African economies currently face a double threat. First, commodity prices are at their lowest in decades, which has already caused aÂ 16 percent dropÂ in sub-Saharan Africaâ€™s terms of trade (the ratio of export prices to import prices). Second, responding to its own slowing growth, China has scaled back its investment on the continent. As a result, African economies increasingly face budget shortfalls, weakening currencies, and constrained economic growth.
Particularly hard hit are those African economies, such as Nigeria, that are dependent on exporting commodities and importingâ€”in the words of President Muhammadu Buhariâ€”â€œeverything including toothpicks.â€ Despite the pressure that Nigeriaâ€™s foreign earnings shortage has put on its currency, the naira, Buhari has obstinately refused to devalue it, ignoringÂ callsÂ from the International Monetary Fund (and many international observers) to do so. The bleak financial outlook has driven some Nigerian consumers to try to kick-start the economy through less orthodox measures, including a movement to encourage the consumption of locally produced goods. This movement, led by Nigerian Senator Ben Murray-Bruce, has spawned a popular Twitter hashtagÂ #
BuyNaijaToGrowTheNaira, as well as aÂ catchy theme song.
While promoting African consumer brands isnâ€™t a comprehensive solution to the regionâ€™s economic woes, local companies represent an important opportunity for African leaders looking to diversify their economies and protect them from future external price shocks.
As Africaâ€™s populationÂ grows rapidly andÂ urbanizes over the coming decades, so will African consumer markets. While African middle class affluenceÂ hasnâ€™t materializedÂ as quickly as anticipated, estimates suggest thatÂ 128 million Africa households will enjoy discretionary income within the next five years. If new African consumers can look to local producers to meet this growing demand, local companies will benefit handsomely, economies will transition away from a reliance on commodity exports, and dependency on importing foreign goods will be reduced.
African companies enjoy several advantages in meeting this rising consumer demand. To start, they often understand local markets and consumer preferences better than foreign competitors. For example, the Tanzania-based Bakhresa Group recognized that many poorer African consumers treat carbonated drinks as a luxury and prefer to drink them over multiple sittings. The company then packaged their Azam Cola in recyclable plastic bottles that could be resealed, as opposed to the drink-on-the-spot returnable glass bottles used by market-leader Coca-Cola. CokeÂ soon followed suit, also repackaging their product in resealable plastic bottles.
Whereas non-African firmsâ€™ oftenÂ struggle to make their advertising relevant across the continent, African companies have proven adept at tailoring their marketing strategies to a local consumer base. Bidco, a Kenyan consumer goods company, produces marketing content inÂ seven languages in Kenya alone. This strategy has been working. Bidco is currently present in sixteen African countries and evenÂ acquired the Anglo-Dutch corporation Unileverâ€™s cooking oil and soap brands in 2002.
Beyond more effective marketing, many African consumers tend to prefer to purchase local brands, a huge advantage for an African firm competing for a share of the market. In a study conducted by Deloitte, 90 percent of Kenyans, 78 percent of South Africans, and 78 percent of NigeriansÂ expressed a preference for local food brands over their international competitors.
While decision-making in non-African companies often happens in corporate offices in Europe, African firms better understand how to work with local business communities and source their inputs domestically. Sourcing domestically allows firms to side-step problems related to national shortages in foreign currency holdings and, if properly employed, to price goods more competitively than international firms that are reliant on transporting their inputs from further away. Zambeef, a fast-growing Zambian food company based in Lusaka, is an example of this model. The firm has developed a vertically integrated, locally sourced production chain thatÂ supports local agricultural producers and insulates the company from foreign exchange fluctuations. Zambeef has alreadyÂ expanded into Ghana and Nigeria and hasÂ plans to enter the Congolese and Zimbabwean markets.
African governments have begun to recognize the potential in domestic consumer markets. In 2014, the Ugandan government launched itsÂ Buy Uganda, Build Uganda Policy,Â aimed at increasing public and private consumption of local goods instead of imported products. In an effort to help develop local suppliers, the policy mandates that 20 percent of government procurement must be locally sourced.
Non-African firms have taken notice, too, and are piggybacking on the success of profitable local competitors. Earlier this year, Coca-Cola paid $240 million for a 40 percentÂ stake in the Lagos-based CHI, a popular fruit juice and dairy product company responsible for the Chivita brand, among others.Â However, the advantages enjoyed by African companies donâ€™t necessarily outweigh the broader challenges faced by those looking to do business on the continent. Corruption, bloated bureaucracies,Â non-tariff trade barriersâ€”such as transit fees, customs inconsistencies, and policy restrictionsâ€”and lack of infrastructure and power still make trade, investment, and commerce difficult for African and non-African firms alike. Furthermore, while African governments remain keen to support their own commercial actors, this enthusiasm doesnâ€™t carry over to companies from other African countries. In a timely example, the Nigerian government recently fined MTN Group Ltd., a South African-based mobile telecommunications firm that is the continentâ€™s largest by value, a recordÂ $5.2 billion last year for non-compliance with new regulations implemented amid a security crackdown. While MTN is still in negotiations with the Nigerian government, and the fine amount has been subsequently lowered to $3.9 billion, the company has already been forced to disconnect more thanÂ 10 percent of its subscriber base in Nigeria.
These challenges notwithstanding, African firms could play a critical role in helping Africa grow, diversify its economies, and protect itself from the next global downturn. To read more on how African economies can maintain growth in a constrained global economic environment, see a new Atlantic Council study by J. Peter Pham and Aubrey Hruby,Â Embracing Impact: How Africa Can Overcome the Emerging Market Downturn.
-Â Â Â Â Â Â Â Julian WyssÂ is a Program Assistant with the Atlantic Councilâ€™s Africa Center andÂ Erina IwamiÂ is an Africa Center intern.Newsweek, but first published by The Atlantic.