Prospects in the retail and consumer goods ...

March 2016

So much in store Prospects in the retail and consumer goods sector in ten sub-Saharan countries

pwc.co.za/retail-and-consumer

Project and editorial team Anton Hugo, PwC Africa Retail & Consumer Industry Leader Charmaine Haskell, Senior Manager Mandy Stroud, Senior Manager Catherine Ensor, Senior Manager Enbers Moodley, Senior Graphic Designer Jaco Maritz, Maritz Africa Intelligence

Many other professionals within PwC reviewed the text and contributed local expertise to this publication and we thank them for their assistance.

This report was written in cooperation with Maritz Africa Intelligence. Thank you to Dinfin Mulupi, Kate Douglas, Dianna Games and Darias Jonker for their contributions.

The bulk of this research was conducted in 2015.

1000 | So much in store

Contents

Foreword The big picture Country profiles

1. Angola 2. Cameroon 3. C?te d'Ivoire 4. Ethiopia 5. Ghana 6. Kenya 7. Nigeria 8. South Africa 9. Tanzania 10. Zambia Contacts Key figures

2 3 16 16 24 32 39 47 55 63 72 82 91 99 100

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Foreword

Despite some of the challenges there remains reason for optimism about doing business in Africa. There are encouraging economic growth rates predicted for 2016 and beyond in a number of countries in Africa and the growth expected in Africa's consumer market provides a major attraction to retail and consumer companies looking to the future.

Although significant investment has gone into improving infrastructure in many countries on the continent the quality of infrastructure remains mixed. Retailers need to assess each country individually and ensure they understand how the quality of ports, roads and energy infrastructure will impact their operations.

However, Africa's fortunes are very much tied into those of the global economy. The fall in oil and other commodity prices has seen pressure on government revenues and the ability of governments to increase social expenditure and wages in the public sector. In particular, countries such as Angola, Nigeria and South Africa are feeling this impact and this could impact on the growth of the consumer market in these and other African economies.

The relative weakness of many emerging market currencies has meant a higher risk of tightening monetary policy (with its resultant impact on customer's wallets), exchange controls and of course increased import costs for retailers. Managing the effect on their operations (in particular their cost base) of volatile currencies will continue to be a focus for retailers in Africa.

Different strategies have been developed for expansion in Africa, including selecting a regional hub to facilitate expansion (such as Kenya into East and Central Africa and Nigeria into West Africa). A critical success factor for retailers and consumer goods companies moving into many African countries has been their ability to implement supply chains that deal with the operational challenges that exist. Given the size of Africa, companies often need to make significant upfront investments in distribution centres and in many countries upfront lease payments to landlords covering a significant period may also be required.

In this report, we focus our analysis on ten African economies that we believe offer some of the most compelling opportunities for retail and consumer

businesses looking to expand in Africa. Sub-Saharan Africa remains one of the fastest growing regions in the world and the successful expansion of a number of global and African retailers and consumer goods companies across the region speaks to the opportunities that exist.

Individual country profiles provide an overview of the demographic and economic situation, challenges and opportunities, as well as sharing insights about doing business from executives on the ground.

Meanwhile, the "big picture" section at the beginning of the report outlines a number of the major trends shaping the retail and consumer sector across subSaharan Africa.

We hope this report will enhance your understanding of some of the risks but more importantly the opportunities that Africa has to offer, and provide the groundwork for deeper conversations.

Anton Hugo

Retail & Consumer Industry Leader PwC Africa

2 | So much in store

The big picture

Trends shaping the retail and consumer sector in sub-Saharan Africa

Recent years have seen surging investor interest in sub-Saharan Africa's retail & consumer sector. Whereas the focus was traditionally on extractive industries such as oil and mining, a growing consumer class demanding everything from mobile phones to fast food have prompted many retailers and consumer goods companies to look with fresh eyes at opportunities in the region.

Macro developments

Since the turn of the century sub-Saharan Africa has undergone a number of changes that have made it a more enticing investment prospect for consumer-focused companies. The region's economic progress and the `Africa rising' narrative have been well-documented, and we will not discuss it in depth.

The purpose of this report is to offer insight into the make-up of sub-Saharan Africa's retail and consumer goods industries, and provide an outlook for the coming five years. However, with each country at its own stage of development and stark differences in culture and consumer behaviour, one cannot paint the entire region with one brush.

We have therefore focused our research on 10 countries ? Angola, Cameroon, Ethiopia, Ghana, Ivory Coast, Kenya, Nigeria, South Africa, Tanzania and Zambia. In choosing these territories we considered a variety of factors, including the size of their economies and attractiveness from a consumer perspective, while aiming to provide a good geographical spread.

To give readers a broad snapshot, we have identified significant trends likely to impact the development of the region's retail and consumer goods industries over the coming years.

Many sub-Saharan Africa countries have emerged among the world's fastest growing economies. For example, between 2000 and 2014, GDP in Angola, Ethiopia and Nigeria grew at average annual rates of 9.2%, 8.8% and 7.7% respectively.

While significant work remains there has also been some progress on the governance and political front, with many countries moving towards better administration and deepening democracy. For example, Nigeria's March 2015 election was the first time since 1999 that the country had a democratic transition of political power. The polls also defied predictions of security problems and unrest.

These developments, coupled with urbanisation and an increasingly connected and demanding consumer class have given investors a lot to be positive about.

A growing consumer class demanding everything from mobile phones to fast food have prompted many retailers and consumer goods companies to look with fresh eyes at opportunities in Africa.

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Countries analysed in this report

C?te

Ghana

d'Ivoire

Nigeria Cameroon

Ethiopia Kenya Tanzania

Angola

Zambia

South Africa

4 | So much in store

Economic factors

Figure 1 Commodities at USD-indexed prices (Annual average prices, 2007=100)

Despite this underlying optimism, many sub-Saharan economies have also been impacted by a string of external and internal challenges that are already having a negative impact.

Softer demand from Europe and China, lower commodity prices (most significantly the oil price, which is severely impacting crude producers such as Angola and Nigeria) and security threats in countries such as Nigeria and Kenya have all had a harmful impact on GDP growth.

250 200 150 100

50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015

In its January 2016 World Economic Outlook Update, the IMF revised forecasts for global growth down by 0.2 percentage points for both 2016 and 2017, reflecting a weaker pickup in emerging economies than previously expected. Despite the challenges, the outlook for sub-Saharan Africa remains positive and significantly ahead of the global average

Crude oil, average ($/bbl) Copper ($/mt)

Aluminum ($/mt)

Coal, South Afican ($/mt)

Gold ($/troy oz)

Source: World Bank Commodity Price Data (The Pink Sheet)

Figure 2: GDP growth: Global vs sub-Saharan Africa

Iron ore, cfr spot ($/dmtu)

Platinum ($/troy oz)

Despite a string of external and internal challenges having a negative impact on its growth rate, Africa's prospects remain significantly better than the global average.

7

6

5

4

3

2

1

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sub-Saharan Africa

World

Source: IMF, World Economic Outlook, January 2016

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Figure 3 GDP growth in profiled countries (%)

The strong US dollar has inflated the costs of imports and raw materials, putting added pressure on local economies.

6 | So much in store

15

12

9

6

3

0

-3

-6 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Angola

Ethiopia

Nigeria

Cameroon

Ghana

South Africa

C?te d'Ivoire

Kenya

Tanzania

Zambia

Source: IMF World Economic Outlook Database, latest release October 2015

Many African currencies have also weakened against a strong US dollar, which has inflated the costs of imports and raw materials. Furthermore, fresh electricity generation problems in many countries, particularly South Africa and Ghana, means companies have to rely on generators during periods of electricity load shedding. This is expensive and adds to the cost of doing business, which has seen some companies having to lay off staff.

Figure 4 Real effective exchange rates for profiled countries (annual average index, 2007 = 100)

160 150 140 130 120 110 100

90 80 70 60 50

2007 2008 2009 2010 2011 2012 2013 2014 2015

Angola C?te d'Ivoire Cameroon Zambia

Ethiopia Ghana Kenya

Nigeria Tanzania South Africa

Source: Bruegel, Real effective exchange rate database, updated 26 November 2015. Acessed at

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