Thursday, June 27, 2013 09:16 PM / Culled from Harvard Business Review
If you have considered investing in Africa, you have no doubt been influenced by frequent recent reports on the continent's apparently large, burgeoning middle class. These rising Africans are said to be increasingly armed with the hard currency, and the taste, to pay for your goods and services.
But if you have actually taken some steps toward attaching hard numbers to this supposedly massive middle-class consumer base, you probably have also found a fair amount of confusion.
Part of that confusion stems from the tendency of commentators to postulate the existence of all-purpose middle-class African consumers (let's call them AMACs) who behave homogeneously regardless of where they are in Africa and what their backgrounds are. This approach can beef up the numbers, but it can also lead to some ridiculous arguments about what exactly is being talked about here.
The most popular view, supported by the likes of the New York Times, the African Development Bank, and the World Bank — all powerful influencers of how the world thinks about Africa — puts the number of AMACs at more than 300 million. They arrive at this number by counting all types: cattle-ranchers, roadside food vendors, taxi drivers, etc.
On the other end of the spectrum, Citigroup Africa economist David Cowan has actually said that there is no middle-class consumer segment in Africa. Instead, Africa has only two super-classes: the über-rich, and a large sprawl of poor people who nevertheless are inclined towards consumption.
Between these extremes is a multitude of other estimates. Top global consultancies, Deloitte and McKinsey, estimate the size of the African middle class at between 200 million and 300 million. A widely-quoted economics commentator for a global bank with a huge presence in Africa has said there are 120 million AMACs. A consultant with the manage-ment advisory group Global Pacific says that only 5% of Africans earn enough to qualify for the "global middle class," bringing the number down to 50 million. The OECD, the so-called Paris Club of rich nations, puts the number at 32 million.
A nice spectrum we have here: from zero to 300 million with almost everything in between. It's a frustrating state of affairs if you are a busy investor hoping to play this 'expanding African consumer base' business; unless there is a better way to approach the problem. Maybe it's a waste of time to quarrel over quantities when it is the AMAC idea itself that needs unpacking.
For a start, Africa's middle class is exceptionally heterogeneous. It is that fact — rather than the sheer number of middle class consumers or even the pace of growth in these numbers — that can have the most effect on the economic role and business significance of Africa's middle class.
Across Africa, incomes are rising fastest among those engaged in broker-ing trade in goods and services across fragmented markets. These are the people who shuffle goods from one trade-post to the other, braving tattered roads, noisome customs officers, leaking kiosks (serving as warehouses), clueless laborers, and even more clueless technicians. As economic conditions improve across Africa, these folks are the first to know and the first to scale up their operations.
These are the importers who have never heard of a "letter of credit," much less opened one, the "suitcase merchants" who travel to Dubai and the Far East every month to haul in cheap consumer goods on baggage trolleys, as well as their collaborators who stay at home to push the stuff in the open-air markets. These are the second-hand goods dealers and distributors opening up small towns to commerce. They are the vanguard of the African middle-class.
These people are rarely well educated, though, and they share none of the cultural traits seen in the West and Asia as prerequisite to a middle-class life. Many young and educated Africans, on the other hand, share few of the economic traits associated with middle-class status elsewhere. Lacking a regular income and strong social networks, and bereft of the professional grooming and mentorship opportunities available to true middle-class types, they have become a monument to an educational system increasingly at odds with the social and economic realities of the new Africa.
This amazing contradiction in most African societies — of an expanding educated underclass and an 'uneducated' rising economic class — sums up why the African economy is struggling to acquire the characteristics one would expect of an economy bursting with middle-class vibes. Simply put, even if the number of middle-class people was expanding as dramatically as some observers claim, there is no guarantee that market and consumer behavior would look anything like what emerged in other societies when their middle-class population begun to approach critical mass.
For the prospective investor in Africa, then, it is obvious that qualitative factors should matter more than quantitative factoids in shaping your strategy. Because even were you to find consumers interested in your products, you may struggle to serve them because your assumptions about customer-service skills in the local market may turn up to be completely flawed. Your assumptions regarding how quickly you may be able to 'educate' your consumers to embrace certain attitudes, expectations, or user skills (for example using your web-based tool rather than coming over to your brick and mortar joint) may be far off the mark.
The qualitative character of the middle class in your targeted African country has implications for your human resource strategy, public relations, government relations, corporate responsibility and citizenship, reliance on local financial instruments, operational effectiveness, and the overall sustainability of your market position.
It makes sense therefore to focus your energy on understanding more about the unique contextual situation of the middle classes in your chosen country of engagement in Africa than to turn yourself into an amateur census-taker.