Business & Finance
Tuesday, July 26, 2011The Growing Power of Formal and Informal Economies
by Olumide Oluwole, Director of Business Development—West Africa, Africa.comShare this article:
With increasing attention being paid to sub-Saharan Africa due to a visibly rising middle-class and its spending power, there has been an obvious and overt change in the investment landscape of the continent.While global investors are continuing to pay attention to Africa’s natural resources, others are looking towards consumer consumption. Three weeks ago, Wal-Mart completed the purchase of majority stake in South Africa’s store chain, Massmart Holdings. In an interview with the Wall Street Journal, Doug McMillon, the CEO and president of international operations for Wal-Mart, stated that he is excited to serve growing middle to lower income-class customers in the region and would like to accelerate growth.
There is also Yum Brands, whose companies include KFC, Pizza Hut, Taco Bell, and Long John Silver’s. The corporation stated that it envisions 1,200 KFC restaurants in Africa by 2014, twice its current number, and is now branching out into Nigeria, Namibia, Mozambique, Ghana, and Zambia, among others. The Wall Street Journal stated last December that Yum plans to invest about $500 million in expansion and expects to double its operating profit in Africa to $120 million by 2014.
According to a study by McKinsey Global Institute, the number of households in Africa with discretionary income is projected to increase by 50 percent to 128 million over the next decade. The African Development Bank estimates that the continent has around 300 million people with incomes in excess of their basic needs, up more than 60 percent from a decade ago.
It should make sense, then, that in Nigeria—the most populous country in Africa, with over 150 million inhabitants—is seeing a shift in the purchasers of lace, a high-end fabric, which has traditionally only been purchased by wealthy consumers.
An interesting perspective that the article takes is that the growing preference for so-called “high-end” products reflects not only the expansion of the consumer class, but is also the result of a growing underground and informal economy. The article states that Nigeria’s informal economy is at least as big as its formal one, which is estimated at $200 billion. Examples within the informal economies includes vendors that sell blue jeans, DVDs, wood tables, and even cellphones. This comes as no surprise, as Nigerians are known to have a keen eye on business opportunities and takes advantage of them: these informal economies create job opportunities and increase the flow of money within the Nigeria and other countries.
However, the article also states that foreign companies such as Samsung Electronics of South Korea and Spanish-based retail chain Mango are establishing themselves in Africa with the goal of feeding off the spending power of consumers who earn their living from the informal economy. The article features a Nigerian woman, Monica Adeola, who began selling lace in 1970 as a housewife who was looking to make a little side cash. Last year, she grossed $200,000-$300,000 in sales.
Austria is credited in starting the lace trade, which is now worth about $37 million a year. China entered the Nigerian lace trading space in 2000 and last year exported $63 million worth of materials. The article states that China exported over $200 million in lace last year to Nigeria, Benin, and Togo.
Obviously, there will be continued investment in Africa’s natural resources, but there is increasing evidence of the growing spending power that African consumers will have. Large multinationals are noticing opportunities, and Chinese-based companies have begun reaping profits. These are all signs for investors to pay closer attention and take advantage of growth on the continent.
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