FDI in sub-Saharan Africa over the past decade has been driven by the story of the emergence of the middle class. A variation on this investment rationale comes under the name of Africa rising. Indeed, the rate of FDI growth in Africa has been the highest globally for two years. We might, however, have to leave our comfort zone now that Nestle has announced a 15 per cent reduction in its workforce in its Equatorial Africa region this year. The regional chief executive told the Financial Times that “the middle class here in the region is extremely small and it is not really growing”.
While Nigeria is not part of the Equatorial Africa region for Nestle, we have to search for any read-across and ask on what basis the company geared up its regional investment. The middle class can be defined in several ways. The most generous definition was supplied by the African Development Bank, which set a poverty threshold of US$2 per day in 2012. It ruled that 34 per cent of Africans had higher incomes and were therefore middle class. The most narrow emerged from a Standard Bank survey of 13 countries in 2014, based on a threshold for households of US$20,000 per year. This reportedly translates into just 800,000 middle-class families in Kenya in a population of 44 million.
A donor-funded body in Nigeria, Enhancing Financial Innovation and Access, estimated the adult population in 2012 at 87.9 million, which it divided into three income bands: four million earning above N70,000 (now US$350) per month, 38 million between N18,000 (US$90) and N70,000, and the balance below N18,000. It chose not to categorise the group in class terms and provided good material for potential investors. Nigeria has become a middle-income country since the rebasing of its national accounts last year but the point of greater interest is the distribution of that income.
The monitoring of trends in consumption in Nigeria does not offer as many clues as one would hope. If we start with the new national accounts on an expenditure basis, we find that private consumption expenditure increased in real terms by 21.1 per cent in 2013 and just 2.0 per cent. When we add back inflation, we have growth of just 11 per cent last year. The principal drivers of GDP growth of 6.3 per cent in 2014, in fact, were exports of goods and non-factor services (15.6 per cent) and gross fixed capital formation (13.4 per cent).
At a sectoral level, there are no data for retail sales or housing starts or turnover in white goods. There is now a useful official series on domestic air traffic and we would add our own manufacturing PMI, which was launched in April 2013.
Perhaps the most useful indicator has covered active subscriptions to mobile telephones. These soared in the years following the award of licenses in 2001, confounding the expectations of many analysts and at least one leading entrepreneur in the industry that penetration would peak at no more than 20 to 30 per cent. The growth in subscriptions has since slowed dramatically in a maturing industry. Our take is that in this case, which is repeatable, the investment community greatly underestimated incomes and consumption demand. (Why is Vodafone not represented in the country?)
We cannot say on what basis the likes of Nestle based their investment strategy in Africa. They may have commissioned the Nielsen Corporation (formerly AC Nielsen), they have tracked the revolution in mobile telephony or they may have had a chief executive who was enthusiastic about Africa. Most likely, they did not depend on national statistical offices across the continent.
Without a career including a spell at Nielsen, we can still suggest that the foreign consumer goods companies may not have always positioned themselves well in the individual markets. The listed companies in this segment in Nigeria have had several successive poor quarters, which have been attributed variously to insecurity, fuel subsidy cuts (January 2012), bureaucratic red tape, dilapidation of the infrastructure including power and, most recently, two naira devaluations.
Their topline growth has slowed but Nigerians continue to buy competitively-priced similar products with different brands, which are manufactured by unlisted companies. The latter operate with fewer regulatory constraints and smaller cost bases. They may also have a better feel for the local market and may have upped their game in terms of promotions and packaging.
The unlisted operators may have benefited from new foreign investment. Jumia and Konga are two prime examples in online retailing. More generally the leading private equity players have discovered Africa in the past 18 months, and their early acquisitions are based on the emerging middle class story: KKR (a flower farming venture in Ethiopia) and Carlyle (Diamond Bank in Nigeria as well as a vehicle tyres and parts retailer in South Africa). Helios, a smaller player with strong Nigerian connections, has raised three Africa funds since 2007 and made a name for itself in telecoms towers.
The read-across from Equatorial Africa to Nigeria is not proven, for which gaps in data provision are largely responsible. Unlisted companies in the consumer goods segment have not taken the hits reported by the household multinationals. Foreign investors are still entering the segment. Like most uncontested investment strategies, the household incomes story has been hostage to a certain amount of hype. The underlying fundamentals, however, remain sound in our view.
Gregory Kronsten
