Much has been made of East Asia’s ballooning middle class, as consumers there turn away from familiar street-side stalls and choose instead to fork out that bit extra for world-recognised brands. It’s a phenomenon that has seen many a corporation head eastwards, and hundreds of thousands of holidaymakers pick up the extra travel catalogue or two. However, the development is in no way exclusive to the Asian continent. The same demographic changes can be seen across sub-Saharan Africa, where Western names are looking to cash in on a lesser-known, and more uncertain, transformation.
When talking about Africa as an up-and-coming retail destination, it’s usually the northernmost portion of the continent that receives the most attention. However, sub-Saharan Africa’s burgeoning middle class and rock-solid fundamentals mean that the world is finally beginning to sit up and take note.
Out of the 300 million people in Africa, half are what you call the ‘floating middle class’. They could revert into poverty very easily
“The growth of the sub-Saharan African middle class is the result of a range of interrelated factors including strong economic growth that has resulted in higher GDP per capita and increased purchasing power, high commodity prices, relative political stability, high commodity prices, business environment improvements, and mobile phone proliferation, which has increased the reach of a wide range of businesses”, says Matthew Searle, Head of Sub-Saharan Africa Country Risk and Financial Markets at Business Monitor International. And while the level of development falls short of the more promising Southeast Asian market, the opportunities for retailers are widespread, if complicated.
Growing opportunities
According to UN statistics, Africa’s one billion-plus population is on course to reach 1.5 billion by 2030 and two billion in the 15 years that follow. By 2071, Africa’s population will be greater than those of India and China combined, meaning that, for retailers, the continent is impossible to ignore. True, a large population does not necessarily guarantee more opportunities – but the facts state that Africa’s middle class is 30 percent greater than it was in 2000 (according to the African Development Bank) and stands ready to spark the beginnings of a new era for retail.
Rising household incomes together with a string of positive indicators mean that those in sub-Saharan Africa are making their way up the ladder, and a budding middle class is bringing explosive and positive change for a place that has long been handicapped by lack of opportunity. Research conducted by Johannesburg-based Standard Bank shows that the number of middle class households is set to rise from 15 million currently to 40 million by 2030, with Nigeria – currently boasting the continent’s largest economy and population – leading the charge.
“The growth has led to increased demand for modern retail formats and shopping centres, as well as for products that were not widely available in the past”, according to Thomas Verryn, Research Manager at Euromonitor International. “Sub-Saharan consumers, with increased spending power, are increasingly looking for high quality products.”
Uneven distribution
The region’s headline economic performance and rising middle class makes for attractive reading. However, the task for retailers is a difficult one: the growth is unevenly distributed, and the purchasing power of Africa’s so-called ‘middle class’ is not as significant as the label might suggest.
“There is a middle class in Africa, and it has been growing at a rate of 3.2 percent per annum since 1983. You have over 300 million people who are sitting in the middle of the pyramid, as I like to call it”, said Chief Economist and Vice-President of the African Development Bank, Mthuli Ncube, in an interview with IMF Survey. “But there is a distinction. Out of those 300 million people in Africa, half are what you call the ‘floating middle class’. They could revert into poverty very easily because of a death in the family, or some other shock. At any given time, there is always a floating middle class. Then there is the more stable part of the middle class – about 150 million people – and they are [the] ones who provide robust growth.”
Although studies show that sub-Saharan Africa’s middle class is growing, 86 percent of households in Standard Bank’s sample still sit in the low-income band. Unlike in advanced economies, Africa’s middle class tag does not necessarily mean that individuals can enjoy a decent standard of living. According to the African Development Bank, any individual earning between $2 and $20 a day falls into the African middle class category, which means that even basic services can fall outside of their financial means. “When one considers that the definition of absolute poverty is those living on less than $1 per day, it will not take much for an African to move from middle class to poverty”, says Searle.
Looking ahead
Western retailers looking to enter sub-Saharan Africa, therefore, must make a distinction between the Western and African middle class – while those in America, for example, may stretch to an iPhone and a designer jacket or two, many in sub-Saharan Africa struggle to meet health insurance payments.
The situation means that the types of retailers targeting the region currently fall into two distinct categories: those selling low-cost, high-volume goods and those targeting Africa’s newly affluent population. “Demand in sub-Saharan Africa is split between a lot of people who are buying beer (just out of poverty) and a small elite buying Porsches (elite) without much in between”, says Searle. “This is the big difference from a lot of Asian countries, where you see the emergence of an actual middle class, as many in the West would think of it. Related to this, Asian consumers are more likely to purchase from formal outlets whereas people in sub-Saharan Africa will purchase from informal outlets.”
The unavailability of land, inadequacy of suppliers and regulatory restrictions in key sub-Saharan African economies pose a considerable challenge to those unfamiliar with the territory. However, for those willing to weather the storm and wait out the immediate problems, a presence in Rwanda, Nigeria or Namibia, for example, could prove invaluable in the years ahead, as disposable incomes increase and consumers, increasingly, favour Western brands.
Of all the big name brands to have set up shop in sub-Saharan Africa so far, nowhere else has there been more success than in the luxury goods sector, where consumers are offloading their newly acquired wealth by the billion. One Bain & Company study shows that the continent’s luxury market is currently worth approximately $2bn, with sales having risen 35 percent over the four-year period.
However, if the performance is to filter down into less than luxury retail segments, what’s important is that Western retailers tap into African consumers and understand how it is they differ from those in mature markets. Searle says, “Rather than being a single consumer market, sub-Saharan Africa is comprised of a patchwork of relatively small economies, which are poorly connected due to poor infrastructure and burdensome bureaucracy. This means that rather than being able to access the large pool of regional sub-Saharan Africa consumers, retailers are forced to focus on individual countries or small groups of countries.”
“Retailers often make the incorrect assumption that all markets in Sub-Saharan Africa are the same, which can cost them dearly. They need to consider that Sub-Saharan Africa is vast, and that each country has its own unique challenges”, says Verryn. “As with any major investment anywhere in the world, [it is] important for retailers to do their homework before entering a new territory. Cultural, regulatory and governance nuances all pose potential challenges to new entrants.”
Clearly the complexities number in the many, but what’s certain is that consumers in sub-Saharan Africa are gravitating towards Western products and services, and retailers must put aside both time and money to meet an entirely unique set of circumstances.
