Africa needs everything. What an opportunity.

Need is not the same thing as the inability to pay. Africa’s consumer sector is growing rapidly. While natural resources contributed about a third to Africa’s growth in the decade from 2000 to 2010, consumer-facing and partially consumer-facing industries contributed 45 percent of that growth, according to a 2012 McKinsey & Company report, The Rise of the African Consumer.^* The authors predict that more than half of African households will have discretionary income by 2020, which is an increase from 85 million today to 130 million. Along with that, they project consumer industries (including retail/wholesale, retail banking, telecom, and tourism) will grow by more than $400 billion by 2020. That forecasted increase is more than half of the total projection for all business revenue growth over the period.²

Much of the growth in Africa’s wealth is hidden. This is true both statistically and literally. Statistically, the World Bank’s GDP figures are based on the formal economy only, meaning income reported to the government. The size of the informal economy is unknown, but informal work is estimated to represent almost 80 percent of nonagricultural employment, more than 60 percent of urban employment, and over 90 percent of new jobs in Africa through the mid 2000s.³ In his influential study, financed by the World Bank’s Doing Business project, Friedrich Schneider found that the informal economy represented on average over 42 percent of GNP in the early 2000s.⁴ Though urbanization and formalization have probably decreased the informal sector’s share somewhat, the result is that official GDP figures consistently understate the purchasing power in African villages and cities. As a cautionary tale on relying on these figures, African investor Miles Morland points out that just an adjustment in how the economy is measured caused Ghana’s reported GDP to jump by 70 percent in one year.⁵

Equity Bank CEO James Mwangi has a more granular view of informal spending in Africa’s villages and cities. The sixth of seven children raised by a widow, James grew up poor in rural Kenya. Though his family insisted on schooling, he also sold fruits and hauled charcoal for pay as a child. It was his first exposure to the retail customers operating at the margins of the formal economy. It is on the strength of those customers that James has built Equity Bank, the largest in East Africa. Today Equity has 7.8 million accounts and a market capitalization of over $1.3 billion. In 2012, James was named Africa’s businessperson of the year by Forbes.

James relates the success of Equity to those early lessons hauling coal to customers. “I saw that they have money, but they need it right away, and they keep it nearby, ” he told me recently. “That money was hidden in mattresses before it was with Equity.”

One reason James’s competitors failed to serve the low-income customer is because they viewed that customer as an unacceptable credit risk. In fact, Equity Bank’s nonperforming loan (NPL) rate was an industry-beating 3.0 percent in the third quarter of 2012.⁶ That same false perception of credit risk is evident for Africa as a whole. According to a 2012 report to the G20 by the consulting firm Roland Berger, the cost of capital in Africa assumes a rate of nonperforming loans of 15 percent, when it is actually 8 percent. According to the G20 report, this misperception of risk alone means excess costs of up to $9 billion annually.⁷

GE finds opportunities in Africa where others routinely misperceive risk. “There’s perceived risk here, ” Jay Ireland explained, “but if we think about credit defaults and bankruptcies, where have we seen more of that in the last eight years? The U.S. and Europe, or Africa? There’s no leverage here, we’re facing no risk from that. Every project is backed by sovereign credit guarantee and a letter of credit. Also, not paying your creditors in Africa means going out of business. American Airlines went into bankruptcy, but still flies. That’s not an option for most companies in Africa, so they pay. Some Westerners tend not to see that.”

Business leaders who succeed in Africa have observed need and recognized it as an opportunity to expand, rather than shrink, their addressable market. That dynamic is not limited to low-income or “base of the pyramid” customers. Chris Kirubi’s businesses sell to rich and poor alike. One of his more recent ventures is in biometric identification, a scan of your thumb or eye to confirm identity. Once the purview of James Bond movies, biometrics are an occasional feature of developed-country economies. They meet a pressing and widespread challenge in frontier markets like Africa’s, where companies want to extend food and health-care benefits to their workers without risking a mass expansion of informal beneficiaries. Chris explains:

We’re moving directly to biometrics so that we skip over photo ID cards, which somebody gives to his cousin to go to the clinic. We are rolling it out across the whole of Kenya, as well as Uganda. The next will be Rwanda and Tanzania. Some of our corporate customers have saved as much as 40 percent of their medical bills the past year. Now, we’re extending the service to track attendance at work so you don’t give your friend your card to punch you in or out. We’re extending it to corporate canteens where employees eat so that no Tom, Dick, and Harry can walk in where you’re serving.

Sunny Verghese was not raised in Africa, but his decades of experience there let him see the current opportunity in meeting Africa’s needs. Sunny is the founding CEO of Olam, a $14 billion global agribusiness with a market capitalization of U.S. $3 billion. He was raised in India and trained among that country’s first generation of globally competitive business leaders, attending India’s prestigious Indian Institute of Management (IIM) in the early 1980s. After a four-year stint with Unilever’s Indian subsidiary, Sunny was asked by the Kewalram Chanrai (KC) Group to manage its agribusiness affairs in Africa. “While I was at business school, Africa was not much mentioned, ” Sunny recalls. “When I first went to Africa, it was a complete eye-opener for me. The KC Group was already doing good business there, and I could see it getting much better as governments relaxed their hold on commodities and on farmers.”

Sunny positioned the newly formed Olam to serve the role that had previously been managed (and often mismanaged) by government procurement boards. The company has since expanded its African businesses dramatically. Today Olam’s operations in eighteen African countries extend from farming to branded consumer foods.

Sunny is sharp, to the point, and extremely detail oriented across geographies and commodities. He will tell you the prevailing wage rate in Colombia, the going price for coffee in Tanzania, and the average inflation rate across Africa in a single breath. In Africa, Sunny sees continued opportunity to supply global agribusiness needs. However, he also sees opportunity in Africa’s rising demand:

Given our portfolio of products, Africa is very important as a source of origin, but Africa is also very important from a market point of view. For example, Africa has the potential to become self-sufficient in rice. Out of the world’s thirty million to fifty million tons of rice that is traded, Africa imports about nine million tons of that. So almost a third of the world’s rice trade goes into Africa. I believe that Africa does not have to spend a single dollar of foreign exchange to import its rice. It can grow all its rice and be self-sufficient. Africa also imports almost all of its wheat, nearly thirty million tons, because we’ve not harnessed Africa’s potential so far. Olam has supplied those products into Africa in the past, but today, we turned towards growing them in Africa for Africa.

Then there is the opportunity to provide Africa with processed food. Most of the multinational branded companies dismiss Africa as a niche market, and a very difficult market in which to execute. Most of the products that they sell in Africa are not based on real market or consumer insight, and they’re not targeted and adapted to African tastes or African price points. We see a huge opportunity to tailor-make consumer food products in Africa with low unit price, high quality, and value-for-money products that are based on solid consumer insights and research about African consumer taste and how it is developing.

Seeing the opportunity in need drives success in Africa even for companies that are not selling to Africans. I recently worked with a mining company producing in West Africa entirely for export to Asia. The company had a register of several hundred social and economic risks associated with its operation, and sought an overarching architecture to manage them. Ultimately, the company found the entire register had its roots in a single meta-challenge: We run a multi-billion dollar project in a region where people earn $100 a year. How do we convert that gap into opportunities, now and for the next hundred years?

Perceiving the opportunities in bridging that gap, rather than just the risks, changed the dynamic of how the company manages not only community affairs, but its entire supply, production, and transit operation.

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