Industry Trend Analysis - Rapidly Expanding Wealthy Consumer Drives Luxury Demand - OCT 2017


BMI View: The luxury goods sector is poised for robust growth in Kenya, driven by the country ' s rapidly expanding wealthy consumer base. Kenya is well-positioned to accommodate multinational conglomerates seeking to establish a footprint in the emerging sub-Saharan Africa (SSA) luxury market. We believe increased purchasing power, as incomes rise and the entrance of new luxury products and retailers will be the key to driving this growth in luxury demand.

Kenya is set to emerge as one of Africa's largest luxury markets over the next five years (2017-2021). The rapid influx of premium-to-luxury brands in the market is evidence of the potential the Kenyan market holds for this consumer segment.

Notably, luxury will still be a niche consumer segment for the foreseeable future, with companies targeting a small portion of the population. Luxury spending across Sub-Saharan Africa (SSA) will remain low, with no expectations to target the mass market within the next decade. We note that SSA markets will continue to be dominated by low-income households, with Kenya's consumer base characterised by over 80% of households earning less than USD5,000 per annum over our five-year forecast period.

Robust High-Earners Growth To Drive Luxury
Households Disposable Income, % y-o-y
BMI

Nonetheless, it is worth highlighting the growth in the high-income household bracket. The pace in which high-end households have already expanded over the last five years, and BMI's forecasts for projected growth in the next five-years, will well-exceed the growth levels predicted for low-income households. BMI forecasts a 18.7% compound annual growth rate (CAGR) for households earning USD50,000-plus (disposable income) over 2017-2021, while households earning a disposable income of USD1,000-plus grow at a mere 5.5% CAGR, over the same period.

Kenya Well-Positioned For Luxury

According to the 2017 Wealth Report by Knight Frank, Kenya is home to the fourth fastest growing population of ultra high net worth individuals (UHNWI) in the world. These are individuals who hold investable assets of at least USD30mn. In addition to this consumer base, the number of millionaires (USD1mn+) and multi-millionaire (USD10mn+) is also growing considerably, with this number reaching close to 10,000 in 2016.

Top Spenders Driving Income Growth
Kenya - Disposable Income, per capita & Spending Per Capita
e/f = BMI estimate/forecast. Source: National Sources, BMI

Rapid disposable income growth in Kenya will be significantly driven by the top earning population, with spending by these individuals set to impact consumption trends. Spending by the richest 10% of the population will exceed national levels, with per capita spending growing by a 10.9% CAGR over 2017 - 2021. Spending per capita by consumer groups falling in the bottom 20% and middle 60% of the population will grow at a more modest rate of 4.4% and 8.5%, respectively. This underpins our view of consumer spending being largely driven by the elite in Kenya.

The spread between the high-end consumer and the national purchasing power has diverged considerably over the years and will grow wider over our five-year forecast period. We forecast spending by the high-earning consumer will exceed the national rate, with disposable income per capita reaching KES136,311 (USD1,113) by 2021, while the richest 10% of the population are forecast to spend more than double the national income average. BMI forecasts this consumer group to spend KES384,039 (USD2,841) per capita over the same period.

We believe Kenya's luxury market is set for strong growth over our five year forecast period and beyond. Our view stems, not just from our income level forecasts, but from the recent developments in the market, such as the global luxury brand LVMH beginning distribution of its cognac product, Hennessy, in Kenya in May 2017. The company's entrance into the market shows that the prospects BMI is highlighting are also recognised by international luxury companies.

Retail Development Attractive To Multinationals

Kenya also benefits from robust retail space development to further encourage the entry of high-end retail brands. The expansion of shopping malls in Kenya has outperformed a majority of markets in the rest of Sub-Saharan Africa. Mall developments remain focused in the capital city of Nairobi; which is where high net worth individuals tend to be based, but also offers benefits for retailers from a supply chain perspective, as the logistics offering in the capital are more developed.

Illustrating this view is the entry of French perfume and cosmetic house Madora, which has established its first three stores in Kenya, specifically targeting middle to high-end clientele. The company currently operates in The Hub, Westgate Shopping Mall as well as Two Rivers mall.

With the emerging expansion of luxury retailing in Kenya, we expect the entry of large luxury conglomerates to move in more rapidly and that they will be better placed to expand their footprint, as they will be able to launch multiple brands into the market in areas such as beverages, personal care and fashion. In our view, the success of Hennessy in Kenya will place LVMH in a better position to expand its offering in Kenya through the fashion and accessories segments, as the company will have already gained expertise in operating in Kenya and will have developed its supply chains in the luxury beverage segment, which it can utilise to develop similar logistics options for its other luxury brands.