Morningstar's long-term approach to analyzing companies requires careful analysis of Africa, which we expect to become an increasingly fertile region for consumer spending over the next several decades.
Several tailwinds drive these expectations: favorable demographic trends, including a large, young, and rapidly growing population; wealth creation and the growth of Africa's consuming class; urbanization and infrastructure investments; and favorable regulatory reform.
Many consumer staples firms have been slow to act because of historical government instability, commodity price swings and the impact on consumer spending and raw material costs, and the perception of poor returns on infrastructure investments. These fears have slowly been placated, however, with consumer companies coming to the realization that Africa offers an opportunity to extend their brand and develop economies of scale. Companies with moats are especially poised to take advantage.
Youth Force Drives Growth
According to U.N. projections, Africa's population is expected to grow from approximately 1.1 billion to 2.4 billion by 2050. This represents a compound annual growth rate of 11.3%, outpacing world population growth estimates of 4.4% and collectively making it one of the highest potential emerging markets across the globe. For perspective, China and India are expected to have a collective population of 2.9 billion by 2050, and the United Nations forecasts that Africa will surpass the collective population of these two regions by 2065. To capitalise on this large addressable audience - both from a potential spending and workforce perspective - we believe companies will increasingly migrate to Africa in the decades to come.
Africa is also made up of a younger population than many emerging markets, with a median age of 19.7 years, using U.N. estimates, compared with just over 30 in Asia and north of 40 in Europe (Exhibit 1). Over the next several years, we expect dependency ratios, which are the number of children and elderly supported by each working individual, to decline, freeing up income for additional personal consumption. Moreover, we believe regulatory reform has accelerated over the past decade, breaking down many trade barriers in the region and allowing for new infrastructure and workforce investments by foreign companies that should help to stabilise many economies across the continent.
Younger African consumers have not only become important to the region's economies, but like many developed economies, they have also become more brand-conscious and technologically savvy.
In our view, this portends major changes in consumer consumption patterns in the years to come. According to an October 2012 McKinsey survey of African urban residents, 16- to 34-year-olds account for 53% of the continent's income. Additionally, 53% of 16- to 34-year-olds claim to follow the latest fashion trends, versus 33% for individuals older than 45, and 67% are active online, compared with just 32% for individuals older than 45. We believe these developments are important for many consumer staples companies, as we think it is vital to start cultivating brand intangible assets now given the lifetime of potential transactions that the typical African consumer represents. This dynamic is particularly noteworthy for alcoholic beverage companies, which will have access to a much wider population above the legal drinking age at a time when they are adopting new taste preferences that will carry through to adulthood.
Wealth Catalyst for Consumer Spending
A natural by-product of Africa's growing population, an expanded government and corporate workforce, and infrastructure investments, wealth creation will be a key catalyst for consumer spending growth over the next several decades. Africa's workforce is currently made up of approximately 382 million people, with another 122 million expected to enter the workforce by 2020, according to McKinsey. This suggests that Africa's consuming class could reach 500 million by 2020, representing more than a third of the continent's projected population, offering a consumer base that will be difficult for most consumer staples companies to ignore.
A move toward a salaried job culture and away from traditional government and agricultural activities will drive the rise of the African consuming class. According to the International Labour Organization and McKinsey, almost 60% of Africa's labour force was composed of government and agriculture jobs in 2010. Over the next several decades, we anticipate a shift into more commercial agriculture professions - commercial farming on underdeveloped land, crops for biofuels - which we expect will play a major role in global infrastructure investments across the globe.
We also think manufacturing, service, and technology professions will become more commonplace in the years to come, as foreign and domestic firms capitalize on Africa's vast labour pool and infrastructure investments. In fact, many African nations have wage rates and productivity levels that are competitive with other cost-effective manufacturing regions such as Southeast Asia, which should present a key tailwind for manufacturing growth. Additionally, with increased urbanization and modernization, we believe that demands for retail, technology, hospitality, and other leisure services will naturally emerge, creating even more labour opportunities.
After combining population growth, rising wages, and infrastructure investments, it's not surprising that African economies are growing more rapidly than most regions of the world. Over the past 10 years, Africa collectively posted a GDP annualised growth rate of 4.7% (compared with 2.7% globally) and is home to six out of the 10 fastest-growing economies, according to The Economist. Over the next several decades, we expect GDP growth in the region to increase exponentially, growing to potentially $30 trillion by 2050 from about $2 trillion today, rivalling Asia's economic growth at the end of the past millennium.
Africa's wealth creation directly ties to the topic of premiumisation. Many consumer product companies with exposure to Africa have reported stronger growth numbers among their more affluent brands in recent years, which we expect to continue. For this reason, we tend to find wider economic moats among those consumer staples companies with expansive product portfolios across a varied range of price points.
In our view, this allows for natural trading-up opportunities and the ability to shape consumer preferences. Although luxury and other premium categories tend to be the most lucrative for consumer companies from a profitability standpoint, we believe entry-level products can be margin-accretive because of economies of scale advantages (one of the five moat sources Morningstar uses to assign economic moat ratings). Several large consumer staples companies, including Diageo (DGE), Unilever (ULVR), and SABMiller (SAB) have noted that scale typically reduces per unit costs, enabling excess economic profits among mainstream brands as well.
