“The most perfect political community is one in which the middle class is in control, and outnumbers both of the other classes.”
This quote from Aristotle could not be more true today. Research by the IMF and others shows that societies with a strong middle class and a small gap between rich and poor are more likely to experience economic growth.
Figuring out how strong the middle class is, however, can be problematic. This is particularly true in Africa, where foreign companies have both vaunted the region’s growing middle class and struggled to target it.
A lot of different measures of Africa’s middle class exist. One of the more recent - and perhaps nuanced - estimates was developed by Credit Suisse in a 2015 study. In contrast to previous research, ‘middle class’ is defined more broadly to consider assets and wealth accumulation rather than just income.
Credit Suisse estimates that globally the number of middle class adults jumped from 524 million in 2000 to 664 million in 2015, an increase of 140 million or 27 percent.
Africa remains far behind. The size of its middle class in 2000 was 18.4 million people and, from that time until 2015, this segment increased by only 400,000 individuals only despite a decade of high growth.
This stands in contrast to estimates that have posited an explosion of middle class consumers in Africa.
Credit Suisse’s methodology considers those who own between $50,000 and $500,000 in wealth as middle class in the United States. For other countries, the IMF series of purchasing power parity (PPP) values is used to derive middle class wealth bounds.
For example, Nigeria and South Africa had their lower bounds at $21,725 and $22,696, respectively. The lower bound figures are set to provide substantial protection against work interruptions, income shortfalls, or emergency expenditures.
This means that an economic shock would not necessarily immediately affect a household’s status, and factors in the middle class’ historical aspiration to own property as a means of ensuring economic security.
According to the study only 3.3 percent of the African population can be classified as middle class. These individuals accumulate 32.1 percent of the total wealth in the African continent, or $834bn. In global terms, however, this corresponds to only 0.3 percent of the total global wealth.
Understanding the business case
Although this analysis gives a rather pessimistic view of the growth and current size of the middle class in Africa, companies have managed to succeed in this segment. However, most have only thrived after setbacks and experimentation.
Aluzinc Asia is a Singapore-based global company that trades building and industrial raw materials. Navin Ravindran, vice president for sales, is optimistic about the region’s consumer potential. “We have the vision to develop the African business to $100m in the coming three years, which is more than double our revenue in 2015,” he says.
However the challenges are real. According to Mr Ravindran, customers creditworthiness, poor infrastructure, lack of defined product standards and the high cost of financing are all issues the company has to contend with.
There are also factors undermining the long-term, steady growth of the region’s middle class. “The rate new jobs are created is very volatile and there is a lack of genuine efforts from the government to uplift people from below the poverty line,” he says.
Massmart is a well-established and major South African distributor of consumer goods in Africa. Seeing the potential of African markets, the company was acquired by American conglomerate Walmart in 2011.
“It [the growth of a middle class in Africa] is real, but slower than originally anticipated. Various African country laws and prohibitive business conditions make it difficult to gain momentum,” Michael Bridger, divisional foods manager at the company, explains.
Vega Foods, another Singapore-based company, is almost exclusively focused on African markets, having settled there 15 years ago. “When we decided to look into Africa, we thought: someone has to change the game field. Let’s give the less fortunate something that will make them feel that it’s not only the upper class who enjoys a better product,” says Vikramm Chand, CEO of Vega Foods.
According to Mr Chand, Africa’s middle class exists but it is struggling compared with other regions. “Middle class in Africa is very different. When you come down to sub-Saharan Africa, which is where we concentrate, the middle class is just a threshold above the mass market,” he explains.
Current economic conditions are not helping. “Currencies are very weak, there is ample corruption, and unstable governments. We are well established there, but new entrants will face a choppy and slow growth,” he warns.
Elizabeth Arden (EA), the global cosmetics company, entered the African market in 2009. Its sub-Saharan headquarters are in South Africa, and it sells a broad selection of fragrances and skincare products across the continent. According to Corne Nel, managing director for South Africa, the nascent nature of these markets presents the company with an opportunity.
“The beauty industry is still very underdeveloped. The sub-Saharan business has seen a significantly faster growth than that experienced in the South African business over the last few years. These are very much developing economies and we see growth of up to 35 percent,” he says.
Agribusiness giant Olam International has a similar outlook. “There is certainly a growing middle class. We have seen a shift in consumption habits. Consumption of packaged food, which is convenience-oriented, has grown. This is an indication of larger disposable income and an indication of social ascending,” says MD Ramesh, the company’s president for South and East Africa.
A strong middle class creates demand and generates employment opportunities in a wide variety of areas. More jobs and better education result in economic growth, propelling the less fortunate to a higher economic and social status.
It is a virtuous cycle. Businesses and policymakers across Africa would do well to support it.
Published:26 July 2016
This article was first published by This is Africa on 26 July 2016