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Africa's McTipping Point?

Borko Handjiski's picture

Three quarters of a century since the opening of the first McDonald’s, the fast food chain operates around 34,000 outfits in around 120 countries and territories across all continents. In Sub-Saharan Africa (SSA), however, – a region of 48 countries and almost a billion people - only South Africa and Mauritius have been able to attract this global food chain.
 
This peculiarity cannot be explained only by the fact that the region is poor. The company has found a market in about 30 countries with GDP per capita of less than US$ 3,000 (in constant 2005 US$) at the time of their first McDonald’s opening. Hamburgers, Cheeseburgers, and Big Macs are also on offer in a dozen of low-income countries as well. When the first McDonald’s opened in Shenzhen in 1990, China’s GDP per capita was less than US$ 500 per person. Of course, Shenzhen’s per capita income was several times higher, but the company has also found a market in Moldova since 1998 when the GDP per capita of the 3 million person country was less than US$ 600 per capita. There are many cities in SSA today that have higher income, population concentration, and tourists than what Chisinau had in 1998; yet they do not have a McDonald’s. As a matter of fact, 22 SSA countries today have higher income per capita than what Moldova or Pakistan had when the first McDonald’s opened there, and 15 of them have higher income per capita even than what Indonesia or Egypt had at their McDonald’s openings (see chart).

Chart: Sub-Saharan Africa is rich enough for McDonald’s


What then explains SSA’s inability to create a favorable environment for global food chains? It is hard to imagine that an entire continent is disinterested in Big Macs and fries. Actually, South Africans seem to love it as the chain has opened more than 150 outlets since it established itself in 1995. The investment decision to open a McDonald’s, as for any other business, rests on the feasibility and profitability of the product offering. Three factors, beyond the market’s buying power (income), are likely to be found decisive. First, it is an issue of access to finance: local investors would need hundreds of thousands of dollars to bring the McDonald’s (or other global fast food chain) brand – not an easy sell in the region with the least developed banking sector (measures through the share of credit to private sector to GDP).  Then, there is the question of security of investment which depends on crime levels, state intrusion (including governments’ openness to foreign investors) and corruption. Finally, ingredients have to be imported in an efficient manner through participation in global supply chains, thus infrastructure, logistics and trade regulations come into play. When McDonald’s opened in Moscow in 1990, it had to import 90 percent of the around 300 ingredients that go into the menu. The SSA countries seem to be missing one or more ingredients to have the red neon sign with a golden yellow “M”.

Having the above ingredients may mean more to a developing country beyond the taste that comes with the burgers. In almost 60 percent of cases, developing countries grew faster in the five years, compared to the previous five, following the opening of the first McDonald’s. Moreover, the acceleration of growth is substantial (from 1.7 percent to 6.3 percent annual growth for those countries that had GDP per capita of less than US$ 1,000 at time of opening). What this means is that McDonald’s may be viewed as one of the tipping points for when a country has amassed sufficient urban middle-class, investment security and supply chains for economic take off. In the case of SSA, the ingredients are not there yet, but the recent economic trends and reform advancements may bring more red and yellow neon lights across the continent’s capitals.
 

Comments

Submitted by DuncanGreen on

So hold on. Am I right in thinking that this is all pure speculation - you have no evidence for why MacDonalds actually avoids SS Africa, (asking them, press statements etc), you just wanted an eye-catching way to talk about ease of doing business? Smart packaging, if a bit frustrating for anyone who actually wants to know the answer......

Submitted by Borko on

Dear Duncan,

Thank you for your comment. You are right to point that no information on 'why SSA is being avoided' was collected. This is because the analysis is based on revealed rather than declared preferences. With the latter as a starting point, the blog hypothesizes about what the reasons may be, illustrating that low income does not seem to be the sole reason.

best, Borko

Submitted by Nicholas Nickson Murozvi Mada on

i am an African and from souther Africa. It really doesn't matter which part of Africa but what really matter is the fact that Africa is failing dismally mainly because of our opportunistic politicians supported by fellow Africans for Africanism. We must learn when to shelf Africanism because that has put us into drains. There is serious lack of commitment to lead for a working system across Africa. Let alone a franchise like Madee cannot function in most of these countries because of lack of requirements. We must be straight up with the facts on the ground in order to move on.

Submitted by maxima ikwunze on

I find it interesting & exciting that someone has observed that this legendry eatry is not investing in Africa. Here in Nigeria, it will be worth while for me to take part in this dream come true.

Submitted by Borko on

Dear Maxima,

According to wikipedia, Nigeria is about to have a McDonald's soon, though I'm that given the size of the country there are many opportunities.

best, Borko

Submitted by Katongo Katambo on

To me, the reasons espoused in this article are very valid and basic. That is why strategic National Development plans of most if not all SSA countries mentions, at the very least, one of these as an issue to be addressed.

Submitted by Nyakairu on

I think it's best, for health reasons, that McDonalds has stayed out of Africa - and I hope it remains thus.

Submitted by Borko on

It is a very valid point! The example of global fast food chains is only used a means to illustrate the point that SSA countries are way behind the rest of the world in the attractiveness of the business environment and that is not explained solely by the fact that they are poorer.

Submitted by Ivan on

Interesting comparisons, but why does it seem to me that the article seems to present the idea that having a McDonalds is a desirable state of "development"?

Submitted by Borko on

Dear Ivan, the article aims to make the point that having the business environment in place to have global fast food chains is good for development because that means there is also potential for many other more productive and healthier business opportunities.

Submitted by Dr Mpuma Kamanaga on

KFC and many other international fast food brands have opened up more stores in the same SSA countries with the same conditions that have been outlined and are doing just fine. There is definately more to this story that the factors outlined. It would have been insightful to hear from the company itself rather than put forward hypothesis

Submitted by Borko on

Dear Dr Kamanaga,

This is a good point, KFC is present in few countries. Perhaps KFC requires lower investment (global fast food outlets are often times franchises opened by domestic investors and it could be the amounts of funds needed that determine which chain to invest in), or has less stringent requirements on ingredients (which makes the business feasible in countries with weak logistics). In any case, these are my hypotheses, I looked for any company statements on why McDonald's hasn't invested (or seen interest for its franchise model) in Africa but couldn't find any.

best, Borko

Submitted by Ahmed K on

Let us also not forget that the red neon sign and the yellow M bring another devastating problem with it (i.e the exponential increase in overweight and Obesity and it's associated many health problems). Yes the business environment is not healthy to attract global business into Africa but let us just hope fast food chains won't make their way there as the risk on health and the huge economic cost that comes with it is too big for Africa to tolerate. In the US we are spending hundreds of millions of dollars every single day to treat obesity and it's related problems and lots of DALY are lost due to it; don't think Africa with it's under nutrition problem it can afford the nutrition transition and amplifying the double burden of malnutrition rate above its current rate; in the last 10 years obesity among children less than 5 more than doubled (went from 4% in the 1990 to 8.5% in 2010) and the highest rates are in African countries that moved from low to middle income : read more at
http://aaaspolicyfellowships.org/sci-fly/obesity-growing-global-disease

Submitted by Borko on

Dear Ahmed, the health and nutrition concerns are absolutely valid. The example of fast food chains is used to illustrate the weaknesses in the business environment in SSA and the fact that the lower attractiveness for foreign investment goes beyond the low income levels.

best, Borko

Submitted by Oguntoye O on

First, while I'm quite sure that SSAfrica's economic backwardness can be related to its lack of global chains like this, I'm still not convinced her progress can be definitively linked to their presence. SSA has peculiarities that I think defy so many established markers in the outside world, so if these global chains do come in, the correlative effect of sped-up growth in 5 years you mentioned, will not hold. SSA's economic growth right now has been praised to high heavens with the "Africa Rising" theme, but it really is not rising, in the same way perhaps as the Asian Tigers did. It rises in offficial reports but the lives of citizens is not really changing.

Secondly, the way the global chains/firms work with Africans is different from they do with the rest of the world. For instance, their is a serious distrust of Nigerians by foreign firms that ensures that most Nigerians employed are kept in menial low-income positions with little prospect of promotion. Like KFC, the shop attendants are Nigerians but all managerial positions in each shop is held almost exclusively by Indians and other People of Near/far eastern origins. Many other foreign firms, especially of North American and Eastern founding, do this. The token Nigerians elevated are used more as stooges with little discretionary responsibilities. This ensures that this companies never fully become domesticated, and hurts the development of experienced upper-level/technical man power.

Three, I want to point out the fact that i agree that although their is a correlation between economic devt and the presence of foreign chains, i suspect that the link is less of causation for SSA. I rather think that the real indication, for SSA nations of economic growth, would be the presence and sophistication of indigenously owned companies in strategic sectors like Banking (which you mentioned briefly), Industrual manufacturing (especially in heavy metals and technological equipments) Agriculture, Energy and Education.

Submitted by Borko on

No doubt that fast food chains are a very tiny part of the economy, but in this case they are used as a signal for how other parts of the economy are moving (including foreign investment). Some of the countries with high income levels [on paper] have very high poverty (Eq. Guinea being the starkest example), and that is one of the reasons why there is no interest for opening a McDonald's.
I fully agree with your third point, SSA will take off as the presence (number) and sophistication (productivity) of domestic companies increases across numerous sectors of the economy. We see this happening already in several countries.

Submitted by Bankelele on

The WSJ had a similar piece last year and the challenge of efficiently sourcing consistent, quality, abundant beef for burgers is a challenge that McDonalds is still likely to face in African markets.

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