were spectacularly successful with Castle Lite,” Bowman said. “The consumer proposition was very strong and simple: an ice-cold reward that is much healthier and better for you.”

As Bowman reminded us, though, it takes more than a smart strategy to succeed in Africa. Underpinning SABMiller’s growth was a mindset of winning: “Right from the beginning, our people had a can-do attitude. They just went out there and built the business. They were the real heroes of this story.”

In 2011, we published an article in Harvard Business Review entitled “Cracking the Next Growth Market: Africa.” We posited Africa was one of the world’s fastest-growing regions, and that farsighted companies able to spot the African opportunity and act on it before others would reap enormous gains. SABMiller’s story is a perfect example. Today, we believe the long-term growth prospects for Africa are even greater—and the case for businesses to invest in the continent is even more compelling.

We don’t pretend that Africa is an easy place to do business, given its geographic complexity, infrastructure gaps, and relative economic and political volatility. Despite these challenges, we believe that companies and investors in every part of the world should be taking a close look at Africa today and its place in their growth strategy for the next twenty years. Here are four good reasons:

• Africa is a 1.2 billion–person market in the midst of an historic economic acceleration.

• Hundreds of large companies, home-grown and multinational, have already built successful businesses in Africa, but there is room for many more.

• Africa has huge unfulfilled demand, making it ripe for entrepreneurship and innovation at scale.

• You can achieve extraordinary growth and profitability—provided you get your strategy and execution right.

A 1.2 BILLION–PERSON MARKET ON THE CUSP OF TRANSFORMATIVE GROWTH

Africa is a big place: its land area is second only to Asia’s, and it contains a major share of the world’s agricultural land and mineral reserves. Its current population of around 1.2 billion is projected to double over the next thirty years, making Africa an exception in a world of slowing population growth. Those numbers should be reason enough to interest global businesses.

What really makes it a continent to watch, though, is the historic economic shift under way. A glance at world economic history gives an indication of what could be ahead for Africa. In Europe and North America, for example, average per capita income barely increased for almost two thousand years, but suddenly soared with the Industrial Revolution, increasing twentyfold between 1820 and 2015.¹ Asia’s boom came later but was much faster: its GDP per capita increased tenfold between 1960 and 2015. And within Asia, China’s rise in per capita income has been even more dramatic: it took just three decades for GDP per capita to multiply tenfold after the launch of economic reforms at the end of the 1970s.

One of us (Georges) spent seven years in China at the height of its economic acceleration. Many African cities today remind him of Chinese cities such as Chongqing or Wuhan twenty years ago: they have the same hustle, the same entrepreneurial energy, and a similar emerging class of aspiring citizens. The urban energy of Lagos, Nairobi, or Abidjan today suggests that much of Africa has reached an inflection point where a sufficiently large pool of people have risen beyond providing for their basic needs and have the wherewithal to discriminate among consumer goods, save for their first washing machine or refrigerator, or send their kids to better schools. Indeed, in many parts of urban Africa, there are signs that the simultaneous increases in population and per capita income are triggering exponential growth in demand. That is reflected in the proliferation of retail outlets, cell phone networks, restaurants, housing developments, car dealerships—and traffic jams.

Tidjane Thiam, the Ivorian-born CEO of Credit Suisse and former head of Prudential, the global insurer, is a keen observer of this growth phenomenon—and its implications for business. “The human brain thinks in a linear fashion,” he remarked to us, “but exponential growth is in fact more common in nature. Think of an acorn growing into an oak tree.” Thiam gained firsthand experience of this truth while building Prudential’s business in emerging Asia. One $50 million investment multiplied to $4 billion in little over 15 years—an eightyfold expansion. Thiam believes that conditions in many African markets today offer similar opportunities. “You’ve got the demographic boom combined with GDP growth rates of 6, 7, or 8 percent.” Companies that get in early and shape the right strategy can sustain double-digit profit growth over decades, he said. “There is an element of breaking ground, but the long-term rewards will be very high.”

The numbers suggest that Africa is in the midst of a significant acceleration (see figure 1-1). Real GDP grew at an average annual rate of little over 2 percent during the 1980s and 1990s, but then leaped ahead to 5.4 percent in 2000–2010, making Africa the world’s second-fastest-growing region after emerging Asia. Notably, this growth spurt was driven in nearly equal measures by labor-force growth and productivity growth, marking the end of a long period of stagnant productivity. In the late 1990s, private capital flows to Africa (including foreign direct investment, equity, and debt) overtook aid inflows and remittances for the first time in decades.

FIGURE 1-1

The numbers highlight Africa’s acceleration—and the opportunity for business

Rising productivity and investment in the first decade of the twenty-first century reflected the increasing diversification of Africa’s economies away from resources exports. Although Africa benefited from soaring global demand for oil and minerals during this period, commodities explain only part of the continent’s growth over that decade. McKinsey’s 2010 report, Lions on the Move, found that oil and natural resources accounted directly or indirectly for just 24 percent of Africa’s GDP growth from 2000 through to 2008.² Other sectors accounted for most of the growth surge: tourism, financial services, transport, telecommunications, and construction all grew at annual rates of around 8 percent over this period. GDP grew rapidly both in countries with significant resource exports (5.4 percent) and in those without (4.6 percent).

After this heady decade, Africa’s growth slowed sharply—to an annual rate of 3.3 percent between 2010 and 2015. This was prompted by the twin shocks of the Arab Spring, which halted growth altogether in Egypt, Libya, and Tunisia; and the collapse of oil prices, which caused growth to fall sharply in oil-exporting countries including Algeria, Angola, and Nigeria. In the rest of Africa, however, real annual GDP growth grew from 4.1 percent in the period from 2000 to 2010 to 4.4 percent between 2010 and 2015.

No doubt, many African countries will remain vulnerable to economic and political volatility. In 2016–2017, for example, Nigeria suffered its first economic contraction in a quarter century as oil production slumped.³ In the same period, South Africa’s already slow growth was further hampered when its respected finance minister was fired and credit ratings agencies downgraded its sovereign debt. The slowdown in Africa’s two largest economies was felt across the continent.

In early 2018, however, a change of president in South Africa reinvigorated investor confidence and sent the rand to a three-year high against the US dollar. Recovering oil prices and continuing economic diversification lifted Nigeria out of recession. Egypt’s GDP growth was expected to reach 5 percent, while the World Bank forecast Ghana to be the world’s fastest-growing economy in 2018.⁴ Those developments were a reminder that, despite volatility, Africa’s long-term growth prospects remain promising. Overall, GDP is still expanding faster than the world average and is forecast to accelerate to make Africa once again the world’s second-fastest-growing region.

FIGURE 1-2

Most companies see Africa as a major growth market

Source: Mckinsey Insights executive survey on business in Africa, 2017.

Our colleagues point out that, of all the ICASA markets, Africa has the most unfilled potential. But it also faces the greatest challenges, including increasing sustainable urbanization, accelerating infrastructure development, and deepening regional integration. A ...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• Part One: Why Africa, Why Now?
• Part Two: How to Win in Africa: A Strategic Guide
• Conclusion: Do Well By Doing Good
• Notes
• Selected Bibliography
• Index
• Acknowledgments
• About the Authors