Is Africa’s middle class emerging or not?
The backlash against the story of the emerging middle class in Africa has begun.
In June, Nestlé announced it was cutting jobs in Africa. Giving an interview with the Financial Times, the company’s equatorial Africa region CEO, Cornel Krummenacher, made a particularly damaging statement that will have scared the horses:
“We thought this would be the next Asia, but we have realised the middle class here in the region is extremely small and it is not really growing.”
Nestlé set off a wave of soul searching about whether corporate strategists had got it all wrong. Was the emerging middle class in Africa really emerging as we had been led to believe?
It had to happen at some point because expectations were running so high on the back of the now ubiquitous story of ‘Africa Rising’. Four years ago, the African Development Bank published a hugely influential research paper, The Middle of the Pyramid: Dynamics of the Middle Class in Africa. The paper contained a startling headline: 34% of Africa’s population, more than 300 million people, were already in the middle class in 2010.
The paper defined the middle class as people earning as little as $2 a day. If you didn’t read past the headline you wouldn’t have appreciated that the real story was actually that hundreds of millions of potential consumers across Africa were slowly being lifted out of poverty. The trend was right: consumers were getting wealthier. But it was the timing and the impact in question: when would these new consumers enter the middle class and how quickly would they start buying stuff?
So is Nestlé right? Is the middle class small and not really growing? If you look at income data, the share of consumers in Africa on incomes of more than $10 a day has barely shifted in the past five years. The share of those on incomes above $4 a day has gained just two percentage points and is fewer than one in five.
In several markets it is easy to read the headline numbers on fast economic growth without appreciating how population growth and high levels of income inequality mean that the impact on poorer consumers is often less dramatic. There is no doubt that income growth among low and middle income consumers faces real challenges.
At Trendtype, our research indicates that official data is often a poor gauge of income growth. It is easy for poor income data to make it hard to set expectations and targets correctly. The larger the informal and black market economy, the worse the problem is – consumer spending doesn’t seem to be supported by the economic data. Which is why retailers like Pick n Pay continue to find success in Zimbabwe despite the apparent absence of a middle class.
Forget the middle class, for a moment. Whether you look at income data (less accurate) or asset classes and lifestyles (more accurate), the same picture holds true: the major engine of growth is the large number of consumers who have emerged out of poverty and have consistent disposable income for the first time.
These consumers do exist and their incomes are rising.
But FMCG companies may have been unprepared for what these consumers spend on once they get disposable income. From near zero penetration five years ago, more than 170 million consumers in Africa now have a smartphone. The continued growth of smartphones is now being propelled by the same low income, emerging consumers that food and drinks brands are also trying to win over. Smartphones, fast moving consumer goods and televisions are all competing for the same limited budget.
In other words, part of the problem is spending priorities, not the size of the middle class.
Ben Longman is managing director of African market intelligence company Trendtype.