Retail markets expose the ‘middle class’ myth in emerging economies

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Global income Jun15

5 years ago, the Swiss food company Nestlé forgot everything it had ever learnt about emerging markets, and suddenly decided that Africa was just about to become ‘middle class’ by Western standards. Now it is having to pay the price for its mistake, and is cutting 15% of its workforce in the equatorial Africa region.

Its problem was that it chose to believe the African Development Bank’s estimate that there were 330m ‘middle class’ Africans.  But as Cornel Krummenacher, chief executive for the region, told the Financial Times:

“We have realised the middle class here in the region is extremely small and it is not really growing…“We don’t have enough money every month to pay the bills. With these cuts, we hope we will be able to break even next year.”

In reality, as Mr Krummenacher explained, he now believes the region’s middle class is “a more sobering 15m across 11 countries, with only 800k middle class households in Kenya, a nation of 44m people.”

Meanwhile, Jean-Marc Huët, Unilever’s chief financial officer, has admitted that consumer goods companies have got it wrong in China as well.  Nestle has been burning instant coffee that it can’t sell, whilst Unilever’s own sales have been falling off a cliff – they were down 20% in Q4, and fell another 20% in Q1.

India is the same story.  As the Wall Street Journal reports, most of India’s 250 newly-built shopping malls are empty :

“Some analysts had estimated India’s middle class would swell to more than 400 million people, it turns out that only a sliver of them—less than 10 million by McKinsey & Co.’s estimates—have enough disposable income to make them steady mall goers.”

Africa, China, India.  Together, they account for more than half of the world’s population.  And, of course, it was very tempting to believe that suddenly many of their 3.7bn people were about to become ‘middle class’.  But what companies forgot was that ‘middle income’ is not the same as ‘middle class’.  As the pyramid above shows, based on data from the Harvard Business Review:

  • The West contains 1bn people living in countries with average GDP/capita of $45k, and with median ages of around 40 years
  • China and Russia contain 1.5bn people with average GDP/capita of $7k, and median age of 37 years
  • The other 4.8bn people living in emerging economies have average GDP/capita of just $4k, and median age of less than 30

And as the World Bank has noted:

“If it is shocking to have a poverty line as low as $1.25 per day, it is even more shocking that 1/7th of the world’s population lives below this line.”

Global income Jun15aA more realistic view is provided by the second pyramid, which highlights the reality of life for the 4bn people in the world who live on less than $5/day:

  • 1.4bn live on $3 – $5/day, and have had an average of 2 years secondary schooling.  They own bicycles, mobile phones and often TVs, and urgently need better housing, health care and more education
  • 1.6bn live at subsistence level, on $1 – $3/day.  They have perhaps had some primary education, and need sanitation, regular work, and very basic products
  • 1bn live in extreme poverty, on less than $1/day.  They lack almost everything and live a precarious existence from day to day

This is why my Christmas wish was that companies would finally abandon the myth that emerging economies were suddenly becoming ‘middle class’.  Instead, I hoped they would focus on meeting more basic needs – such as providing 2.5bn people with toilets.

6 months later, I feel cautiously optimistic that the message is starting to get through.  Nestlé and Unilever are two of the world’s biggest, and most successful companies.  If they have begun to recognise reality, then hopefully others will soon follow.

 

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