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2020s Vision: Power to the poor

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

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    Tellimer Research
    23 December 2019
    Published byTellimer Research

    In today's 2020s Vision them, we disagree with consensus that the African middle classes are the principal drivers of consumer growth, which ignores the obvious truth that nearly 80% of the population in Sub-Saharan Africa live on less than US$4 a day. African consumer companies cannot to afford to fail to serve the huge poorer demographic.

    The Africa consumer sector has been under a cloud, underperforming the Frontier and Africa indices since June 2014. Some of the key factors have been the commodity collapse and severe currency depreciation in principal African markets since 2014. In 2015-18, 12 of the major African countries recorded a slowdown in consumer spending relative to the previous three years.

    The march of African consumer growth

    However, we view this as a temporary pause in the march of African consumer growth. We believe the fundamental case for African consumer growth is robust. It has a young population, high levels of urbanisation and rising incomes, and these should present a compelling opportunity in the next five years.

    Then there’s the white heat of technology. Mobile money is growing five times faster in Africa than in Asia. According to Euromonitor, half of Africa’s population will have a smartphone by 2025, which will transform consumers’ habits. As has been seen with M-Pesa in Kenya, consumers will increasingly buy and sell products, pay bills and remit funds using mobile phones.

    More importantly, though, we differ from the consensus view that it is the African middle classes that are the principal drivers of consumer growth. The rhetoric on the emerging middle class masks the stark reality that nearly 80% of the population in Sub-Saharan Africa live on less than US$4 a day (according to the ILO). In our opinion, African consumer companies would be better served if they targeted the poorer, larger demographic.

    The bottom of the pyramid

    We believe the ‘bottom of the pyramid’ offers compelling opportunities, as it is the poor that are likely to drive consumption in Africa. In Nigeria, for instance, over 85% of the population can be categorised as poor, and the poor account for 58% of the country’s household expenditure. A return to a GDP growth rate of 5% in the next five years would only reduce this to 73% of the population by 2020 and account for 51% of total household expenditure.

    So far, we think that the market has ignored the potential consumption growth of the poor over the next decade. We expect a 6.4% CAGR in the absolute consumption expenditure of persons with a daily income of less than US$4 over the next decade. The rise of Africa’s poor will be accelerated by the increased use of micro credit, higher commodity prices that would boost rural incomes and higher disposable incomes, especially in Nigeria’s hinterland.

    The poorer segment of the population is an engine of consumption. And we think there is more to that story. To read more of our research on this topic, including our proprietary PEP (Productive Exposure to the Poor) metric, see our in-depth report.

    Read our full 2020s Vision: 20 themes for the next decade report.