Development, Urbanization, and the African Consumer Class

How Consumer Markets and Private Investment will Perpetuate Africa as a Continent of Megacities

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Those who drive investment on the African continent, either as investors or limited partners, understand the developmental effects that such investment can have on local and regional economies. Indeed, many venture capitalists (VCs) in the space look for this sort of impact while also searching for those startups who will accomplish such goals on the largest scale. Because early-stage investment in African bears certain risks, investors are also seeking outsized returns in proportion to the risk level. Finding such returns requires finding large enough markets to serve, which can be challenging in a fragmented environment like Africa. This challenge demonstrates the necessity of high-quality data to measure market size and consumer activity and behaviors.

To understand such behaviors and markets, reports have been written outlining various data about the size of the African middle class or ‘consumer class,’ whom corporations or startups can target in various markets. This writing will address some of the research on this so-called “consumer class” and the relationship between investment, development, urbanization, and the elusive African consumer class.

In 2020, Fraym published “Finding the African Consumer,” a report documenting a new methodology of evaluating Africa’s consumer class and demonstrating the size of said demographic.  Unique to Fraym’s methodology of mapping the consumer class was considering both the number of assets one owns (refrigerator, television, automobile, etc.) as well as education status. By combining asset ownership and technology, they were able to avoid income-based estimates, which often don’t take into account African informal economies and ‘side hustles.’ Fraym considers the consumer class as those who can either regularly or semi-regularly purchase what consumer-facing companies would deem ‘premium goods,’ so it is important to note that this study is not measuring mass-market consumers, an even larger demographic.

It is additionally important to note that documenting such a demographic is challenging and has been attempted a fair number of times, and this study has limitations too. The informal nature of work and therefore lack of data about it, which has been mentioned, is one such limitation and is why Fraym took the asset-education route. However, this route has limitations too, as different urban African populations have much different styles of living and may have different asset-ownership tendencies. For example, Lappeman et al. found that while 65.5% of Dar es Salaam consumer class respondents reported owning their housing, only 8.4% of Nairobi respondents reported property ownership with 86.4% renting from someone else (25.3% in Dar es Salaam). Compare this with 58.4% of Abidjan respondents reporting that they rent from family and friends (thus making them non-owners), a category comprising less than 10% of respondents in both Dar es Salaam and Nairobi. Thus, different urban lifestyles can also affect data about the African consumer class and their consumption tendencies, and this can affect consumer data. In short, no dataset can perfectly map the demographic, but this report uses new methodologies to extend the discussion.

Fraym calculated that there are 330 million in the African consumer class. Finding and addressing this demographic is key for businesses and ventures seeking venture-sized markets. Interestingly, Fraym found that two-thirds of this class resides in five countries, three of which are in North Africa: Egypt (78m), Nigeria (52m), South Africa (36m), Morrocco (29m), and Algeria (25m). Fraym also identified that an additional 30% of the consumer class remain in 15 nations, what they dub the ‘Frontier Fifteen.’ These nations are: Ethiopia (10.5m), Angola (9.3m), Kenya (8.7m), Ghana (8.4m), Tanzania (8.3m), Sudan (8.2m), Tunisia (8.1m), the DRC (8.0m), Cameroon (4.9m),Mozambique (3.8m), Zimbabwe (3.7m), Cote D’Ivoire (3.3m), Zambia (3.3m), Uganda (3.2m), and Senegal (2.2). While it is stark that 5 nations represent 2/3rds of consumers and that 20/54 nations make up 95% of the consumer class, the research about the relationship between urban centers and consumption struck me more and prompted this article.

In their consumer class research, Fraym additionally found that 50 African cities represent 80% of the consumer class, and ten of these cities are in Nigeria! Cairo has the largest consumer class market, followed by Lagos, Johannesburg, Kinshasa, Luanda, Alexandria, Casablanca, Cape Town, Dares Salaam, and Nairobi to round out the top ten (visit the report to see the other 40). The idea that cities are economic hubs, in which there are higher levels of consumption, would not surprise anyone; nonetheless, the disparity between urban consumers and rural was beyond anticipation. This urban phenomenon demonstrates a few things. The first is that businesses must take an urban first approach to reaching their customers, which includes reaching people in ways that align with urban behavior and consumption patterns, such as television advertising. Additionally, it may suggest that the time and capital spent serving rural and semi-rural customers may not be worth the hassle when compared with the size of other nearby urban centers. Thus, in consumer-facing sectors, startups planning their go-to-market strategy ought to understand which markets will be large enough for them to scale, and in all likelihood, they will be urban markets.

Africa’s consumer markets are urban. Therefore, ventures and growing businesses are going to spend their time and resources breaking into urban markets where they know they will find reliable consumers. Additionally, venture capitalists and other investors in the ecosystem, who are looking for massive addressable markets, are going to invest in the companies serving such markets, urban markets, to find high-returning prospects. As the urbanization trend continues to develop in Africa, more people will enter cities for work opportunities, and the larger the opportunity will be for customer acquisition in urban centers.

As I had mentioned in the beginning of this writing, investors in the ecosystem understand the developmental results which private sector investment can spur. This is part of the reason why development finance institutions are keen on backing venture capital firms and other private investment projects. However, I posit that the urbanization trend, combined with private investment and the locale of African consumer markets, will create a feedback loop in which private investment must be placed a high-opportunity markets, and thus the urban consumer will be served. This loop of finding big markets, addressing them, and investing in them will continue to propel the African consumer and African urban development to the point which Africa will become known for megacities. As Africans continue to migrate to urban centers to find work, access modern goods, earn higher wages, and create new lives, private capital will continue fund ventures serving the largest markets in Africa. This loop will ultimately build megacities and secondary cities while failing to address more rural populations in an effective way, or so I hypothesize.

So what to make of this? As venture capitalists continue to invest in the future of African technology, more ventures will look to serve the growing population of urban consumers. The VCs who are looking to back companies serving massive markets will ultimately continue to play in the many of the same spaces, the spaces that make it worth the time and money for VCs and founders, which is why the ‘big-4’ exists. As spectators continue to ask why Nigeria, Egypt, South Africa, and Kenya continue to eat up VC funding, the numbers largely speak of themselves. Venture capitalists need deals that possess significant upside for LPs, and these are often found in the big-4 markets, which have both large consumer markets and thriving tech ecosystems. Thus, as the continent continues to urbanize, VCs will need to continue to make sure their investment strategies align with consumer and market trends and sizes. In all, the gap between urban and rural will continue to widen as investments flow into companies serving urban consumers, and the big-4 will continue to retain their dominance.

Read the Fraym report here: (PDF) FINDING THE DYNAMIC AFRICAN CONSUMER - Fraym · FINDING THE DYNAMIC AFRICAN CONSUMER 6 KEY INSIGHTS Ninety-five percent of the African Consumer Class is located in just 20 countries - DOKUMEN.TIPS

Read Lappeman et al. study here: Africa’s heterogeneous middle class: A 10-city study of consumer lifestyle indicators (sagepub.com)

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P.S. Fraym estimates that Dar es Salaam has more in the consumer class than Nairobi! Should more ventures target Tanzania?

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Written by Ben Finlay, Founder and General Partner at Plesion Capital.

To learn more about Plesion Capital, visit plesioncapital.com or email contact@plesioncapital.com

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