Posts Tagged ‘GEMS’

New data shows “middle class” label misleading; skews market analysis

Anyone familiar with the literature and handwringing around the size of the African middle class that’s an ongoing sidebar to the emergence of the continent’s economies, will appreciate the FT’s analysis of recent research results.

The global middle class is both smaller and poorer than previously thought, according to a new study, with hundreds of millions who have recently emerged from poverty in developing countries still vulnerable to falling back into it.

2fbfaf19-051c-47bc-9f4d-519b3494c738.imgAnd yet, we note that upward mobility has definitely taken place, albeit not at the same standards as originally set in the countries that first industrialized.

97691226-8da3-401b-a3fe-5ea8caa77f0d.imgThese findings seem to underline something we’ve been saying for quite some time now, that the metrics used to originally define the demographic “middle class” may not be applicable outside of their home region.

Africa’s connected and demanding consumers have never been so visible as they are today, and their buyer behaviour and consumption habits are undeniable. They, and their ilk in India, China or South America, just may not fit the criteria of “middle class” as entrenched in the OECD nations. This goes beyond mere purchasing power or access to consumer credit – it has often been said that “middle class” is as much a state of mind as of wallet size.

These results when contrasted with the weaker signals in social evolution and shopper behaviour imply that we need to step back and distinguish what purpose of our analysis is meant to serve before counting heads in one class or the other.

The FT article references Nestle’s rethink in sub Saharan Africa after discovering there weren’t as many “middle class” as they were led to believe. It leaves out the fact that Nestle’s fails came from trying to sell Nespresso sachets and premium pet food in consumer markets very different from wherever their new boss was prior to his posting in “Africa”. Its far easier to blame the customers for not wanting to buy your product than to conduct a consumer insights survey from the ground up assessing this untapped frontier market. Your decades of consumer research will not help in the entirely different operating environment of the African continent.

Yet, the same article overlooks the success of various emerging market private equity firms – Abraaj is one of the most visible – investing in FMCG brands and household furnishings; or, the rise of dairy as a key consumer segment. Denmark’s Arla cooperative has named Nigeria as one of its key strategic markets in the coming 5 years.

When it comes down to the African consumer market opportunity I advise people to listen to what the leaders of such companies who are already reaping the benefits of increasing sales and trade may have to say than the metrics and measurements from an environment that is dramatically different from this one. As BCG’s recent research states:

What MNCs are facing in Africa is similar to what they’ve faced in parts of Asia and Latin America: an increasingly capable set of local competitors. In a 2013 BCG survey of executives in developed markets, 73% said they considered local companies in emerging markets to be a threat. In contrast, 50% said this about emerging-market-based MNCs, and 40% said this about MNCs in their home markets. The entity looking to eat your lunch in Africa is one that your board of directors—and maybe you yourself—didn’t know existed until recently.

I’m actually glad that this research has discovered that the “middle class” is slowing down everywhere, even in the greatest consumer market on Earth. Perhaps, then, it’ll force marketers to rethink their assumptions on identifying and valuing opportunity spaces and question the meaning of the term “middle class” before chasing it like a unicorn in the woods.

There’s definitely a whole new opportunity and market that is emerging, and it must be studied from scratch from the ground up. Reflexive old labels and segments don’t apply.

Update: There’s an interesting Guardian article on this, with this insight:

Middle class, in the US, means what working class means in Britain. Except that, while nobody – even in Corbyn’s Labour party – goes around saying they represent “working-class values”, all politicians in America claim to represent the values of this middle class.

Might this explain the challenge of attempting to define and describe middle class across cultures?

Why the Search for the Middle Class is a Waste of Time and Money

CJamzx5WsAANOgfOnce we stop focusing only on the search for the mythical middle class, we see the very real changes that have taken place, globally, over the past 25 years. The Pew Report in the previous post focused primarily on the middle income/middle class, overlooking in their haste that even this segment of the world’s population had almost doubled from 7% to 13%. Their rationale is based on conventional thinking which frames the importance of this middle income demographic so:

Developing a vast middle class is key to sustaining growth in emerging economies, whose comparative advantage in offering advanced markets products at a fraction of the cost is waning with new technologies.

Just a couple of days before this Pew report, the United Nations released an important global development report. Here, we can see the real changes that have taken place in historically poverty stricken populations like India’s and China’s:

More than a billion people have been lifted out of extreme poverty since 1990 with China and India playing a central role in global poverty reduction, a major UN report has said

The latest estimates show that the proportion of people living on less than $1.25 a day globally fell from 36 per cent in 1990 to 15 per cent in 2011. Projections indicate that the global extreme poverty rate has fallen further, to 12 per cent, as of 2015.

The poverty rate in the developing regions has plummeted, from 47 per cent in 1990 to 14 per cent in 2015, a drop of more than two thirds.

“The world’s most populous countries, China and India, played a central role in the global reduction of poverty. As a result of progress in China, the extreme poverty rate in Eastern Asia has dropped from 61 per cent in 1990 to only 4 per cent in 2015,” the report said.

“Southern Asia’s progress is almost as impressive — a decline from 52 per cent to 17 per cent for the same period — and its rate of reduction has accelerated since 2008,” it said.

Who cares about the middle class and their mythical relationship to economic growth and progress when the data shows that poverty has been halved, and a billion people can dream of hope. If this middle class were genuinely related to economic growth then we wouldn’t be seeing these conflicting headlines. From the same article that touts the need for a middle middle as critical to growth, already linked above, and referencing the Pew Research report.

India’s middle class barely expanded during the decade, increasing from 1 per cent of the population in 2001 to 3 per cent in 2011, an increase the study called ”small by any measure.”

While the Indian economy is currently said to be so:

India is seeing “stable growth momentum” even as economic activities are expected to slow down in China, the US and many other major economies, says Paris-based think tank OECD.

Last month, OECD — a grouping of 34 countries — had pegged India’s growth to remain “strong and stable” at 7.3 per cent in 2015 on the back of revival in investments.

India has surpassed China to become the world’s fastest growing economy by clocking 7.5 per cent growth for the three months ended March. In 2014-15, the economy had expanded 7.3 per cent.

Earlier this month, Finance Minister Arun Jaitley said the country is no longer satisfied being in the 6 to 8 per cent growth.

“It wants to transcend to another level and aim for 8 to 10 per cent growth… We wish to grow faster because we have a huge challenge of eradicating poverty ahead of us,” he had said.

Given the imperative to push hundreds of millions above the poverty line – far more important to a developing country like India, a historically poverty stricken country – worrying about the mythical middle class is the least of the government’s problems. India’s NREGA is the world’s largest public works programme, benefiting 182 million human beings, only 15% of the country’s population.

This begs the question: “Is growing a vast middle class really key to sustainable growth?

India didn’t grow one (sounds rather like a beard, doesn’t it?) as large as or as fast as China, yet India’s economic indicators seem to be healthier and its population emerging out of abject poverty.

One wonders whether the continued emphasis and focus on chasing the middle class dream not only blinds us to the very real social and economic developments taking place but also whether its a corporate imperative rather than a societal one?

In the long run, will more noodles and biscuits matter, or the fact that more girls are going to school, studying computers and English?

This same single minded search for a middle class is creating its own set of repercussions on the African continent. One gets the feeling there’s a bunch of folks wandering around dazed and confused, groping and grasping blindly for something called “middle class”. Again, overlooked in this game of blind man’s buff are data points like Kenya’s recent emergence as a lower middle income country – the World Bank upgraded it from low income last month:

“Our latest data show that in terms of this indicator, the world’s economic geography has changed a lot. In 1994, 56.1% of the world’s population – 3.1 billion people – lived in the 64 low-income countries. In 2014, this was down to 8.5%, or 613 million people, living in 31 countries. It is heartening to see that over the last one year itself four nations crossed over that critical line from the low-income to the lower-middle income category.”

But, no, lets go chasing the mythical middle instead. On paper, and in the numerous reports churned out by management consultancies, they might be easiest demographic to sell consumer goods to, but as I’d asked 8 years ago, is the holy grail of economic development only the creation of a consumer society? And, is it something that can be realistically aimed for, given the rapidly dwindling natural resources of our planet?

Global tipping point in development

Two years ago, I’d written the following words:

Finally, enough people in enough places have managed to lift themselves free of the gravity well sucking them down into completely insecure and uncertain relationship with the poverty line (aka the next meal or three for the entire family) that they can plan ahead for the next purchase or investment in their future economic status and social standing. One is not independent of the other, especially not in the closely knit, hyper local social networks in rural regions of the developing world.

What we’re in fact seeing are the metrics that demonstrate that tipping point I’d sensed a couple of years ago, while wandering around rural Kenya.

People, not consumers, are bootstrapping themselves out of poverty and feeling steady enough to make a leap for the brass ring of prosperity. The shift is so huge – 700 million people or 10% of the planet’s population – that we’ll be seeing the impact and influence of this emerge over the near term emerging future.

They’ll be neither the Bottom of any Pyramid nor the Middle Class – both measures use metrics too obsolete to account for the leapfrogging taking place in the eternally developing world. What they won’t be is stagnant, or satisfied with their achievements. Pew might say they haven’t come far enough, but who is to say that’s their own metric of success?

Global emerging middle classes are Africa’s GEMs

Kentucky Fried Chicken at The Junction, Nairobi, Kenya  2011 Photo Credit: Niti Bhan

Bright Simons cautioned us about hyperbole and exuberance in a recent article published on the HBR site. In “Beware Africa’s Middle Class“, he points out with great clarity that the ’emerging market consumers’ spotted by the optimists over at the African Development Bank (AfDB) were nothing like the bourgeois conjured up by the prosaic “middle class” labeling. In fact, he says, university educated graduates were still looking for their mythical middle class job, all white collar and old school ties of course, while the economic engine was actually being run by successful entrepreneurs, smallholder farmers, opportunistic traders – most of whom were growing informal micro enterprises without having completed their educations due to financial pressures.

Here is what Simons has to say:

Across Africa, incomes are rising fastest among those engaged in brokering 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 were the number of middle-class people 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.

Naturally not. Bright Simons has hit the nail on the head. This emerging consuming class has none of the characteristics assumed as a given when considering the “middle class” household’s consumption patterns or preferences. Few credit cards or regular payslips may be present; the majority being one of the vast majority of Africans – 96% of all mobile phone owners – who are on cash only prepaid phone and data plans. While their incomes maybe too volatile for market researchers seeking to segment them into neat pigeonholes of disposable incomes, their activities are too dynamic to relegate them to the ‘bottom or base’ of any poverty indicator. In fact, these characteristics describe the bottom of the pyramid (BoP) consumer mindset and behaviour without the assumption that poverty is a steady state uninfluenced by aspirations.

Light fixtures installed and ready for future electric connection, Kitui, Kenya April 2013

This dynamism is a characteristic of the opportunity available at a certain point of time or when factors are just right, and it swings enough to allow the aspiring informal bourgeoisie to risk the additional investment in symbols of ‘having arrived’ – a much larger and tangible shift in daily life such as a vehicle upgrade (bicycle to motorcycle) or an LPG cooking stove to replace the charcoal. These are not simply the additional momentary cost of a brand name takeaway meal but usually imply an increase in household budget.

And these aspirations are very often signaled to the entire community, especially when they are one of the tangible class markers of clear upward mobility like a connection to the electric grid. It is not uncommon to see homes of the global emerging middle class all kitted out with wiring and fixtures just waiting for that last jump up for the brass ring.

These dynamic GEMs are far more likely to be representative of the Africa Rising narrative, than the now obsolete image of the ‘poor African’ villager.