East Africa becoming a favoured destination for region's retailers
Strong economic growth, a large population and proximity to Middle East markets all seen as advantages
Retailers looking to expand into new lucrative markets are eyeing East Africa. This region of the African continent is emerging as an investment destination of choice across multiple sectors.
A number of factors play into East Africa’s appeal. The first is its robust economic growth, projected to be 5.9 per cent for the year, following a 5.7 per cent increase in 2018. Together, this makes region the continent’s strongest performer. Consumer demand is rising among a 362-million strong population, with household consumption the main driver, along with strong public infrastructure investment.
Other positive factors include ease of doing business, and a relatively transparent legal structure with many countries following the British civil law. Geographically, too, East Africa is in proximity to the Middle East and is easily accessible from business hubs there.
Yet the attractiveness of East Africa does not guarantee success. In fact, retailers and brands unwilling to put in the groundwork in terms of diligence and understanding the local culture and nuances are setting themselves up for failure.
The first rule of a successful investment operation in East Africa is a long-term commitment with mutual benefit for both the investor and local community. While many private equity capital investors in the region have a lifecycle of up to six years, we would argue that this “get in, get out” strategy is sub-optimal on a few levels. First, the beneficial local impact is limited – and the investment does not add to the market’s development. Second, it limits long-term sustainable revenue generation opportunities. More equitable and mutually value-generating solutions require longer-term involvement with timeframe of more than 20 years. It is only then that a brand can make an impact and establish its presence for the future.
A second critical point is to treat East Africa as you would any other market, and first seek opportunities on the ground. Historically, some investors have headed straight for government incentive schemes without examining the lay of the land. This top-down approach has led to challenges. On the other hand, a bottom-up approach where investors assess their chosen project based on location, local partner, regulations and viability before approaching the public sector for buy-in is far more likely to yield enduring success.
Alongside this, maintaining a physical, on-the-ground presence is highly beneficial. For instance, large retail operations such as Majid Al Futtaim’s will train around 400 people for every single outlet it opens. A physical presence with an emphasis on local employment helps brands understand local market preferences and serve them effectively. It also offers employment opportunities and community boost required to create disposable income that facilitates the consumption of goods and services.
And finally, retailers and indeed any other investors exploring East Africa, would do well to not simply try and recreate developed market experiences. Investing in the region is not as simple as taking ideas from the developed world and importing them. East Africa today is categorically not Europe from 20 years ago. Developing markets, catalysed by technological advances, are following very different growth patterns. Entire steps in conventional development have been leapfrogged because new technologies are now available.
For instance, East Africa never saw the credit card revolution that consumers in Western markets experienced. The region did not see an explosion of fixed-line infrastructure. Instead, East Africa went straight to mobile, digital wallets and digital credit. Kenya, for instance, is the world’s leader in mobile money adoption. Our research indicates that more than one-third of customers in-store currently prefer paying with digital wallets. Retailers need to recognise the exponential digital growth still waiting in the wings, and make this a key element of their long-term engagement with the East African market.
East Africa still poses some challenges around issues such as compliance, Know Your Customer (KYC) and logistics challenges. And like any other market, it requires a game plan, an ability to commit for the long-term, an understanding of local culture, and an emphasis on mutual benefit for investors to make the most of its potential.
This is an approach we have taken in Kenya since opening our first Carrefour store there in 2016. It is the same path we’re following in Uganda, where we will open our first store this month.
Hani Weiss is the chief executive of Majid Al Futtaim Retail
Published: December 27, 2019 07:00 AM