May 17, 2017 – Research for this article was collected during William’s recent visit to East Africa. It is the second in a two-part series. The first was on Kenya’s consumer market.
With one of the highest GDP growth rates on the continent and a large, growing population, Tanzania regularly features alongside economies such as Ethiopia and Côte d’Ivoire as a priority market for MNCs seeking to grow their SSA portfolios through expansion.
Frontier market favorite
Tanzania offers a natural next step for companies with an existing presence in neighboring Kenya, one that many in the consumer space are seriously considering given the opportunities to capitalize (in many cases, as a first-mover) on Tanzania’s rising consumer spending (we expect 7% YOY growth in consumer spending in 2017, and 7.1% YOY next year).
Government pledges to invest in infrastructure and improve the efficiency of state institutions further underlines why companies are actively considering the market as part of their SSA portfolios.
In addition, Tanzania remains relatively under-served. Foreign brands are not widely available and many standard channels, such as formal retail, are unsophisticated, suggesting the market has – at least until recently – been overshadowed by its more developed neighbors. This creates opportunities for companies that enter early to establish brand loyalty and to dominate market share, especially as competition in other regional markets like Kenya intensifies.
Sub-par spending power
However, while growth is high, spending power remains quite low. Given Tanzania’s high poverty rate (47% of the population) total consumer spending is, in dollar terms, less than half that of Kenya, despite the latter having a smaller population.
Moreover, given that over 70% of working adults subsist on irregular incomes – from activities such as small-scale farming and informal trading – income levels are susceptible to shocks and fluctuations from month to month, or even week to week. Consequently, spending patterns for most people trend towards covering the basics of survival, leaving a smaller segment with the necessary discretionary income to afford non-essential products on a regular basis.
MNCs need to ensure that their expectations for the market to reflect these realities, while ensuring their product and pricing strategies are rooted in a nuanced understanding of their target segments’ priorities and spending power. Where there is a mismatch, performance suffers.
South African retailer Shoprite, for example, having prioritized Tanzania as part of its SSA expansion strategy, ultimately exited the market amid disappointing sales. It targeted mid-segment shoppers, notably through a flagship store in Mlimani City Mall on the outskirts of the commercial capital Dar es Salaam. However, prices for its (often South African-sourced) products were beyond most locals’ purchasing power. Moreover, Shoprite faced stiff competition from local East African retail chains, as well as from the informal sector, where most Tanzanians conduct the bulk of their purchases, and where prices can be 50% cheaper.
The case stands in contrast to that of local FMCG producer Azam, which built its brand initially through offering low-cost beverages, ice-cream, and wheat products at a fraction of the price of international rivals, making its products affordable even to low-income Tanzanians.
MNCs seeking to expand their market share in the low-cost FMCG space therefore face stiff local competition, and will need to invest in tailored sales and marketing strategies, and foster partners with deep local knowledge, if they are to succeed in Tanzania’s challenging mass market.
Picky premium customers
At the other end of the spectrum, Tanzania offers a small premium market consisting of local business professionals, senior government officials, business expats, aid workers, and tourists – who feature relatively strong and stable spending power.
Several firms have penetrated this market with some success through a combination of offering high quality goods, reliable supply of in-demand stock, and an attractive and convenient retail experience. South African deli chain Food Lovers Market, which operates a store in Dar es Salaam’s upmarket Oyster Bay area with a local franchise partner, is a good example of this.
Although this segment is almost exclusively focused in the commercial capital and the tourist island of Zanzibar, some premium demand may gradually shift to the area surrounding Dodoma, the official seat of government, as the authorities gradually move more public employees there as part of a wider relocation program.
However, in targeting Tanzania’s higher-income segments, MNCs should be cognizant of Tanzanians’ growing awareness of trends, products, and prices available abroad. Many upper-middle class consumers may prefer to delay purchases of products that are locally available until they travel abroad, due to the wider choice and more competitive prices for the same products in other countries, for example.
MNCs need to ensure that even products tailored to the upper middle class offer superior value for money and are relatively in line with pricing in other markets, such as Dubai or Western Europe.
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