THE NUMBERS are in, and what they show us is something that has surprised many. When, in 2011, the African Development Bank (AfDB) classified 300 million people as middle-class on the continent, the resulting traction from that count fuelled everything from intellectual debate to global policy and investment decisions, adding a tailwind to the narrative of Africans “lions” on the move.
The thing is, a new report - READ: SPECIAL REPORT: 18 million, not 300 million: That’s the size of Africa’s ‘real’ middle class—and it could disappear - says that just 18.8 million Africans can be classified as middle class if their net worth, and not what they spend, is used as the reference. Also that this is not a homogenous figure with some 4.3 million of the continent’s middle class - or one quarter - live in just one country, South Africa.
Whilst the AFDB figures fuelled many investment decisions, judging from the actions of many retailers and brands, this news is nothing new to them. They continue to recognise that poverty levels, especially in Sub-Saharan Africa (SSA) are still quite high, with items such as food and other necessities dominating consumer budgets.
One tell tale sign is looking into small kiosks in Nairobi, Kenya, you’ll see pretty much the same things - all catering for the mass market of low-income earners. Small sachets of detergents, soaps and basic food items such as sodas, bread and milk. These are known as fast-moving consumer goods (FMCG) - generally cheap products that have a short shelf life, and are purchased by consumers on a regular basis. Profit margins on these products are usually low for retailers, who try to offset this by selling large volumes.
Business strategies targeting the mass market of low-income earners are apparent.
Because FMCGs tend to be near identical, they need branding that stands out and gets remembered. This has resulted in the proliferation of a marketing strategy (involving both small and big business) that targets stand-alone shops across rural and peri-urban areas, in which buildings are often painted advertisements.
This strategy also demonstrates how infrequently larger supermarkets are visited by the majority of African consumers who will only occasionally stock up on packaged goods, home and personal care products, because of a lack of transport and financial constraints.
As a result the vast majority will more frequently visit these smaller retailers - in Kenya, for instance, 95% of shoppers frequent dukas - all of whom will stock a limited product range, at times no more than 4 or 5 FMCG items.
The response by smaller retailers to this trend is evident - in Lagos, Nigeria for example, laundry detergents are stocked in no less than 100,000 outlets reflecting the low margin, high volume strategy.
Every penny counts
Affordability remains critical, given generally low incomes and high unemployment.
Recognising this, brands have demonstrated extreme frugalness and sensitivity to the spending habits of the consumer. One example is how in June 2012 Coca Cola cut its price for a 300 ml soda from KSh25 ($0.3) to KSh23 ($0.27) in order to boost demand.
Packaging has become ever more important, reflecting market realities with smaller packaging sizes for low income consumers and growth in canned food and drink. Cans, for example, are becoming more popular than glass for beer and other drinks because they are cheaper to produce, requiring less power to manufacture. Coca Cola and SABmiller have also adapted, pushing business models that rely on the use of returnable glass bottles to keep packaging costs low.
Unilever is another company that has reacted with goods sold in small packages, known as low unit packs (LUPs), weighing from 45 grams to just four grams, and costing from as little as half a cent. The company targets informal sellers who buy big packs, reselling them in smaller portions customers.
In Kenya, Orbit Chemical Industries reduced packaging to almost unthinkably small proportions and as a result boosted sales of detergent powder by 300%. As a result, it opened up it’s markets, reaching a new set of rural consumers.
The growth of local brands able to pay top dollar for rentals is still small due to the limited market size with big pockets. Even South Africa’s Pepkor Stores mostly avoided taking space in shopping malls as they expanded into Nigeria because of the high rentals, taking a low-cost model to the streets of Lagos. Pep’s strategy in Africa, which targets the lower-middle income earner with a low margin, high volume model, found its success in stores in standalone locations, in less formalised retail areas, without the need of big parking areas.
Put simply, the base of Africa’s consumer pyramid cannot be thought of as a market with the vast proportion still focusing their budgets on needs rather than adapting behaviours and budgets to fit products into their lives. As a result lot of companies have quickly reacted, some have had their fingers burned and left, having seen that the projections for Africa’s middle class isn’t quite what they expected it to be.