Preparing for Africa's Rising Middle Class

Earlier this month, Walmart made a formal offer to acquire a majority stake in South Africa's Massmart, the third-largest distributor of consumer goods in Africa. This move illustrates how a growing number of companies are looking to capture opportunities created by the continent's incipient middle class in the next 25 years. Coca-Cola recently made a strong show of confidence in the region by committing to invest $12 billion over the next 10 years in its production and distribution across the continent. It has also been reported that China Mobile, the world's largest carrier, is seeking investment opportunities in Africa.

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With improving political and macroeconomic stability, and economic growth projections of 4.75% this year in Sub-Saharan Africa, the once-marginal region seems poised to become a significant source of business growth in the next quarter century. Key findings from the McKinsey Global Institute show that Africa is offering a higher rate of return on foreign investment than any other developing region. Yet a report by ATKearny identifies numerous operational challenges and risks remain associated with doing business in Africa. In light of these risks, South African companies are in a strong position to capitalize on business opportunities throughout Africa due to the stability and maturity of the nations' economy combined with an understanding of the continent's diverse business environment. Indeed, Walmart's decision to cut its initial bid from full ownership to a 51% stake may have been part of a well conceived strategy to allow a partner already familiar with the retail space in the region to more fully drive its expansion strategy into and across Africa, especially in untapped rural areas. Experts speculate that halving the offer was likely also necessary for Walmart to obtain the support of the South African Government, which owns a large number of shares in Massmart via the State Pension Fund. Last year, a proposed merger between Bharti Airtel of India and MTN Group of South Africa failed after the companies were unable to address governmental concerns that South Africa would lose an important corporate icon in the deal.

While firms such as Massmart are best positioned to mitigate the risks of doing business in Africa, they are also likely to be the least open to acquisition for that very reason. The partner-based approach ultimately adopted by Walmart and Massmart reflects a belief that this strategy will succeed in accelerating profitable growth in African markets. Developing partnerships - whether for market entry or solution delivery - necessitates a firm understanding of each player's role and comparative advantage in terms of local relationships, brand, logistics and distribution. A complete value chain analysis assessing the resources and ability of each player is the foundation of any partnership strategy and can complement the assessment of market entry options.

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