CHAPTER 1

A GIANT AWAKES

One of our objectives in writing this book is to prompt business executives and entrepreneurs from the Americas, Asia-Pacific, Europe, and the Middle East to take a fresh look at the business opportunities in Africa—and while you’re at it, to spend some time exploring our beautiful continent. One must-do activity is a game drive in one of Africa’s remarkable nature reserves—perhaps the Serengeti in Tanzania, Kruger National Park in South Africa, or Namibia’s Etosha National Park. As you bump along the rutted savannah on the back of a Land Rover, however, you’ll discover that some of Africa’s most magnificent animals can be hard to spot. A leopard, for example, might be perched still and silent on the branch of a marula tree, its coat a natural camouflage under the dappled shadows of the leaves. The untrained eye is likely to see only the tree; but those who know what they’re looking for will pick out the leopard a mile away.

That’s a fair analogy for the business world. Executives with on-the-ground experience in Africa sometimes manage to spot opportunities that are hidden from the view of global observers. Just look at the story of SABMiller. The beer maker started as South Africa’s national champion, snapped up global brands such as Pilsner Urquell, Miller Lite, and Peroni, and ended up on the London Stock Exchange’s FTSE 100 list before being acquired by rival Anheuser-Busch InBev for $103 billion in late 2016. It was SABMiller’s success across the African continent, along with its operations in Latin America, that made it such a growth star and justified the eye-watering price tag for its takeover.

From 2007 to 2016, the brewer saw its African sales outside of South Africa climb from $280 million to $1 billion. By 2016, SABMiller had brewing operations in around forty of Africa’s fifty-four countries. Mark Bowman was the managing director of SABMiller’s Africa region during that decade. He told us, “We spotted a huge opportunity in Africa’s beer market, and we seized it at the right moment. In the early part of this century, most global firms saw Africa as unattractive, so we had limited competition.”

SABMiller knew otherwise. The continent’s population was growing by around 2.5 percent a year, much faster than most other regions. Seventy percent of the population was under the age of thirty, most countries were increasingly urban, and their economies were growing—all bullish signs for beer consumption. SABMiller’s insight was simple yet powerful: like consumers the world over, Africans like beer. When they can start spending a portion of earnings on nonessentials, one of the first luxuries they turn to is an upgrade from home brews to commercial brands. “We realized that, if we acted early, we could become number one or two in many African markets,” Bowman said. “We recognized that if we established a leading position, even if it was small in the beginning, it could grow into quite a big business. Even so, I don’t think we ever fully appreciated that African markets would generate the value that they did.”

SABMiller began acquiring existing African breweries in 1993, starting with a 50 percent stake in a money-losing operation in Tanzania. With its local partners, it quickly turned that brewery around, tripling production and generating healthy profits within three years. That whetted its appetite for more. “We more or less tried to buy anything that was for sale, had a reasonable brand and had reasonable prospects,” recalls Bowman. He says the deals were often complex, burdened by poor bookkeeping and questionable tax-avoidance schemes practiced by the acquired breweries, but SABMiller pushed ahead as long as there was some prospect of generating a positive return. “With hindsight, what we thought was expensive was actually cheap,” he says.

The company started with a conservative strategy, using secondhand equipment in its new breweries to save money and cycling in end-of-career executives to manage them. Bowman recounts, “As we developed confidence in the business, Africa became a much bigger priority. We completely transformed our philosophy and approach and developed a much bolder long-term vision of what Africa could deliver.” One element of that new strategy was an aggressive program of brewery building across the continent. With its equipment-supplier partners, SABMiller developed a standardized “brewery in a box” that it could quickly assemble. A second element was to hone its marketing insights: using the brand-positioning approach it had developed globally, SABMiller created a diverse portfolio of African brands tailored to local markets.

In Nigeria, for example, SABMiller developed a new brand, Hero. “Our head of marketing in Nigeria convinced us that this was the right name, because people saw themselves as everyday heroes, heroes of their own story,” Bowman told us. SABMiller wanted the new beer to come across as local, not the product of a multinational. It designed the label with a rising sun, a favorite symbol of the Igbo people, an ethnic group native to Nigeria. And in a country where it can take up to six hours to earn enough to buy a half-liter of beer, SABMiller priced the brew 25 percent below the market-leading Star brand. Bowman recounts the launch of the Hero brewery, an event attended by Nigeria’s then-president, among other luminaries. “Three or four distributors came up to me and told me the history of the Hero brand—even though it was totally new! They’d completely bought it in their minds. It turned out to be one of the most successful brands we ever launched, and our production was never able to keep up with demand.”

SABMiller’s approach to brands also took into account the huge differences in spending power among African consumers. By the time it was acquired by Anheuser-Busch InBev in 2016, SABMiller had begun to extend its portfolio beyond its traditional mainstream beer offering. In its drive to appeal to low-income consumers, it acquired a small brewery in Zambia that specialized in a commercial version of the local home brew made with sorghum and maize. SABMiller would eventually market the brew as Shake Shake (you really do have to shake the brew before drinking because of the sediment) in a dozen countries. At the same time, SABMiller also made a strong play for consumers higher up the income pyramid. It launched Castle Lite, a South African beer brand, in multiple African markets, targeted at “upper mainstream” consumers at a price premium. “We were spectacularly successful with Castle Lite,” Bowman said. “The consumer proposition was very strong and simple: an ice-cold reward that is much healthier and better for you.”

As Bowman reminded us, though, it takes more than a smart strategy to succeed in Africa. Underpinning SABMiller’s growth was a mindset of winning: “Right from the beginning, our people had a can-do attitude. They just went out there and built the business. They were the real heroes of this story.”

In 2011, we published an article in Harvard Business Review entitled “Cracking the Next Growth Market: Africa.” We posited Africa was one of the world’s fastest-growing regions, and that farsighted companies able to spot the African opportunity and act on it before others would reap enormous gains. SABMiller’s story is a perfect example. Today, we believe the long-term growth prospects for Africa are even greater—and the case for businesses to invest in the continent is even more compelling.

We don’t pretend that Africa is an easy place to do business, given its geographic complexity, infrastructure gaps, and relative economic and political volatility. Despite these challenges, we believe that companies and investors in every part of the world should be taking a close look at Africa today and its place in their growth strategy for the next twenty years. Here are four good reasons:

• Africa is a 1.2 billion–person market in the midst of an historic economic acceleration.

• Hundreds of large companies, home-grown and multinational, have already built successful businesses in Africa, but there is room for many more.

• Africa has huge unfulfilled demand, making it ripe for entrepreneurship and innovation at scale.

• You can achieve extraordinary growth and profitability—provided you get your strategy and execution right.

A 1.2 BILLION–PERSON MARKET ON THE CUSP OF TRANSFORMATIVE GROWTH

Africa is a big place: its land area is second only to Asia’s, and it contains a major share of the world’s agricultural land and mineral reserves. Its current population of around 1.2 billion is projected to double over the next thirty years, making Africa an exception in a world of slowing population growth. Those numbers should be reason enough to interest global businesses.

What really makes it a continent to watch, though, is the historic economic shift under way. A glance at world economic history gives an indication of what could be ahead for Africa. In Europe and North America, for example, average per capita income barely increased for almost two thousand years, but suddenly soared with the Industrial Revolution, increasing twentyfold between 1820 and 2015.¹ Asia’s boom came later but was much faster: its GDP per capita increased tenfold between 1960 and 2015. And within Asia, China’s rise in per capita income has been even more dramatic: it took just three decades for GDP per capita to multiply tenfold after the launch of economic reforms at the end of the 1970s.

One of us (Georges) spent seven years in China at the height of its economic acceleration. Many African cities today remind him of Chinese cities such as Chongqing or Wuhan twenty years ago: they have the same hustle, the same entrepreneurial energy, and a similar emerging class of aspiring citizens. The urban energy of Lagos, Nairobi, or Abidjan today suggests that much of Africa has reached an inflection point where a sufficiently large pool of people have risen beyond providing for their basic needs and have the wherewithal to discriminate among consumer goods, save for their first washing machine or refrigerator, or send their kids to better schools. Indeed, in many parts of urban Africa, there are signs that the simultaneous increases in population and per capita income are triggering exponential growth in demand. That is reflected in the proliferation of retail outlets, cell phone networks, restaurants, housing developments, car dealerships—and traffic jams.

Tidjane Thiam, the Ivorian-born CEO of Credit Suisse and former head of Prudential, the global insurer, is a keen observer of this growth phenomenon—and its implications for business. “The human brain thinks in a linear fashion,” he remarked to us, “but exponential growth is in fact more common in nature. Think of an acorn growing into an oak tree.” Thiam gained firsthand experience of this truth while building Prudential’s business in emerging Asia. One $50 million investment multiplied to $4 billion in little over 15 years—an eightyfold expansion. Thiam believes that conditions in many African markets today offer similar opportunities. “You’ve got the demographic boom combined with GDP growth rates of 6, 7, or 8 percent.” Companies that get in early and shape the right strategy can sustain double-digit profit growth over decades, he said. “There is an element of breaking ground, but the long-term rewards will be very high.”

The numbers suggest that Africa is in the midst of a significant acceleration (see figure 1-1). Real GDP grew at an average annual rate of little over 2 percent during the 1980s and 1990s, but then leaped ahead to 5.4 percent in 2000–2010, making Africa the world’s second-fastest-growing region after emerging Asia. Notably, this growth spurt was driven in nearly equal measures by labor-force growth and productivity growth, marking the end of a long period of stagnant productivity. In the late 1990s, private capital flows to Africa (including foreign direct investment, equity, and debt) overtook aid inflows and remittances for the first time in decades.

Rising productivity and investment in the first decade of the twenty-first century reflected the increasing diversification of Africa’s economies away from resources exports. Although Africa benefited from soaring global demand for oil and minerals during this period, commodities explain only part of the continent’s growth over that decade. McKinsey’s 2010 report, Lions on the Move, found that oil and natural resources accounted directly or indirectly for just 24 percent of Africa’s GDP growth from 2000 through to 2008.² Other sectors accounted for most of the growth surge: tourism, financial services, transport, telecommunications, and construction all grew at annual rates of around 8 percent over this period. GDP grew rapidly both in countries with significant resource exports (5.4 percent) and in those without (4.6 percent).

After this heady decade, Africa’s growth slowed sharply—to an annual rate of 3.3 percent between 2010 and 2015. This was prompted by the twin shocks of the Arab Spring, which halted growth altogether in Egypt, Libya, and Tunisia; and the collapse of oil prices, which caused growth to fall sharply in oil-exporting countries including Algeria, Angola, and Nigeria. In the rest of Africa, however, real annual GDP growth grew from 4.1 percent in the period from 2000 to 2010 to 4.4 percent between 2010 and 2015.

No doubt, many African countries will remain vulnerable to economic and political volatility. In 2016–2017, for example, Nigeria suffered its first economic contraction in a quarter century as oil production slumped.³ In the same period, South Africa’s already slow growth was further hampered when its respected finance minister was fired and credit ratings agencies downgraded its sovereign debt. The slowdown in Africa’s two largest economies was felt across the continent.

In early 2018, however, a change of president in South Africa reinvigorated investor confidence and sent the rand to a three-year high against the US dollar. Recovering oil prices and continuing economic diversification lifted Nigeria out of recession. Egypt’s GDP growth was expected to reach 5 percent, while the World Bank forecast Ghana to be the world’s fastest-growing economy in 2018.⁴ Those developments were a reminder that, despite volatility, Africa’s long-term growth prospects remain promising. Overall, GDP is still expanding faster than the world average and is forecast to accelerate to make Africa once again the world’s second-fastest-growing region.

Our colleagues point out that, of all the ICASA markets, Africa has the most unfilled potential. But it also faces the greatest challenges, including increasing sustainable urbanization, accelerating infrastructure development, and deepening regional integration. A failure to achieve any one of these could stall growth. In chapter 2, we look at these challenges and the role that business can play in solving them. For now, it’s worth pointing out two efforts by African governments that are already making tangible economic impact, and that have the potential to create a sea change if they reach critical mass.

Of the over one thousand respondents in our executive survey, the majority concur with these forecasts, and predict that most African households will join the consumer class in the next twenty years. They also expect that rising investment in both digital technologies and natural resources—the new and old economies—will boost development. Nearly 90 percent of African-based companies, and 58 percent of those based in other regions, expect their revenues in Africa to grow over the next five years, and most plan to expand their African footprint to additional countries (figure 1-2).

Ordinary Africans are also strikingly optimistic about the future. For example, a McKinsey global citizen survey conducted in 2017 found that nearly two-thirds of Nigerians believed their country would be better for the next generation. In developed nations such as the United Kingdom, by contrast, 60 percent of respondents thought the next generation would be worse off.⁵ That points to Africa’s part in a “great rebalancing” of the global economy toward emerging markets.⁶ As a 2017 McKinsey Quarterly article expressed it, “There are three geographic entities—India, China, and Africa—in which urbanization is empowering populations that exceed one billion people, and a fourth, Southeast Asia, with more than half a billion. Together, these enormous ‘ICASA’ (India, China, Africa, and Southeast Asia) markets hold the potential for significant continued expansion. We expect more than roughly half of global growth over the next ten years to come from these geographies.”⁷

The first is a drive to improve the ease of doing business—an area in which Africa has long lagged other regions. Several African governments have introduced reforms such as setting maximum processing times for permits and registrations, increasing the transparency of government fee structures, and implementing risk-based compliance processes that focus effort on more probable contraventions. These efforts to make Africa more business friendly have begun to yield results. For example, Nigeria jumped twenty-four places in the World Bank’s 2018 ease-of-doing-business ranking, from 169th to 145th, thanks to a reform effort that has put in place speedier business registration, improved efficiency in ports, and a new visa-on-arrival system for visitors. According to the World Bank, African countries implemented more than eighty reforms to the business environment in the year to June 2017, and four of the ten most improved countries worldwide, including Nigeria, were in Africa.⁸

Rwanda was several steps ahead of most other African nations, and is now a model for other efforts. In 2007, the East African nation set up a task force to improve its business environment. Reforms included setting up an effective “One Stop Center” for investors, streamlining construction permitting, introducing a simplified fixed fee for property registration, extending customs hours, and instituting risk-based customs inspections. Its ranking on the ease of doing business climbed from 150th in the world in 2008 to 32nd in 2014.⁹

The second notable effort is to remove trade and travel barriers between Africa’s fifty-four countries to accelerate regional integration. African governments have been working for years to counter fragmentation by forming trading blocs that reduce tariffs and red tape for member countries. For example, the six-member East African Community and the fifteen-member Southern African Development Community have both seen their intra-bloc trade grow at around 15 percent a year over the past decade.¹⁰ The integration of Africa’s regional markets could soon accelerate. By 2017, twenty-two African countries had ratified membership of the Tripartite Free Trade Area, which will combine more than 600 million people in a single trading bloc, forming the thirteenth-largest economy in the world. In March 2018, forty-four countries agreed to establish the African Continental Free Trade Area. If ratified by all signatory countries, it will be the biggest trade agreement since the formation of the World Trade Organization in 1995.

The late Calestous Juma, professor of the Practice of International Development at Harvard’s Kennedy School of Government, had long argued that larger markets would spur Africa’s industrial development, including a shift to higher-value products. He noted, “This will not only create jobs but it will also have the added advantage of diversifying Africa’s economies. The associated technological development will lead to the creation of new industries.”¹¹ We have confidence that the Continental Free Trade Area will become reality sooner rather than later, and prove him right. One encouraging sign is the move to visa-free travel between African countries. When McKinsey partnered with the African Development Bank and the World Economic Forum in 2012 to create the African Visa Openness Index, only five African nations offered visa-free or visa-on-arrival access to all fellow Africans. By 2018 that number had risen to close to twenty. Many of these countries have already seen sharp increases in the number of tourist arrivals and business visitors.

MORE BIG COMPANIES THAN YOU IMAGINED—BUT ROOM FOR MANY MORE

Some of the companies we feature in this book—like Coca-Cola, Comcraft, SABMiller, and Total—have been operating successful businesses in Africa for fifty or one hundred years. But many global companies only started to explore the continent’s potential in the mid-1990s. McKinsey was one of them. Although we had worked in Africa since the 1970s, we opened our first office in Johannesburg in 1995—shortly after Nelson Mandela was elected as South Africa’s first post-apartheid president. As we worked across dozens of countries and opened a further six offices across the continent, we found ourselves in the midst of an economic awakening in which business was playing a central part.

In those early years, just visiting clients was a challenge. Flights were so infrequent that it was faster to travel the three thousand miles from Yaoundé, Cameroon, to Dakar, Senegal, by way of Paris than trying to navigate through the airline schedules for hops across Africa. One of us (Mutsa) remembers arriving at one of the only business hotels in Lagos at 10 p.m. one Sunday night, and having to wait three hours to check in, as the hotel was full to capacity and accepted payment only in US cash. Today, there are dozens of hotels to choose from, many of international standard. Indeed, one manifestation of Africa’s business boom has been the proliferation of international hotel brands and air travel routes.

Who are the executives you might meet in the marble-clad lobbies of one of these new hotels or on one of the many intracontinental flights? They could be from just about any sector: a manager from Shoprite, the South Africa–based supermarket chain that now operates more than twenty-five hundred stores across thirteen African countries; or an executive from one of Africa’s many cross-border banks. Perhaps you might overhear a conversation between executives from France’s Michelin and Côte d’Ivoire’s SIFCA, which have partnered to build some of the world’s largest rubber-production facilities in West Africa. There’s every chance you’ll bump into someone from MTN, the mobile phone company with more than 200 million subscribers in twenty-two nations in Africa and the Middle East.

In fact, MTN’s growth story neatly mirrors the continent’s: in 2000, the entire sub-Saharan African region had fewer telephone lines than the island of Manhattan alone. By 2016, there were more than 700 million mobile phone connections across the continent, roughly one for every adult. South Africa–based MTN increased its subscriber base thirty-two-fold in the first ten years after its founding in 1994.

The health sector has enjoyed an equally rapid acceleration, driven by urbanization and expansion of health systems. We expect that Africa’s pharmaceutical market will be worth $40 billion to $65 billion by 2020—double or triple its 2013 value.¹² Several large pharmaceutical companies are riding this wave. For example, South Africa–based Aspen Pharmacare, founded in 1997, built a presence in multiple African markets and is today a leading global generics player, with twenty-six facilities on six continents. Its 2016 revenues reached nearly $3 billion.¹³

Companies in the energy sector have grown fast too. Total, the France-based oil major, has nearly a century-long history in Africa—but it has capitalized on the continent’s recent surge in demand for energy by expanding both its upstream oil and gas production and its downstream distribution network. As of 2017, it was pumping the equivalent of more than six hundred thousand barrels a day from Africa’s abundant oil and gas resources—and selling much of it to African customers via its network of four thousand service stations, the continent’s largest. “Our mission is to bring energy to our retail customers, and not only to produce the natural resources of these countries,” Total’s chairman and CEO, Patrick Pouyanné, told us. “Africa now represents 30 percent of our group’s activity worldwide, and is a major long-term pillar of our growth.”

In the transport and travel sector, consider the story of state-owned Ethiopian Airlines, which has driven an aggressive expansion strategy that nearly tripled its passenger numbers from 3.1 million in 2010 to 8.8 million in 2017. In the year to June 2017, the airline recorded a full-year profit of $232 million on revenues of $2.7 billion—more than many global airlines.¹⁴ Today Ethiopian Airlines serves around ninety routes across Africa and beyond.¹⁵ It is also the technical and strategic partner of Togo-based startup Asky Airlines, in which it holds a 40 percent stake. Asky itself, started on the initiative of several African governments and private-sector businesses in 2010, has addressed another gap: a lack of reliable air travel connections in Central and West Africa. It has grown rapidly and now serves twenty-three cities in the region.¹⁶ (One of its routes is from Dakar to Yaoundé—so, thankfully, we no longer have to make that trip via Paris.)

These are just a few of the companies we’ve tracked via our database of large companies operating in Africa. That research has revealed surprising figures: four hundred companies earning revenues of $1 billion or more and nearly seven hundred companies with revenue greater than $500 million (figure 1-3). These companies are increasingly regional or pan-African. They have grown faster than their peers in the rest of the world in local currency terms, and they are also more profitable than their global peers in most sectors.¹⁷ Around two-fifths of them are publicly listed, and the remainder are privately held. Just over half are owned by Africa-based private shareholders, while 27 percent are foreign-based multinationals and 17 percent are state-owned enterprises.

In 2015, Africa’s seven hundred largest companies together boasted $1.4 trillion in annual revenue. Seventy percent came from nonresource sectors such as retail, agri-processing, health care, financial services, manufacturing, and construction—evidence of the continent’s progressive diversification.

Despite some notable corporate success stories, however, Africa lags behind other emerging regions in hosting large companies. Excluding South Africa, it has just 60 percent of the number one would expect if it were on a par with peer regions.¹⁸ In fact, nearly half of Africa’s big firms are based in South Africa (figure 1-4). Moreover, Africa’s big companies are smaller, on average, than those in other emerging economies. The average large African corporation has annual revenue of $2.7 billion, compared with around $4 billion to $4.5 billion for big companies in Brazil, India, Malaysia, Mexico, and Russia, for instance. Outside South Africa, Africa’s firms earn less than half the revenue of their emerging market peers as a proportion of GDP. No African company was featured in the 2017 global Fortune 500. By comparison, Brazil and India, whose GDPs are smaller than that of the African continent, each boasted seven companies on that list and China had 109.

Africa’s relative lack of big companies matters not just for shareholders but for society, because these firms are the primary drivers of economic growth. We might think of big companies as the baobabs of the business landscape: not only do they tower above the rest, they also have deeper roots and longer life spans. Known as the tree of life, the baobab produces highly nutritious fruit that sustains many communities. Business baobabs, too, enliven their local economies: they contribute disproportionately to higher wages and taxes, productivity improvement, innovation, and technology dissemination. Like baobabs, large firms create their own ecosystems, fostering small-business creation through their supply chains and distribution networks. They are also better able to attract capital, which means they are much more likely to compete on the global stage. We put a forest of baobabs on the cover of this book because we believe Africa has the space—and need—not just for the hundreds of billion-dollar companies that are thriving across the continent today, but for many more.

Because of these twin issues—too few large firms and too little scale among those that do exist—the total revenue pool of large companies in Africa (excluding South Africa) is about a third of what it could be.¹⁹ There also remains a high degree of fragmentation in many sectors, suggesting considerable unmet potential for companies to build scale. In the food and agri-processing sector, for example, the top three firms hold a combined market share of 25 percent or less in nearly all of Africa’s largest economies.

UNMET DEMAND CREATES OPPORTUNITY FOR ENTREPRENEURS TO INNOVATE AT SCALE

Africa’s vast unmet needs and unfulfilled demand make it a continent ripe for entrepreneurship and innovation at scale. And if it is to build its rightful number of large companies, then many of its younger firms will need to think big: they are the business baobabs of the future. Indeed, smaller and medium-sized companies have a critical role to play in accelerating economic development, serving the unmet needs of African markets, and especially creating jobs. The World Bank, for example, estimates that SMEs are responsible for 77 percent of all jobs in Africa, and as much as half of GDP in some countries. Midsized companies in particular are major job creators: McKinsey research shows that firms with between fifty and two hundred employees create jobs at twice the pace of both large corporations and small businesses.

In the course of writing this book, we encountered dozens of entrepreneurs who have launched startups explicitly targeted at addressing Africa’s unmet demand. One of them is US-born Brooks Washington, founder of the Nairobi-based investment company Roha. He has made the development of greenfield manufacturing plants in Africa a core focus of his business. Washington told us that he has scoured the continent for opportunities where “we can build defensible businesses that match latent demand with global technology.” One such opportunity is glass-bottle manufacturing in Ethiopia to supply the country’s fast-growing beverage industry: to date, drinks makers have had to import 90 percent of their bottles. Roha has partnered with South Africa–based Consol Glass and the Development Bank of Ethiopia to build a $80 million glass-bottle plant in Debre Birhan, some seventy-five miles from Addis Ababa. When completed, the plant will have the capacity to produce 200 million bottles a year.

Another notable startup is Gro Intelligence, whose web application and tools provide a real-time picture of the factors influencing agricultural commodities, to clients in the financial services, physical trading, consulting, and sourcing and procurement sectors. It was launched in Kenya in 2014 by Sara Menker, an Ethiopian-born former Wall Street commodities trader. Reflecting on the insights that led her to launch the company, she told us, “At the time in the US, land prices were skyrocketing. I said, ‘Hold on. I come from a place that has a lot of land that’s super-cheap. People are buying land in areas of the US at $15,000 an acre, but in Ethiopia I could get a hundred-year lease for $1 an acre. So I started looking at investing in agriculture in Africa.”

But Menker soon realized there was a reason agricultural land was so cheap: farmers and investors lacked the information they needed to choose crops and markets, manage risks like weather, and identify where and when to invest in infrastructure. That gap led her to create Gro Intelligence, which she describes as “a Wikipedia for agriculture, but with a very deep analytical engine built on top of it.” Its clients range from some of the world’s largest sovereign wealth funds and hedge funds to individual commodity traders in Africa and around the globe. One coffee trader in Ethiopia who exports large quantities of coffee beans to Germany, using Gro Intelligence’s online platform, learned that much of his coffee was being reexported to Eastern Europe, so he started exporting directly to Poland at higher margins. Menker’s innovation is thus helping other African entrepreneurs build scale.

One of Africa’s most ambitious startups is Jumia, launched in 2012 and today one of the continent’s leading e-commerce companies. Its growth strategy, too, is targeted directly at addressing unmet demand. Sacha Poignonnec, Jumia’s French-born co-CEO, told us: “In Africa, there is growing demand and a shortage of supply. Consumers lack choice and want a better shopping experience.” He says this structural gap between supply and demand is visible on the ground in Nigeria, where there are millions of people with growing discretionary income but few formal retail stores per capita. “You also see it at global airports, where Africans are lined up with heavy luggage, full of products they cannot easily find back home.”²⁰

Poignonnec points out that in Africa, there are sixty thousand people per formal retail outlet—compared with just about four hundred people per store in the United States. Even in comparison with other developing regions such as Asia and Latin America, Africa is woefully underpenetrated in retail options. Though global and African retailers such as Carrefour and Shoprite are rapidly building new stores, Poignonnec believes that this expansion will not close the gap between supply and demand anytime soon. In part, this is because limited access to land and financing constrains the development of big-format retail in many African countries, and in part it is because traffic congestion in Africa’s burgeoning cities simply makes it too hard for customers to get to malls.

By Jumia’s calculations, online sales currently stand at just 0.5 percent of total retail sales in Africa—compared with 4 percent in India, 10 percent in the United States, and 17 percent in China. Says Poignonnec, “My view is that retail will move online very quickly in Africa. E-commerce might reach 15 percent of total retail sales over the next ten years, and then it will go beyond that.” He adds, “In the US, e-commerce is slowly changing centuries of old shopping habits. Here it is creating the habits. People are making their first big buys, like smartphones, and first online purchases simultaneously.”²¹

Jumia, like Gro Intelligence, is proud of its record in helping other African entrepreneurs expand. It boasts a network of forty thousand active merchants across Africa, many of them small enterprises that are using e-commerce to reach new customers and grow their own businesses. Said Poignonnec: “We are helping our merchants, whether they are e-commerce sellers or hotels or restaurants, go direct to the consumer and generate additional business. We’re also helping them make big savings, as the cost to serve via the internet is much lower than in traditional retail. They also get valuable information: how many people have seen their product during the last twenty-four hours, what their conversion rate is, and what the impact is on sales if they change the price or launch a promotion.” To help its merchants professionalize and build scale, Jumia runs training programs covering core business skills such as accounting and marketing.

In 2017, Jumia had over 2 million active customers in thirteen African countries. In that year, its sales reached nearly $600 million—and they had roughly doubled each year since 2013. Like many young, fast-growing e-commerce businesses worldwide, Jumia has not yet made a profit. That has not stopped investors pouring money into the business: it raised $326 million from Goldman Sachs, MTN, and others in 2016. Says Poignonnec: “We’re comfortable about the fact that we’re not yet profitable because we’re on track with our plan, which is to really create scalable infrastructure for our e-commerce platform across Africa.”

There is space for many other startups to build scale in Africa—whether in retail, technology, manufacturing, agriculture, mining, or a host of other sectors. The fact that Africa has fewer large firms than it should is indicative of a business arena that’s wide open for entrepreneurs. You’ll find no shortage of unmet demand. If you’re a big thinker and a risk taker, and if your business plan is compelling enough, you’ll find a legion of investors and supporters ready to help you grow.

One such backer is Tony Elumelu, founder of United Bank for Africa, a pan-African financial institution, and the Tony Elumelu Foundation. He has made it his mission to “create and empower more entrepreneurs” as a way to “democratize job creation.” As he told us, “Only entrepreneurs can create the millions of jobs we need to power Africa’s economies out of poverty. A vibrant, African-led private sector with significant participation from entrepreneurs is the key to unlocking Africa’s economic and social potential.” Elumelu has put his money where his mouth is: his foundation was committed to spending $100 million over ten years to identify, train, and fund ten thousand African entrepreneurs. His goal is that these entrepreneurs between them realize $10 billion in revenue and create 1 million jobs.

EXTRAORDINARY GROWTH AND PROFITABILITY BECKON—IF YOU HAVE THE RIGHT STRATEGY

Despite the huge opportunities we’ve just described, not every company will succeed in translating this potential into growth that is rapid, consistent, and profitable. In a marketplace that is both complex and increasingly competitive, there are huge differences in performance between the most successful companies and the rest. Some companies are the lions of African business, standing head and shoulders above the rest. Others risk becoming the lions’ prey.

Consider the case of Tiger Brands, a major South Africa-based food company. In 2012 it paid Aliko Dangote nearly $200 million for a controlling stake in Dangote Flour Mills in Nigeria. But Tiger soon discovered that the Nigerian market was much more competitive than it had expected. Its troubles multiplied when the sudden drop in oil prices in 2014 sent Nigeria’s economy and currency into a tailspin. Losses mounted, and Tiger ended up pouring another $180 million into the business before giving up and selling its stake back to Dangote in 2015—for one dollar.²² (Dangote Flour Mills has since returned to profitability.)

In the banking sector, despite rapid overall growth, there have also been clear winners and losers. Between 2012 and 2017, banking revenues across the African continent grew nearly twice as fast as the global average, and Africa’s banks were, on average, more than twice as profitable as those in developed markets in 2017. But the best-performing banks have benefited disproportionately from this buoyant market.²³ We analyzed the performance of thirty-five of Africa’s largest banks from 2011 to 2016, and found that the top quintile grew their revenues at 23 percent a year over this period, more than double that of the bottom quintile. The banking lions were highly profitable, delivering an average return on equity (ROE) of 37 percent—quadruple that of their low-performing peers. The lions were also impressively lean: their average cost-to-income ratio over this period was 40 percent, compared with 57 percent for their slower-moving competitors. Their average credit loss ratio was exactly half that of the low performers.

The lions of African banking—including Kenya’s Equity Bank and Commercial Bank of Africa, Nigeria’s Guaranty Trust Bank (GTB), and South Africa’s FirstRand Bank—have staked out an exciting future in the continent. But the market’s high degree of competitiveness, combined with economic and political volatility, has challenged some other big banks. Their missteps have included investing in the wrong markets at the wrong time, paying insufficient attention to risk, and lagging their competitors in innovation.

HOW TO WIN IN AFRICA: A STRATEGIC GUIDE

Whichever sector you operate in, as is clear from the above example of the banking sector, not every company in Africa is benefiting equally from the continent’s overall growth. That’s why, in this book, we are so obsessed with the question: What does it take to win in Africa? We focus on pinpointing the strategic choices and operational steps that companies need to make if they are to translate the abundant opportunities of Africa into winning businesses. To create this strategic guide, we draw on McKinsey’s global research on corporate strategy—but we animate it with the unique circumstances of Africa and the real-world experience of some of the continent’s most successful companies.

Over a two-year period between 2014 and 2016, our colleagues in McKinsey’s Strategy Practice analyzed three thousand of the world’s largest companies to understand which achieved outsize profitability over time, which underperformed, and what accounted for the difference. The metric used in the analysis was economic profit, or economic value added—the profit a company generates after paying back its investors for the use of their capital.

The findings of this exercise were startling: the top 20 percent of companies make 90 percent of the world’s economic profit. The 60 percent in the middle barely meet their cost of capital, and thus make no economic profit. And the bottom 20 percent generate negative economic profit, costing their investors an average of around $1 billion a year.²⁴

Of course, profit is not the only metric that matters. As the success stories of many of Africa’s lions demonstrate, a burning commitment to improving people’s lives is often a major driver of corporate success—this is truly a continent where companies can do well by doing good. Yet few companies will consider themselves successful in the long run without meaningful shareholder returns. Healthy profits are also the fuel to power investment and growth, to support innovation, and to attract and nurture talented people.

So, what does it take to beat the odds and become one of the select few companies that turn market opportunities into enduring value? For one thing, McKinsey’s research shows that picking the right geographic and industry trends is a key factor. Companies with exposure to high-growth cities, countries, and regions improve their odds. Likewise, companies that ride strong industry trends, such as rapid adoption of mobile and digital technology, have much better odds of outperforming. Sometimes those are “trends with a twist,” such as Africa’s large unserved markets or infrastructure gaps: to benefit from such trends, companies need the imagination to see unmet demand or unsolved problems as opportunities.

Just as important, outperformers make smart use of strategic moves—the steps that a company takes to shift its portfolio toward geographic and industry trends, or to double down on profitable growth if it is riding on strong tailwinds. These moves include frequent use of M&A and divestment; aggressively moving resources to the best opportunities; making significant capital investment; driving breakthrough productivity; and innovating the business model to improve the company’s differentiation from competitors.

Last but not least, companies need the resources to invest in promising trends and execute bold strategic moves. Companies with sufficient funds for expansion outperform their peers—as do those that invest heavily in research and development.

We believe these elements provide a useful checklist for any company hoping to build a large-scale, high-performing business in Africa. Let’s take another look at the example of SABMiller. It was early to spot the trends of Africa’s rapid economic and population growth, as well as the continent’s increasingly aspirational consumers, who were ready to switch from home brews to bottled lager. Then the company really proved its mettle when it came to strategic moves. It became an expert at M&A, even in challenging circumstances. It achieved industry-leading productivity. And it used its marketing savvy to create brands that won intense loyalty from African customers. All that was backed with real investment. Once SABMiller’s leadership made African growth a priority, the brewer’s local teams knew they would have the financial backing to grab acquisition opportunities when they came along and later build a string of new breweries.

We can’t influence your company’s degree of financial endowment, but we can encourage you to make your investments in Africa sizeable enough to achieve meaningful scale and impact, just as management teams and boards of companies like SABMiller, GE, Total, Jumia, and Ethiopian Airlines have done. When it comes to trends, we have plenty to say in chapter 2. You’ll see that Africa has both geographic and industry trends in its favor, which is why it is such a promising long-term bet for companies in many sectors. But you’ll also see that those trends come with a twist: unlocking Africa’s growth potential requires imaginative problem-solving on issues ranging from infrastructure gaps to macroeconomic volatility.

In part 2, we turn to the strategic moves that your company will need to make if it is to win in Africa (see figure 1-5). These include a smart approach to geographic expansion, innovating your business model to increase your differentiation from competitors, and operational solutions that will help you manage risk and boost your company’s resilience to Africa’s inevitable shocks. Last but not least, we highlight the approaches you can take to unleash Africa’s talent, including nurturing vocational and managerial skills at scale and fostering a new kind of business leader for the African century ahead.

It’s good news that Africa offers companies so much room to grow, because corporate growth has tremendous positive impact. Some years ago, a group of our McKinsey colleagues wrote a book called The Alchemy of Growth. Growth, they wrote, is “a noble pursuit. It creates new jobs for the community and wealth for shareholders. It can turn ordinary companies into stimulating environments where employees find a sense of purpose in their work.”²⁵ Subsequent McKinsey research has confirmed that high-growth companies outperform their peers in their stock market valuation and are much better placed to fund new investments, attract great talent, and acquire assets.²⁶

Wherever your company is headquartered, Africa offers you exciting opportunities for long-term growth. Yes, there will be challenges and pitfalls along the way, making it critical that you craft the right strategy and manage risks smartly. But we are convinced that the continent should be home to many more large, successful companies earning healthy returns for their shareholders and making a difference in millions of people’s lives. Will your company be one of them?