Posts   |   Calling Africa’s Middle Class: Are You There?

August 29, 2015
Calling Africa’s Middle Class: Are You There?
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It was meant to be the next great corporate prize: Africa’s middle class consumers. What happened? The problem, it seems, was a familiar one: the narrative overwhelmed the details. Wanted: a more realistic narrative.

 

By Afshin Molavi

The idea generated dozens of consultant papers like this one from McKinsey, hundreds of conference panels, and untold number of news articles, including a cover story in the Economist called simply “Africa Rising,” noting the continent has “a real chance to follow in the footsteps of Asia.” It also generated substantive investments as companies from Nestle to Diageo beefed up their Africa presence to chase that growing middle class consumer.

The problem, it seems, was a familiar one: the narrative overwhelmed the details. The narrative proclaimed that Africa was rising, that the pendulum had swung (juxtapose the Economist magazine cover from 2000 – “Hopeless Africa” with its “Africa Rising” 11 years later), and that the continent was marching to become the next Asia. And the narrative rested heavily on the idea of an African consumer revolution fueled by a growing middle class.

The narrative was fed by an African Development Bank paper, published in 2011, that described one in three Africans as “middle class.” One in three Africans? Some 313 million people. Yes, maybe Africa could indeed become the next Asia. March onward, African consumer, and buy some Lipton Tea and Guinness Beer and Kit Kat chocolates for the ride.

Then, Nestle dropped a bomb in June, 2015 by announcing a 15% reduction in its workforce across Africa affecting 21 countries and proclaiming its Africa expansion disappointing. Over the last decade, the world’s leading food and beverage company has invested more than $1 billion on the continent. Nestle’s chief executive in equatorial Africa declared that perhaps Nestle overestimated the size of the middle class, which he found to be “extremely small” and “not really growing.” He said Nestle believed Africa could be “the next-Asia” (yes, that again) but, alas, it was not to be.

Diageo, the world’s leading spirits companies and owner of the Johnnie Walker brand that has marched long and deep across emerging markets as I wrote in Foreign Policy two years ago, also noted a hiccup in its efforts to get Nigerians to “step up” from beer to more premium spirits. The Nestle and Diageo “admissions” made headlines in the financial press, like this FT piece in June.

That sound you hear is a dominant narrative being flipped upside down.

The August/September 2015 issue of African Business (a great publication for Africa watchers), published an important piece summarizing the Africa middle class debate currently raging. Entitled “How big really is Africa’s middle class?” (not available online on the Africa Business site, though you’ll find it published on some blogs; New Silk Road Monitor understands the need for publications like African Business to keep some articles offline, so it will not link to blogs that re-publish entire articles not published on the main site).

The African Business article notes that the African Development Bank paper published in 2011 should have been read more closely for “the fine print.” It noted that the AfDB declared a blanket middle class figure of anyone who spends between $2-$20 per day. But there’s a big difference between a $2 spender and a $20 one, and the problem was that most Africans fell in the $2-$10 category, and only a small slice – 14% — fell in the $10-20 category. “These caveats,” African Business wrote, “have not gained as much publicity as the figure that one in three Africans is middle class.”

The African Business magazine article also highlighted a study with a much starker view of the African middle class published last September by South Africa’s Standard Bank. From African Business print edition below:

“The report examined the middle class in 11 sub-Saharan African countries that account for over half the region’s GDP. Using its own definitions, it estimated the size of the middle class in all of these countries combined to be just 15m. ??This study put Nigeria’s middle class at 4.1m or a mere 11% of the population. It estimated the middleclass population to account for just 21% of Angola’s households, 14% of Sudan’s, and around 10% of Zambia’s. Furthermore, Standard Bank’s research found that most African households remained in a low income band ? an overwhelming 94m individuals, or 86% of the sample population. ??The report identified East Africa as particularly lagging behind, despite perceptions of a bulging middle class in countries such as Kenya. The proportion of low-income households in major East African nations was strikingly high: 99% in Ethiopia, 97% in Tanzania, and 92% in Kenya. The key to Standard Bank’s much more modest estimates about the size of the middle class was its deployment of the Living Standards Measure. This takes into consideration factors like ownership of basic electronic household items such as refrigerators and televisions as well as ownership of other goods such as cars.”

Clearly, data and classifications matter, but the question remains: just because some companies like Nestle and Diageo have noted lower-than-expected results, does that mean corporations should give up on Africa’s consumer middle class? The answer, of course, is no. Companies overshoot all the time, and Nestle and Diageo and others are still well-positioned to benefit from a growing – yes, growing – middle class, even if the numbers were misunderstood.

Consider this from a 2014 KPMG report on Fast Moving Consumer Goods in Africa:

In 2010, there were 50 urban agglomerations in Africa with a population of one million or more, of which three had a population of five million or more. By 2025, the UN expects there to be 93 agglomerations in Africa of at least one million, of which 12 are forecast to have a population of five million or more.

By the way, in the late 1950s, Africa had only three urban agglomerations with a million people or more. These are impressive numbers and will benefit consumer companies that successfully understand this market.

It’s also important to note that smart private equity players like Abraaj Group, Carlyle, Helios Investment Partners, and KKR are circling Africa with record-shattering PE raises for investments across the continent. The FT reported that Abraaj has raised $1.4 billion to invest across Africa, with most of that money targeting sub-Saharan Africa. There are plenty of high-growth local African companies for them to target, as a recent Euromoney report notes (see page 7) from oil and gas and chemicals to financial services, food and beverage and healthcare.

Perhaps Africa may feel a bit like Mark Twain when he saw his own obituary in the newspaper, and wrote back: “the news of my demise has been greatly exaggerated.” The Africa Rising story is not over. It is only beginning, but it will be important to maintain realistic expectations about its pace.