November 28, 2019

The middle classes: How to measure them and how to sell to them

Politicians, journalists and academics like to talk about the middle class so as to acknowledge aspirations or pigeon-hole people. Businesses chasing consumers for their products are more likely to term a household middle income rather than middle class. However, they are all looking at broadly the same group of people.Definitions vary but we would identify core characteristics as regular non-manual employment, a certain level of educational attainment and a measure of financial security. By way of aspirations, we highlight the education of children.

There can be non-economic considerations that are related to status. At the height of the Zimbabwean crisis, unpaid government teachers and doctors could be found picking citrus fruit for export to the UK on farms on the South African border. An anthropologist in the field found that they considered themselves middle class despite their straitened circumstances and that they had minimal contact with their fellow farmworkers.

A few years ago, the African Development Bank (AfDB) came up with a range of daily incomes from US$2 to US$20 to define the middle class. This points to a group of about 350 million Africans. IPSOS employs narrower criteria, and produced an estimate of 100 million with combined daily spending power of around US$400m in its research last year. We favour the lower figure. A recent survey showed that 40 per cent of US citizens could not manage a US$400 external shock (such as a large unexpected bill) and therefore do not enjoy the financial security that we identified as a core middle class characteristic.

We think that this exercise generally brings surprises to the downside. Who would have guessed, for example, that Volkswagen sold just 350 new cars in Africa in 2018 outside South Africa and the countries north of the Sahara? This could be a reflection on the marketing strategy of the auto manufacturer but is nonetheless a small number. (We are confident that we heard correctly.)

In the absence of an effective social safety net, the African middle class is a fluid group of people. A household’s security can evaporate due to substantial medical costs. It does not pay to fall ill. The household budget takes a massive hit and one consequence could be that it reverts to cooking with salt rather than buying stock cubes for flavouring.

Additionally there are changes in progress in society that further complicate the picture including the growth of supermarkets, the expansion of mobile money (notably in East Africa) and the emergence of entrepreneurs developing products to challenge established manufacturers in their field. An example of the latter is food snacks produced with local raw materials.

Marketing of consumer goods has to be flexible therefore but still needs some foundations upon which to base strategy. A well-known company in this field commissioned some research to establish a profile of its African consumers. The research produced some surprises: 20 per cent have hot running water, 40 per cent running water and 96 per cent electricity, while 40 per cent cook on open fires. Since the company does not produce for the low end of the market, we can say that its consumers are middle income.

The consumer profile is not uniform across borders. There are local preferences, for example on the packaging of goods and the style of corporate advertising. There are also initiatives that have shaped the development of the middle class. One such was the Urban Foundation, a business network in apartheid South Africa that promoted home ownership from the late 1970s in the large townships. While issues around the transfer of title on the death of the first owner have since emerged, there is no denying the initial impact of the initiative in boosting middle class numbers.

The rapid expansion of Dar es Salaam to the north of the city is another example. The expansion is the work of private individuals and firms, cash based without state funding and with a negligible mortgage market in Tanzania. This has been a more fragile development than the Urban Foundation initiative. Few of the builders have registered titles and can borrow against their property as collateral. This reinforces our earlier point about the fluidity of income groups.

While the narrative of Africa rising is now seldom heard, large businesses cannot ignore the middle income market for its healthier margins and because they know that the story will change again for the better. In a Nigerian context, consumer goods companies are struggling because of subdued demand. Household budgets are slowly being rebuilt due, inter alia, to the pass through from the firmer oil price, the FGN’s expansionary fiscal stance and, at some point, the rise in the national minimum wage. The companies and their shareholders have to be patient.

  • We wrote this piece after attending a debate in London last week on “The African Middle Class Re-examined”, organized by the Royal African Society. A senior representative of a consumer goods company, an impact investor and three academics with expertise in their field in Africa made up the panel.

 

Gregory Kronsten

Head, Macroeconomic & Fixed Income Research

FBNQuest