September 27, 2007, was a big day in Soweto, a township of more than a million people just outside the South African city of Johannesburg. Former president and Nobel Peace Prize laureate Nelson Mandela and other dignitaries gathered with a local choir and a crowd of thousands to mark a very special occasion. It was not a holiday or anniversary, but the ribbon-cutting ceremony to open Maponya Mall.
Such pomp and circumstance might seem excessive for a new shopping center, but Maponya is not just any mall. With more than 200 stores, it’s the biggest in all of southern Africa, though even that doesn’t fully explain its significance. For a nation long plagued by the apartheid racial segregation system and its legacy, Maponya serves as a symbol of the changes taking place there—changes that are also turning it into a burgeoning market for quick-service restaurants.
Established as a township for black South Africans expelled from Johannesburg during apartheid rule, Soweto previously stood as a reminder of inequality in the country. Since the first fully inclusive democratic elections in 1994, however, its fortune has started to look up. The rush of retailers to move in is no coincidence.
“There is huge potential for development in that market,” says Bernard Drum, a South Africa-based private sector development specialist with World Bank.
With its mostly black population, Soweto is at the forefront of the emergence of South Africa’s new middle class. The country’s economy is growing at a healthy rate of 5 percent, inflation is under control, and—most importantly—prosperity is reaching more than just the white elites. “Changes to the political environment and a focus on black empowerment has resulted in a greater number of black South Africans entering the middle class,” says Shereen Tuff, an analyst with global market research firm Euromonitor International. “This consumer group has a high disposable income, and there is a great focus on increased spending on items that would reflect status and power.”
Consumption spending in the country rose more than 7 percent in the first quarter of 2007, according to the South African Department of Trade and Industry. That bodes well for the restaurants, especially quick-serves. In March 2007, total income at takeaway/fast-food restaurants was up more than 18 percent over the previous year, according to national statistics board Statistics South Africa.
“Quick-service restaurants, in particular, are seen as great value for money, offering quality food at affordable prices,” Tuff says.
A September 2007 study by Euromonitor found that while South Africans are becoming increasingly “cash rich,” they’re also becoming “time short.” Trends such as a growing number of women entering the work place and a breakdown of the nuclear family mean it’s becoming harder for South Africans to find the time to prepare meals at home. As a result, there’s an increased opportunity for fast-food restaurants to serve time-strapped families.
Quick-serves looking to attract this demographic should focus on serving “good, wholesome meals, at a price that is affordable for their target market,” the Euromonitor study suggests. It cites the weekly “kids eat free” day at Panarotti’s Pizza, a sit-down pizza and pasta chain in South Africa, as a good example of how to attract single, working parents and their children.
The Business Climate
Maponya is just one of four malls to open in Soweto over the past two years, and it’s not just retailers that are clamoring to share in the country’s newfound wealth. Automobile companies, telecommunications providers, and banks are all setting up shop there as well. Even search-engine giant Google now has a presence, having opened an office in September.
“Being in South Africa is like being in a boomtown,” says World Bank’s Drum, citing full flights and packed hotels in the nation’s cities. “These are signs of an economy that’s almost bursting at its seams.”
The reason so many companies are moving in has to do with the favorable business climate in South Africa. Out of 178 economies ranked in the World Bank Group’s “Doing Business 2008,” an annual report on the business climates of various industries, South Africa ranked 35th for ease of doing business and 53rd for starting a business. In Africa it ranked as the second best country for doing business, edged out only by Mauritius.
“The business environment in South Africa is good and has been for a long time,” Drum says. “They’re ninth worldwide on corporate governance, and what that says to foreign investors doing business there is that your investment is well protected.”
There are also other reasons why quick-serves should consider South Africa. The country’s high unemployment rate—25.5 percent in September 2006, according to Statistics South Africa—means there is a large pool of unskilled labor from which quick-service restaurants can draw workers. Moreover, the country’s labor productivity is stronger than other middle-income nations, according to a 2005 Department of Trade and Industry and World Bank Investment Climate survey.
South Africa is also a gateway to the rest of Africa. The country accounts for 6 percent of the population, 18 percent of the gross domestic product, and half of the purchasing power on the continent, according to the U.S. Commercial Service.
“I think there are strong long-term opportunities to set up a foothold that will lay the foundation for reach into sub-Saharan Africa,” says Andrew Miller, editorial director of South Africa-based brand consulting firm Unity Design. “If you believe Africa is the global economy’s next big boom-time economy, this could be a good thing.”
South Africa in the News
You’ll be seeing a lot more of South Africa on the front page. Here’s what’s going on.
World Cup 2010
South Africa is set to host the World Cup soccer tournament in 2010, and investment and construction are already ramping up. An economic impact assessment study by Grant Thornton’s tourism, hospitality, and leisure consulting division predicts the event will contribute R51.5 billion (about $7.3 billion) to the country’s GDP, enough to sustain the equivalent of 196,400 annual jobs. In addition, the estimated 330,000 visitors to the World Cup will demand 11,000 tons of food and 14 million liters of beverages, according to the South African Food & Beverage Reporter.
In elections this past December, former Deputy President Jacob Zuma was chosen to succeed current President Thabo Mbeki as leader of the African National Congress (ANC), the governing party of South Africa. In all likelihood, Zuma, a populist, will also be elected president in the 2009 national election, and that raises some questions about the economic policies he might institute. Some worry about the ramifications for investors in the country, but Zuma has been trying to downplay talk that his election will disrupt business.
Setting up shop in South Africa will give brands access to other emerging markets in the region. One example is Nigeria, where the fast-food industry has maintained an annual growth rate of 40 percent, according to a report by the U.S. Commercial Service. In the coming years, it’s expected to continue expanding at a rate of 20 percent. A presence in South Africa could act as a springboard into other hot spots.
South Africa is also establishing itself as a world destination. In 2006, 8.5 million foreign travelers visited the country. That’s up more than 13 percent from the previous year.
“I think you’re going to expect growing tourism in the coming years,” Drum predicts.
More visitors to South Africa means more exposure for brands that set up shop there.