The emergence of an African middle class
A still-new phenomenon, source of numerous business opportunities
Summary:
– There is no clear consensus on the definition of the middle class in developing countries. This explains the discrepancies between existing studies on thepercentage of the African population falling into this category.
– However, there is no doubt that the phenomenon exists; it is still in its infancy. The African middle class is set to grow exponentially in the coming years, driven by sustained economic growth.
– This new middle class shares common characteristics that differentiate it from other social classes and determine the consumption and savings habits of its members.
– Thus, the emergence of the middle class is reflected in the arrival of a new class of consumers, which is driving the expansion of new sectors of activity (telecommunications, automotive, distribution, and banking) and creating numerous business opportunities.
In recent years, numerous studies have examined the issue of the development of an African middle class. However, they have failed to reach a consensus on its definition. The diversity of the economies and markets that make up the continent makes this a difficult task. Hence, there is a divergence of views on how to count the number of Africans who fall into this category. Nevertheless, analysts share the certainty that the emergence of the African middle class is still in its infancy. It is also accompanied by the emergence of a new class of consumers, which is creating numerous business opportunities.
Defining the African middle classes
In a 2011 report entitled « The middle of the pyramid: dynamics of the African Middle Class, » the African Development Bank (AfDB) defines the middle class as individuals spending between $2 and $20 per day. This definition has been widely criticized because, in fact, around 60% of individuals belonging to the middle class as defined by the AfDB actually spend between $2 and $4 per day to live. They belong to what the bank calls the « floating middle class, » a category that is vulnerable to economic uncertainties and likely to fall back into poverty.
However, other definitions have emerged. In 2010, McKinsey defined middle-class households as those earning more than $5,000 per year and having the resources to make « discretionary expenditures » (i.e., an income level that allows them to spend about half on consumer goods/services, excluding food). Another example is Standard Bank, which in a 2014 study entitled « Understanding Africa’s Middle Class » characterized the middle class as households earning between $8,500 and $42,000 per year (the lower middle class being defined as households earning between $5,500 and $8,500 per year and the upper middle class as households earning more than $42,000 per year). These differences in definition inevitably create disagreement about the percentage of the African population that falls into this category.
The emergence of the African middle class is still in its early stages
According to the AfDB, between 2000 and 2010, the African middle class grew significantly from 205 million individuals (approximately 27% of the African population) to 327 million in 2010 (34% of the population). This corresponds to a growth rate of 59.6%, which is higher than the growth rate of the African population itself, estimated at 27.6% over the period 2000-2010. The fastest acceleration concerns the « floating middle class » (spending between $2 and $4 per day), whose numbers grew by nearly 100 million people to reach 21% of the African population. The « stable middle class » (spending between $4 and $20 per day) has grown by 29.4 million people to reach 130 million individuals (13.5% of the African population).
On the other hand, Standard Bank, which conducted a study on the middle classes in 11 sub-Saharan African countries (Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda, and Zambia), which alone account for nearly half of Africa’s population and GDP, claims that between 2000 and 2014, nearly 6 million households were added to the middle class, reaching a total of nearly 8 million. This number seems modest compared to the AfDB’s figures. But it proves that the phenomenon is still in its infancy and represents enormous potential for investors. According to Standard Bank, the number of middle-class households is set to triple in these 11 economies, reaching 22 million individuals by 2030, driven by sustained economic growth in SSA (averaging 5.8% over the 2015-2019 period, according to the IMF).
A new consumer base…
The development of the African middle class is reflected in the emergence of a new consumer base, whose specific characteristics it is important to understand. In its 2011 report, the AfDB describes the middle classes as relatively young, educated (higher education) households living in urban centers with stable, well-paid jobs. Standard Bank adds that middle-class households tend to have fewer children than previous generations and are very concerned about their children’s well-being. In terms of consumption and savings behavior, the priorities of the African middle classes appear to differ significantly from those of other social classes, as they prefer to allocate a larger share of their budget to education, health, insurance, and financial services.
In this regard, the Boston Consulting Group’s 2013 Africa Consumer Sentiment Survey provides some insight into the new priorities of African consumers. According to the BCG survey conducted in eight key economies in sub-Saharan Africa, many Africans have a savings mindset: between 32% and 59% of respondents say they save money for emergencies. In addition, the study shows that the African population is gradually embracing consumerism, with 60 to 90% of respondents expressing a desire to purchase more goods and services each year. They also express a preference for durable goods and services: clothing, automobiles, electronic products (televisions and telephones), insurance, and health services. Finally, the survey shows that African consumers are selective in their purchases: they prioritize quality over quantity and have a strong brand awareness, even when their income decreases.
… creating new business opportunities
This change in the savings and consumption behavior of African populations and the continued rise in their purchasing power suggests a potential demand for new goods and products.
As a result, the banking sector is set to grow in the future, benefiting from the emergence of the middle class, which, thanks to its income and purchasing power, has easier access to credit. Today, only 20 to 30% of the African population has access to the formal banking system, which means that the majority of the population is excluded from the financial system.
The distribution and consumer goods sector also offers great opportunities. French retailer Carrefour, which has joined forces with Franco-Japanese distributor CFAO, has recognized this potential and plans to open the first Carrefour hypermarket in West Africa in Abidjan in September 2015. But this project is part of a more ambitious development plan: Carrefour aims to open around 100 stores by 2024 in eight countries in West and Central Africa. However, it faces competition on the continent from other retail giants such as the American Wal-Mart and the South African Shoprite, which are rapidly expanding their presence in Africa.
This is also the case for the big names in fast food, which are expanding at a rapid pace on the continent. In South Africa, for example, the growth of the black middle class has enabled the sector to develop rapidly. In June 2013, fast food giant McDonald’s already operated 185 restaurants in the country.
Conclusion
Since the beginning of the decade, the African continent has undergone considerable change. It is benefiting from the emergence of a new consumer base and the development of new sectors of activity (telecommunications, automotive, distribution, and banking), whose growth is providing increased support for economic growth. However, it is still too early to identify a solid and prosperous middle class in Africa. Even today, nearly 47% of the population of sub-Saharan Africa lives below the poverty line (i.e., on less than USD 1.25 per day to live on, expressed in purchasing power parity). In this context, the implementation of pro-poor economic and social policies (in education or health) alongside policies to develop infrastructure or improve governance appears necessary to enable a growing number of individuals to break out of the vicious circle of poverty and join the ranks of the African middle class.
Sources:
– African Development Bank, “The middle of the pyramid: dynamics of the African Middle Class,” April 2011
– Boston Consulting Group, “Understanding the consumers in the ‘Many Africas’,” March 2013
– Boston Consulting Group, “2013 Africa Consumer Sentiment Survey,” March 2013
– McKinsey Global Institute, Lions on the move: the progress and potential of African economies, June 2013
– Standard Bank, “Understanding Africa’s Middle Class,” August 2014
– Jeune Afrique, “Portrait of a ‘typical’ middle-class family in sub-Saharan Africa,” August 2014
– Jeune Afrique, “African growth whets Uncle Sam’s appetite,” October 2013
– L’Opinion, “Large retailers target African consumers,” June 2014
