The Africa middle class – growth and opportunties

Dear reader

This week we are focusing on a popular subject – the growing African middle class and the implications for business opportunities, future growth and development objectives.

The facts:

There is major variation in the estimates of the middle class, mostly caused by different definitions. Broadly speaking, the two most common definitions are:

  1. USD 2 per day income or more. This definition is used by the African Development Bank. This would mean a middle class around 350-400 million across Sub-Saharan Africa. It would be set to reach 500 million by 2020.

  2. USD 30 per day income or more. Used by analysts wanting to measure more traditional middle class behaviours, eg. McKinsey and Ernst and Young. Applying this definition, the present middle class is around 15 million people. Estimated to reach 25 million by 2020.

The African middle class is largely urban. In terms of size, the numbers (both definitions) are comparable to India’s. Lastly, it’s a relatively young middle class.

Business implications:

While growing faster than anywhere else, the middle class is still small in Africa. And using the USD 2 definition, the market is still very different than a more traditional middle class market and requires innovative approaches (smaller units, different distribution channels). Key features and opportunities:

  • Services: Private health, education, financial services continue to grow rapidly and have substantial continued potential, from the low-end middle class to the top segment.

  • For education and health and similar services: At the middle and top end, credible certification and quality assurance is crucial.

  • Luxury goods: critical mass reached in more and more places (more than 50 cities have above 1 million inhabitants)

  • Still lots of gaps: Quality vocational training, mechanics etc. And everybody seem to complain about regular stock-outs, spare-parts and abnormally high prices for the above.

  • Consumer goods: for the low end – rapidly growing potential for goods, food and beverages. Packages and sizes must correspond with price strategies and distribution.

  • Don’t forget women: Women as a group are the fastest growing market globally and within that group, African middle class women are the fastest growing segment. But it’s also a very diverse group, which requires targeted approaches.

  • International is good, but increasingly with a local or African touch.

Observations and qualifications:

Fragility: Especially the low-end consumers are at risk of falling back below the poverty line; an important fact given that the vast majority of the middle class is in the 2-5 USD group. They may have certain consumerist behaviours, but in quite different ways than more traditional and established middle class.

Growth estimates: There are major risks and assumptions around the growth estimates. Essentially, the growth in numbers rests on assumptions that economic growth rates will be maintained. It is ATM’s view that growth estimates are underestimating political risks and rests on assumptions that African governments will be able and willing to continue incremental reform. A key parameter to monitor is continued government reform and business environment improvements.

Key risks: After a decade of natural resource driven growth and with benefits from the structural adjustment reforms of the 1990ties still yielding benefits some degree of complacency is visible. Not all countries are pursuing progressive policies and there are increasing risks of interventionism and populist policies. See ATM post from July 2014 on Africa outlook for more detail.

Middle class political engagement: Broadly speaking, the middle class discusses and complains about politics and politicians, but they do not engage as a group – and certainly not beyond call-in radio shows. Few African countries have seen emergence of middle class parties and the few that have (Kenya, Nigeria), have not succeeded in attracting more than 1-2 per cent of the vote. The middle class is much less likely to vote.

What will make the middle class act: The tax link is generally weak, especially in oil/mineral rich countries and the middle class where the deal seems to be “we don’t pay tax, and in return, we don’t expect anything but stability from government”. The middle class is increasingly unlikely to be users of day-to-day public services such as health and education. What will or seem to be the “red line” is when government cannot provide acceptable levels of stability and infrastructure or when corruption gets too overt – especially in times of perceived or real crisis. The January 2012 fuel subsidy strikes in Nigeria is an example of that.

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