Chess in Pink

Sizing up Luxury Goods Opportunity in Africa’s Frontier Markets

September 4th, 2012
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Kenyan consumersForeign investors are flocking
in their droves to sub-Saharan Africa, attracted by some of the fastest growing
economies in the world
and by projections of a bulging middle class. Is this
the next frontier for luxury goods, or is the opportunity more hype than

new gold rush

The dust has barely settled on
London 2012, but there is already talk of who might bid for the 2024 Olympics
(Rio de Janeiro will host 2016, and the 2020 short-list is made up of Madrid,
Tokyo and Istanbul). The 2024 race is almost certain to include a US
heavyweight, probably New York or San Francisco. But, expect to see a
sub-Saharan African city in the mix too.

Kenya's Nairobi is a probable
bidder and would fully expect to win, with or without a US metropolis as rival.
This is because Sub Saharan Africa has a newfound global confidence, fuelled by
its burgeoning economic prowess. GDP in Kenya, for example, is projected to
grow more than 200% at US dollar prices over the period 2011-2020, according to
data from Euromonitor International. Click to Tweet!

A host of frontier
(off-the-beaten-path) African economies are projected to show double-digit
compound annual growth (CAGR) to 2020, which is why so many yield-hungry
investors are digging around for untapped opportunities. The region's youthful
demographics, maturing political infrastructures and abundant natural resources
are fuelling the gold-rush climate.

What is more, Africa's
frontier markets are promising to bud at a time when growth in the BRICs is set
to slow. South Africa itself, the continent's standout emerging market of the
past decade, is entering a period of softer growth, reflecting sluggish
activity in the mining sector.

Investment in Sub Saharan
Africa still carries plenty of risk, however. Economic and political
fundamentals might be stronger than a decade ago, but stories of corruption,
conflicts and instability are never far from the news headlines, and are often
enough to deter more cautious investors.

Even investors who are
currently active in the region will acknowledge that the best opportunities are
typically opportunistic. And there is still the tricky issue of how easy it is
to get money out, once an inward investment has been committed.

Those notes of caution in
mind, is frontier Africa in its current state of development realistically
accessible to luxury goods manufacturers and retailers and is now the right
time to build stronger positions, along the lines of emerging Asia and Latin
America? Or, is there a case for a more prudent and patient approach, taking a
long-term view and building a growth strategy for the future?

classes A and B hold the key to growth

In emerging Asia and Latin
America (China and Brazil, in particular), the key to luxury goods development
over the past decade has been firstly, the growth of a new super-rich consumer
base – there are now over a million US dollar millionaires in China, for
example – and, secondly, in the growth of an aspirational middle class. The
latter has helped fuel strong demand for affordable luxury goods, such as
sub-US$1,000 luxury handbags and diffusion brands of designer labels.

Africa is a long way behind
both emerging Asia and Latin America in terms of the size of its middle class,
but the combination of rapidly growing economies and youthful populations auger
well for the next ten years (and beyond). Equally, a recent spate of oil and
gas discoveries – and the high probability of more to come, for example in
Ghana (oil) and in Tanzania (gas) – could provide a get-rich-quick spawning
ground for a new generation of high net worth individuals (HNWIs).

Indeed, in terms of Social
Classes A and B, sub-Saharan Africa appears on the cusp of a major growth
spurt. In Kenya, for example, Social Class A is forecast to grow by 28% between
2011 and 2020, according to data from Euromonitor International. That is one of
the highest projected growth rates in the world for A-class consumers. Social
Class A in China, for example, is forecast to grow by 4% over the corresponding
period, while in Russia it is forecast to contract 2%.

In terms of actual (absolute)
growth, Kenya's Class A consumer base would expand by 839,200 people to 2020,
which is a bigger increase than in many higher profile emerging markets,
including Turkey, Saudi Arabia, Vietnam, Colombia and South Africa. Kenya's
Social Class B is also forecast to show one of the world's biggest growth rates
between 2011 and 2020, bulging by a projected 590,000. That is almost four
times the projected absolute growth of South Africa's B-class.

These socio-demographic
projections show that Kenya could become an important engine of growth for
luxury goods
, spearheading potentially a new era of opportunity across
Sub-Saharan Africa, especially post-2020. If Nairobi was to host the 2024
Olympics (and the IOC has declared it would be receptive to a strong African
bid) there would almost certainly be a big upside in terms of retail
investment. This is happening now in Istanbul (bidding for 2020) with its
shopping mall boom.

There is already upward
momentum in retail real estate investment in Nairobi. Garden City, a 32-acre
mixed-use retail development on the city's Thika Highway will be the largest
retail mall in East Africa when it opens in mid-2014, for example. Its
developer, Actis, built Nigeria's first shopping mall (The Palms) in 2006, and
Ghana's first A-grade shopping mall (Acera) in 2008. This type of modern retail
initiative will be key to the potential accessibility of luxury brands.

Africa and Nigeria afford some insight into potential demand

Consumers' appetite for luxury
goods and the extent to which aspiration consumption culture might take root in
frontier Africa are difficult to predict. Those factors were easier to get a
handle on in emerging Asia and Latin America, not least because Hong Kong – in
the case of Asia – and Miami, in the case of Latin America, were showcases of
luxury branding that many consumers aspired to. There is no obvious retail
luxury magnet for Sub-Saharan Africa.

South Africa and Nigeria are
the region's main emerging markets (rather than frontier markets) and, as such,
do afford some insight into regional luxury goods demand. According to
Euromonitor International, Nigeria was the second fastest growing market in the
world for champagne between 2006 and 2011, with CAGR of 22%. Click to Tweet! Total consumption
reached 752,879 bottles (75 cl) in 2011 (higher than in Russia or Mexico), and
placed Nigeria among the top 20 champagne markets in the world.

And in luxury cosmetics, South
Africa was one of the world's strongest growth markets over the period
2006-2011 with retail spending (at fixed US dollar prices) showing CAGR of 15%,
according to Euromonitor International. That valued South Africa's total
premium cosmetics market at around US$773 million in 2011. In both South Africa
and Nigeria there are signs that luxury goods culture has taken root,
therefore. And that bodes well for the frontier markets.

risk too far, or an opportunity too good to miss?

What seems clear is that any
new luxury goods venture into frontier Africa needs to be motivated by
long-term rather than short term potential. Click to Tweet! The most significant growth stories
– and returns on investment – will probably not happen until post 2020. That is
a long way hence, and in the meantime there are richer pickings for luxury
goods manufacturers and retailers in emerging Asia and Latin America. That
would probably be the view taken by many company shareholders, for example.

Equally, by building a new
position in a market such as Kenya there would be an opportunity to develop
brand heritage for the future. And that could turn into a key point of
competitive differentiation post 2020. Furthermore, the prized retail real
estate locations of the future will be markedly better value today than in five
or ten years' time.

It comes down to global
strategic priorities and economies of scale. For the world's biggest luxury
goods companies
, frontier Africa looks to be a long-term opportunity too good
to miss. As such, markets such as Kenya ought to become part of their position
building portfolios sooner rather than later. For smaller and mid-sized
players, short-term investment could present more pitfalls than opportunities.
This is because the sweet spot of the opportunity is simply too far into the

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