Look at Johannesburg’s rapidly changing skyline and it’s easy to see the city growing into a bustling metropolis of new homes and modern workspaces worthy of its slogan – “world-class African city”.
All this development matches the growth of the middle class in South Africa, especially among the black African population. Across the country new malls are springing up to service rapidly expanding neighbourhoods and giving the newly minted middle class places to spend.
Recently released studies by the University of Cape Town’s (UCT) Unilever Institute of Strategic Marketing found that the black middle class population had grown to 4.2-million. This increase from the 1.7-million in 2004 goes hand in hand with increased spending power. The black middle class spends R400-billion annually, far more than the R323-billion spent by the historically wealthier white middle class.
The UCT study classified South Africa’s middle class as households earning between R15,000 and R50,000, with their own transport, a tertiary education, employment in a white-collar job and owning their home or spending more than R4,000 a month on rent. Statistics South Africa uses indicators that would increase the size of the middle class even more: access to formal housing, electricity, indoor plumbing, a phone and the use of gas or electricity as a main cooking source.
“There are several challenges in defining what constitutes the middle class in South Africa,” says Merina Willemse, an economist with the Efficient Group. “In the group we call middle class there is a small group who maintain a very high standard of living, and the majority who earn very little.”
Rising demand for consumer goods
However they are defined, the growth of the middle class in South Africa offers opportunities to industry and a chance to grow a stronger and more diverse economy. From adding new pay-TV subscribers to booking exotic holidays, the newfound wealth of the rising middle class means demand for services. More people are also entering the housing market for the first time spurring construction. Research by First National Bank (FNB) shows all sectors of the economy benefit from a growing middle class, but “the biggest beneficiaries are likely to be retail (especially luxury and durable goods), finance, vehicle and the construction industries”.
Africa has become a magnet for consumer goods companies like European drinks group Diageo, the world’s largest by sales, who have been investing in the continent over the past few years. Africa now accounts for 13% of the UK company’s annual sales, or R24.5-billion. For Diageo the fact that there will be 65-million more consumers of drinking age in Africa over the next decade means its premium brands – Johnnie Walker, Ciroc and Tanqueray – will enjoy stronger growth in demand than Chinese and Indian markets.
“The African middle class aspires to improve their lot, to provide education for their children, to progress themselves,” Nick Blazquez, Diageo’s head of African operations, told the BBC. “In that regard they aspire to brands in the same way as consumers around the world aspire to brands. I’m just not sure what the middle class is in the context of Africa.”
Boom in construction
John Loos, household and consumer sector strategist at FNB, says the number of first-time homebuyers has grown from 15% in 2008 to 23% in 2012. “Economic growth supports transformation of the residential market as more new entrants are coming in. Of the total market in 2012, 49.2% were previously disadvantaged.”
In the current financial year the construction industry’s contribution to GDP grew from R4-billion to R31-billion. But this spending has highlighted a shortage of skills in the industry, not just of artisans but among supervisory staff as well.
A skills shortage is, in a quirky way, an indication that the fundamentals of the economy are strong. It shows that a need for skilled workers exists. Conversely, if the skills shortage is not dealt with, continued strengthening of the economy grinds to a halt.
“If we tackle the need for skills development it leads to continued growth, less poverty and greater prosperity. Skilled workers are also able to earn a better salary which pushes them securely into the middle class,” says the Efficient Group’s Willemse.
Entrepreneurs and tech-savvy youth
Willemse believes that encouraging entrepreneurship is the best way to build a self-sustaining, diverse economy. Start-ups represent an antidote to South Africa’s woes and can create sustainable employment that grows the economy and the size of the middle class.
Entrepreneurship tends to be innovation-driven and, in South Africa, local entrepreneurs have been quick to adopt emerging technologies. Like the rest of Africa, South Africa’s population is predominantly young people, who are quick to adapt to and adopt advances in information and communication technology. This will offer new business opportunities that were not even considered possible a few years ago.
One example is in the rise of smartphone use in South Africa. Financial consulting firm Deloitte estimates there are over 10-million active users in South Africa, and the number will continue to rise. This has provided opportunities for designers to grow businesses designing apps. South African companies Snapcab, Zapacab, Afta Robot and Go Metro have all developed mobile taxi-hailing apps that use smartphone GPS technology to connect you to the closest taxi. These innovations have built businesses, provided employment and made it safer and easier to move around South African cities.
Spending, not saving
With an official unemployment rate of close to 25% and a reputation as one of the world’s most unequal societies, South Africa faces unique challenges. The growth of the middle class is an opportunity loaded with pitfalls. One measure of a stable middle class is an improved rate of saving, but this is not true of South Africa. The country has a savings rate of 16.5%, boosted by government and corporate savings, far less than China’s rate of 50% and India’s 30%.
Savings spurs growth in the economy by providing funding for fixed investment. A low savings rate hampers this growth, and makes it more expensive as funds must then be sourced internationally.
FNB research highlights this challenge. “Entry into the middle class means access to credit which allows for the pursuit of aspirational purchases. In many cases increased dissaving (debt) actually occurs among new entrants into the middle class.”
South Africans like referring to themselves as the rainbow nation. It implies a shared vision and dream for the future of the country. A growing middle class strengthens that dream and spreads the wealth of the nation more equitably. As Willemse says, “We have a universal dream as South Africans, to share this country. As we lift more people out of poverty that dream becomes more concrete.”
Article by Sulaiman Philip
SA - the Good News via MediaClubSouthafrica