African spending power rises
African countries’ burgeoning middle classes, with a combined spending power in the region of R1.3-trillion a month, are becoming a force to be reckoned with, according to a new study.
But members of these predominantly urban groups are more likely to own a smartphone than to have access to hot running water, which reflects the infrastructure and service constraints of many countries, the research reveals.
This week the University of Cape Town’s Unilever Institute of Strategic Marketing, in partnership with market research firm Ipsos, released some of the findings of an 18-month survey. The African Lions study into this market estimated it to be about 100-million people.
Although the term middle class is controversial, it is generally accepted to apply to those who are not in poverty and have a disposable income, the research said.
Defining features of the middle class include incomes of between $4 and $70 a day,
secondary school education and being employed, running a business or studying.
The research was informed by work done by the African Development Bank (AfDB), according to Paul Egan, acting director of the institute. In 2011, the bank defined the African middle class as those earning between $2 and $20 a day and listed various subcategories, ranging from the “floating” (those earning between $2 and $4 a day) to the lower- and upper-middle classes (those earning between $4 and $10 a day, and $10 and $20 respectively).
For the purposes of this research, the poor and floating classes were excluded, and $4 was set as the lower threshold. In addition he said the research added a disposable income filter because businesses are interested in market segments that can afford their products.
On average, the research found that individual income for the middle class was an estimated $12.30 a day, and the average household income was about $16.90 a day.
Within this broad grouping, the middle class could be separated into three categories, namely the “vulnerable”, the “comfortable” and the “accomplished”, said Nanzala Mwaura, the head of the African Lions team at Ipsos.
Features of the accomplished middle class include individuals who are established, likely to have a tertiary education, have low or no debt, and have disposable income at the end of the month for emergencies.
The comfortable middle class are typically younger than 27 and are less likely to be the head of a household or supporting extended families.
The vulnerable could have more income than the comfortable middle class, said Mwaura, but their wallet “is completely stretched”. These individuals have high debt levels and typically support other family members.
The study focused on 10 major cities in sub-Saharan Africa stretching from Abidjan in Côte d’Ivoire to Nigeria’s Lagos and Kanu, Nairobi in Kenya, Luanda in Angola and Dar es Salaam in Tanzania, among others.
The elements of the research released this week present an aggregated view of the middle class, but “Africa is not a country”, Mwaura said, noting that the middle class varies widely from city to city. For example, an average of 60% of the people in the 10 cities surveyed were found to be middle class. But the figures for individual cities were quite different. An estimated 49% of the people in Nairobi were found to be middle class but about 68% in Lagos were.
Efforts to define Africa’s middle class have not been without controversy and have varied widely. The AfDB’s assessment put the number of the middle class at 320-million, updated in 2014 to about 360-million.
But the bank itself noted that, at a starting point of having an income of $2 a day, this put the majority of the middle class at just slightly above the developing world poverty line and they were at risk of returning to poverty in the event of an “exogenous shock”.
This has contrasted with the work by other entities such as Standard Bank. In 2014, using a different methodology, the bank estimated that there were far fewer members of the middle class. By looking at 10 countries across the region, it estimated that there were 15-million middle-class households, expected to rise to 40-million by 2030.
Nevertheless, a common thread to this work has been evidence of the growth of this strata.
Although the figures appear low in dollar terms, they are in the middle in terms of income distribution of the countries examined, Egan said.
A key feature of the group is its “entrepreneurial spirit”, Egan said. The research found that the African middle class has diverse income streams. Only 37% have formal jobs, either in government or a private business, about 21% have a second job, and 22% have a side business.
Although several African economies are growing at relatively high rates, jobs are not being created at the rate needed to keep up with the rapid levels of urbanisation in African cities, he said. “So increasingly people are being forced into entrepreneurship and often connecting into the informal sector.”
The informal sector accounted for 93% of new jobs across Africa and 61% of urban employment.
Where people do have full-time jobs, they may not be as secure as in other parts of the world. As a result, people get involved in other economic activity, Egan said.
What distinguishes the African middle class is that this entrepreneurial activity goes beyond just survival. “This is part of a livelihood strategy. You don’t have all your eggs in one basket; you are trying to distribute your risk,” he said.
The cellphone is an almost ubiquitous necessity in this class. The majority (77%) have a smartphone and 83% use it to access the internet. About 33% own a tablet and 49% have a computer. The figure for the accomplished middle class is even higher, with 85% owning a smartphone. About 45% use Facebook regularly, 28% use WhatsApp and 17% use Twitter.
The advance of mobile money has allowed more people to transact and manage their finances, with people increasingly able to save using their mobile devices and to build up a credit record.
At household level, about 20% have access to hot running water, fewer than half own their home and only a third have access to a car or a vehicle.
This is a reflection of the infrastructure deficits that still face many countries, said Mwaura, and the cellphone has been an important factor in “leapfrogging” these constraints.
Affordable data has driven the use of cellphones as the primary way to access the internet.
The research also showed a culture of savings, when possible, with 64% saying they save any extra money. About 72% of respondents have a savings account and 67% said they have money saved in case of emergencies.
But the middle class is still likely to borrow from friends and family.
“Saving is a safety net,” she said, and a large proportion of the middle class did not want to be in debt because incomes were not always secure.
“That’s why the bank of family and friends is loved more than formal financial institutions,” Mwaura said.