Equity Analysis / Global

Will Africa's poor drive consumer spending after Covid-19?

  • Covid-19 may have blunted the African poor, but they remain the main engine of consumption on in the continent
  • We return to our proprietary metric that rates companies on their ability to target the poor – the PEP factor
  • Nestle Nigeria (NESTLE NL), Unilever Nigeria (UNILEVER NL) and East Africa Breweries (EABL KN) rank high on our metric
Will Africa's poor drive consumer spending after Covid-19?

Covid-19 has devastated the lives of Africa's poor. In many countries, the lockdowns have halted the income of day labourers, and curbed their spending. 

Day labourers work primarily in construction, transport and hospitality. They are an engine of consumption, but the World Food Programme (WFP) has warned that a quarter of billion people could face a food crisis if the lockdown eases.

Some countries are beginning to ease lockdowns, and companies across the continent have been proactive in dealing with the new reality. Unilever Nigeria has been packaging hygiene products (Sunlight Soap and Lifebuoy) in small unit sizes to target the bottom of the pyramid. With the easing, the pivotal role that the African poor pays in consumption growth will again be apparent. 

How can African companies better target the poor? 

Companies can successfully target the poor by selling products in small units, accepting low margins per unit and targeting high volumes. 

They can achieve superior margins by segmenting their product mix to the poor. Unilever India and Petra Foods have successfully targeted the poor using this strategy.

The management theorist CK Prahalad has argued that the poor occupy a lucrative part of the consumer story in emerging markets. He developed this framework in his book The Fortune at the Bottom of the Pyramid – Eradicating Poverty Through Profits (published 2004).

Three distinct aspects of the thesis about the fortune that exists at the BOP level are:

  1. Consumers who live at the bottom of the income scale collectively represent billions of dollars’ worth of demand.
  2. These consumers will account for much of the growth in global demand in the future.
  3. Companies that target the poor need to frame their business model appropriately. Prahalad summarises his approach as, “if we stop thinking of the poor as victims or as a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.”

Targeting the poor can be profitable even in the midst of Covid-19. This economic opportunity is valued globally at US$13tn a year, according to the World Bank.

Three Pillars of the Bottom of the Pyramid

To target the bottom of the pyramid, companies must adopt three strategies. 

1. Small unit packages

Consumer firms must be proactive to target the BOP. The unit price must cater to people whose daily disposable spending is less than US$4. For instance, Unilever Nigeria sells shampoos in single-use sachets that carry less than 25ml of liquid. These are priced at below US¢40. Shampoo in small sachets has proved popular even during the lockdowns. 

There are several examples of small unit sizes providing an avenue to target the poor in developing countries. Sachet marketing is a prominent category:

  1. In Brazil, Unilever produces Ala, a brand detergent. This caters to people who previously washed using detergent in the river water.
  2. In India, Unilever produces Sunsilk shampoo in units of US¢2–4.
  3. In Tanzania, Key soap is sold in tiny units for a couple of US cents.

2. Low margin per unit

Instead of imposing a premium on the poor, targeting the poor requires an expectation and acceptance of low margin. The gross margin per unit of shampoo may be half the margin that can be derived from high-end customers.

3. High volumes

While margins may be lower, the BOP presents scale opportunities. Annual shampoo consumption in Nigeria is just 120ml per capita, which is a fraction of Western levels. But, the country has a population of 195mn, which means that the total shampoo market that Unilever Nigeria can address is already similar to the Belgian shampoo market. 

The PEP factor?

Consumer companies have unique challenges in Africa. One is the need to target the BOP through a combination of small unit sizes, high volumes and low margin per unit. The companies that employ these strategies enjoy superior growth to their peers.

We employ a proprietary framework that rates a company’s ability to target poorer customers, as well as the company’s financial health. Our metric is called the Productive Exposure to the Poor (PEP) framework. The PEP assigns a single score for each selected company based on its ranking under seven criteria. 

Our PEP framework is available to Insights Pro subscribers.

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