Africa’s ‘bulging middle class’ has become one of the most ubiquitous buzz phrases in the context of the continent’s business prospects.
But the actual size of the continent’s middle class is the subject of fierce debate. And there are already hints that some companies have paid dearly for overestimating the clout of Africa’s middle-income earners.
In June, Nestlé, the world’s leading food and drinks company, announced its intention to slash its Africa workforce by 15% across 21 countries. Despite investing $1bn on the continent over the last decade and building several new factories, the leading multinational has struggled to make a profit. It has consequently been forced to close country offices in East Africa and halve its production line.
In a frank interview, the company’s chief executive in equatorial Africa, Cornel Krummenacher, admitted that the company had mistakenly concluded that Africa was set to become “the next Asia” and found the middle class to be “extremely small” and “not really growing”. Nestle’s executive vice-president subsequently issued a letter saying that its staff cuts represented just 1% of its sub-Saharan African workforce, and reiterating the company’s “long-term commitment to, and confidence in, the future of sub-Saharan Africa”.
But Nestlé is not the only major corporation that appears to have lost money based on an inflated estimation of the African middle-class market. Last year, drinks multinational Diageo attempted to ‘premiumise’ its market in Nigeria, shifting its focus to promoting pricier spirits. However, the strategy proved problematic, and when the company’s Nigeria sales dropped by 9% in 2014, Diageo promptly shifted back to its traditional strategy of driving Guinness sales. Revenue figures have since recovered.
Defining the middle class
These developments come at a time when uncertainty about the actual size of Africa’s middle class and how it should be defined is on the rise.
In 2011, a team of experts at the African Development Bank Group (AfDB) produced a seminal paper on Africa’s middle class. ‘The Middle Pyramid: Dynamics of the Middle Class in Africa’ found that the number of middle-class Africans had tripled over the space of three decades to 313m. This equated to 34% of the population or one in three people. Thus, one of the most bandied-about statistics of the last five years − that one third of Africans are middle class − was born.
The AfDB report rested on an absolutist definition of the middle class, defining the group as those with a daily of consumption $2-$20 (in 2005 purchasing power parity US dollars). The study explicitly stated that it was moving away from the more conventional tendency to define the middle class as those with an annual income greater than $3,900.
However, the headline statistic to emerge was accompanied by some significant, if overlooked, small print. The AfDB divided the African middle class into three sub-categories: 60% of the so-called middle class went into the first category – individuals with a consumption level of $2-$4 per day. They labelled this group the “floating class”, with individuals within it extremely vulnerable to falling below the poverty line of $2 per day if struck by an unforeseen disaster, expense or unexpected rise in the cost of living.
A further 25% came under the second category: the lower middle class who live just above subsistence level, consuming $4-$10 per day. This category of individuals consumes and saves for a limited selection of inexpensive non-essential goods. And just 14% were definable in terms of the third category: upper middle class, with a consumption level of $10-$20 per day.
Nonetheless, these caveats have not gained as much publicity as the figure that one in three Africans is middle class.
Some very different figures
Last September, Standard Bank published a study that sent ripples of discomfort through the community of African economists. 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 middle-class 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.
“I don’t know if there is a best way to define the middle class, but we decided to define it in the way we did because we felt the absolutist definition of the middle class as those individuals spending $2 to $20 per day was problematic,” says Simon Freemantle, a senior analyst at Standard Bank’s Africa Political Economy Unit and the report’s author.
“There is a huge floating middle class within this definition and they can slip into absolute poverty if they encounter an external shock. They are particularly vulnerable in Africa because we are talking about very import-heavy economies here. This floating middle class spends most of its money on food. If food prices rise then they are very vulnerable.
“In contrast, when you use the Living Standards Measure you are talking about households that spend around half of their income on non-essential items.”
While this definition comes up with a radically different assessment of the size of Africa’s middle class, Steve Kayizzi-Mugerwa, one of the authors of the AfDB study, maintains that there are still positive signs about the growth of this group. “The AfDB took some effort to describe what it meant by its definition of a middle class. It was certainly not based on European or American norms,” he says. “So, the term middle class is rather elastic in the ongoing debate, and the numbers that Standard Bank derived could depend importantly on its definition of the middle class. Having said that, all evidence suggests that the middle class in Africa has expanded rapidly in the past decade. Look at the housing stock for example.”
Falling for the hype?
Although Nestlé and Diageo are powerful examples of the hazards of trying to pin down the size of Africa’s middle class, the attitude of international corporations towards Africa remains largely cautious. Far from being seduced by tales of a bulging middle class, the majority of international consumer-focused
companies, selling everything from cars to coffee machines, have remained impervious to them.
EY’s Africa Attractiveness Survey 2014 found that businesses that have not already made inroads into Africa are significantly less enthusiastic about doing business on the continent than companies that have already made the leap. The former actually ranked Africa as the least-appealing investment destination on the planet. EY commented that “the gap could hardly be wider” and added that it was a view “often based on perceptions that are 20 to 30 years out of date”.
However, some multinationals have made the bold decision to enter the African market, though sometimes with disappointing results. When quizzed on whether companies operating in Africa have overestimated the size of the middle-class market and consequently lost money, the response from experts tends to be guarded. “Generally, Africa is a data-deprived market. Companies will make mistakes,” says Standard Bank’s Freemantle.
“You find that companies targeting the lower end of the middle-class scale are doing very well in Africa. However, for companies with high-end products that will only be affordable to the upper middle class, the market often just is not there yet,” he adds.
Freemantle also points out that some international market leaders with products that would appeal to the upper-middle class rather than the lower-middle class have invested in Africa fully aware of the immaturity of the market. They are determined to establish themselves so they can “be the frontrunner in the game when things take off,” he says. “It’s important to recognise that a lot of major investors in Africa’s consumer market have different strategies.”
Kayizzi-Mugerwa broadly agrees. “There was no presumption [from the AfDB] that this middle class would exhibit Western modes in terms of consumption of food formula for middle-class babies [Nestlé] nor for whisky [Diageo],” he says. “In the latter case, Africans have always had a partiality for beer − irrespective of class – and the beer companies are doing roaring business.” The AfDB expert also warns that there are likely to be other contributing factors to disappointing sales figures among some of the leading consumer companies. “That Nestlé and Diageo are not doing as well as projected does not necessarily reflect the fortunes of the African middle class. It could well be their own poor business strategy,” he says.
“There are many African and other companies that have expanded in the food and beverages industries. Of course poor judgement is rarely acknowledged by multinationals.”