Brands that are looking to engage with emerging African consumers tend to make false assumptions about the direction of economic growth is taking consumer demand across the continent. There’s an assumption that households with rising incomes will adopt the same spending habits as they do in more established economies, with growing interest in consumer goods and even luxuries.
But this seems to be a myth and brands that are making ventures into some of Africa’s fast-growing economies aren’t seeing the effects they expected.
The African continent may be showing favourable GDP growth rates, but this isn’t translating into a predictable consumer demand expansion. Although the continent hosts some fast-growing economies, it’s also the location for some of the most unequal.
GDP growth isn’t necessarily leading to the emergence of a new middle-income consumer group, but rather making a small minority much richer and the poor just a little less poor.
Africa Development Bank’s suggestion that anyone living on over $2 per day is middle class has been criticised for being far too low a bar. For most Africans, rising GDPs are just making their living situations less desperate rather than projecting them into a much cosier lifestyle.
Increasing incomes are helping lessen severe poverty but this isn’t yet creating a huge new class of consumers, as disposable incomes are still fairly negligible for the majority of sub-Saharan Africans. UNDP’s 2013 development report predicted that by 2030 only 2% of the southern world’s middle class would come from sub-Saharan Africa.
Hard to find; hard to predict
Even in countries where such as middle class is emerging, trying to identify and predict middle-class behaviours is no easy job. African consumers seem to tend towards conservatism rather than valuing high-status items. As household income rises, there’s a tendency to save more and invest in education. Consumers are interested in reliable, durable consumer goods rather than necessarily opting for the cheapest possible option.
It’s tough to predict consumer demand by looking at formal economic measures such as GDP. Although GDP may be growing, this isn’t necessarily raising the purchasing power of anything but a small elite. In the five years to 2014, McKinsey estimated that the number of High Net Worth Individuals (HNWI) in Africa grew by 50% and expects the number of wealthy, status-conscious Africans will double in the next decade.
But with an estimated 150,000 HNWIs across the continent, this isn’t yet a significant enough group for many international brands to make a move to engage them locally. HNWIs in Africa may not be geographically concentrated enough to make them easy to reach through usual supply chain methods.
It’s hard to predict consumer demand in Africa even using the latest economic data. With many people still reliant on subsistence agriculture, the weather (particularly rainfall) can be one of the most important factors in determining spending power. The strength of the informal economy should also not be underestimated.
The ILO estimates this could be as big as 60% of GDP in Tanzania, Nigeria and Zimbabwe. It’s also thought to be growing, with women highly involved. The significance of this is that GDP figures don’t indicate what’s really going on in the economy.
Alternative economic measures may be more helpful for understanding consumer demand patterns in African nations. One such measure is the Consumer Class Conditions Index proposed by the think tank Sub-Saharan Africa Research, which aims to measure how easily wealth spreads within economies.
This measure is intended to help indicate the real purchasing power of consumers. It’s this kind of creative economics that may be needed to truly understand what’s likely to happen with consumer demand across emerging African economies.
What seems to be true is that Africa’s so-called middle classes tend to spend their money differently than in other parts of the world. A significant chunk of their purchasing power may be spent trying to overcome difficulties that wealthy elites don’t face elsewhere. One of the biggest outlays is on transportation. In most developed countries, the richest households spend around 20% on transport.
Wealthy Africans spend a far higher proportion of their income simply getting around. In Chad and Tanzania, the richest in society spend around 70% of income on transport. This leaves very little disposable income to fuel significant consumer demand outside the transport sector.
Poorer families may not have the option of moving around much and spend a far lower proportion of household income on transport. But richer groups may have a greater need to travel to work and to manage their assets. Although their incomes are higher, this is eaten up by the costs of overcoming infrastructure challenges such as roadblocks.
The World Bank found 47 roadblocks across a 500km route in Cameroon; each needed a separate bribe-paying to pass. These roadblock costs also raise the price of transporting goods, thwarting supply chains.
It’s also the case that wealthy groups may only be rich by local standards. If we follow African Development Bank’s criteria of middle class being anyone on more than $2 per day, this leaves very little for disposable spending in any region of the world.
African Development Bank even describes a floating middle class, which it sees as households that have risen out of poverty but are vulnerable to returning to it after even a small shock such as an illness or loss of a job. The bank puts nearly half of Kenyans in this category. These vulnerable households are unlikely to jeopardise their situation by frittering away their disposable income, making them a poor basis for a consumer class.
Malls are a good illustration of how African economic growth doesn’t always turn out the way westerners might predict. Although some malls have been constructed to try to reach some of Africa’s wealthy customers, these are often seen as hard to reach – transport infrastructure is still a challenge in many African countries.
Even if you get people to travel to these places, the goods are seen as expensive. GDP growth may have raised people out of poverty, but that doesn’t mean people have enough disposable income to spend frivolously and they find imported goods too costly.
There’s also evidence that even wealthy households stick to their usual shopping habits, such as preferring to shop in open air markets. Here produce is seen as fresher, local goods seem better value than imported ones sold at expensive retail infrastructures and there’s a strong social component to the interaction.
Although there’s been great progress in moving many African households out of extreme poverty and in improving infrastructure across some parts of the continent, there’s not much sign of a sustained and booming middle class emerging just yet – particularly from the parts of Africa south of the Sahara.
Brands that are trying to engage with African markets are likely to find consumer demand is hard to predict and understand, as economic data isn’t always easy to interpret.
With the notorious challenges of managing supply chains in Africa, only the bravest are engaging with African markets despite the positive economic growth that’s being seen in many parts of the continent. Brands should approach these markets carefully.