Starbucks (SBUX) made news last week, announcing a major push into sub-Saharan Africa.
The move isn’t quite as exotic as it sounds at first glance; Starbucks is moving into the affluent areas of Johannesburg and not the wilds of the Serengeti plains.
But the move is significant nonetheless for SBUX because South Africa is the beachhead into the rest of sub-Saharan Africa, and this region is the last real frontier market of any size.
Starbucks is facing the same issues facing most of corporate America: The American consumer market is saturated, and with income failing to rise much over the past decade, there is a limit to the amount of revenue to squeeze out of existing customers.
You wouldn’t necessarily know that by looking at Starbucks stock (it’s trading near all-time highs and sports a bubbly valuation at 33 times trailing earnings and 5 times sales), but for SBUX to justify its valuation, it has to continue delivering growth. And in the next decade, growth means Africa.
Africa: The Final Frontier for SBUX Growth
Africa is the most promising investment destination of the next two decades; and while it won’t be international conferences or “save the children” charity drives that make it happen, it will more likely be thanks to the industriousness of its own people.
I’ve made no secret of the fact that I’m a major Africa bull over the long term, and I’m serious when I say that “Africa is the new China.” This was my rationale for recommending South African mobile phone giant MTN Group (MTNOY) in last year’s Best Stocks contest. That didn’t work out so well for me (unfortunately, I finished in last place). I was, alas, done in by the falling value of the South African rand.
But the macro story made sense then, and it makes sense now.
With the Chinese bubble now slowly deflating, and with India a chronic dysfunctional mess, the African continent is the only large geographic block with the potential for “Chinese-like” growth in the decades ahead. It’s the last major investment frontier.
Let’s look at the numbers: Per capita gross domestic product has more than doubled in the past decade, and two of the six fastest-growing economies in the world are in Africa.
Importantly for my investment thesis, Africa is developing a robust middle class for the first time in its history. According to estimates by the African Development Bank and the World Bank, Africa’s middle class is already well over 300 million people, or about a third of the population. It’s a block of consumers comparable in size to the middle classes of China and India. More conservative estimates put the number closer to 120 million people, but we don’t need to split hairs. Whichever estimate you use, we’re talking about a lot of consumers.
At this stage of development, an African middle-class consumer isn’t comparable to an American middle-class consumer in terms of purchasing power. And they probably won’t get there in our lifetimes. But with every passing year, more and more graduate to the “latte-sipping” class that has the disposable income to buy an overpriced cup of coffee at Starbucks.
If you’re looking to play the long-term development of the African middle class, I still like MTNOY. You have currency risk, of course. But it’s just about the most direct way I’ve found to invest in the very same consumers that SBUX is desperate to tap.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, Charles Sizemore was long MTNOY.
