The popular “Africa Rising” narrative has largely been predicated on the emergence of a growing middle class on the continent, providing a steady rise in consumer demand to go with the increased export receipts and lower public debt burdens seen across Africa. But with oil prices falling since mid-2014, along with a rising US dollar and slowing demand in China, this theory has been challenged. Africa may have an emerging middle class with more spending power now than in previous decades, but retailers will still find themselves dealing with consumers who are vulnerable to economic shocks. Household discretionary income is volatile and it may take more time before spending power becomes broad-based. Bolaji Edu, CEO of property service firm Broll Nigeria, told OBG, “The question about the middle class is whether they really have the savings or earnings potential to spend through slumps. The market will re-establish itself once the macroeconomic picture becomes more clear, but people are wondering what the main drivers of the economy are going to be in the future.”
According to the World Bank, from 2000 to 2013 household consumption in Nigeria grew at a compound annual growth rate of 23.4%, faster than all African countries save Angola. However, the data also show the growth rate slowing significantly from 21.1% in 2013 to 2% in 2014. Still, the sheer size of Nigeria’s population makes it a compelling market. By 2025, according to the UN, there will be at least 84 urban areas in Africa with at least 1m people, and 17 of them will be in Nigeria. Even individual income segments within the country’s demographics are larger than many countries’ entire populations. With 24m people earning $2-4 a day, that makes this demographic on its own roughly equal to the populations of Ghana and more than double that of Rwanda. “There is a strong future for Nigeria, with its large youth population, which in turn is driving consumer goods companies to invest in new technology and infrastructure. This will allow them to handle the expected increase in growth,” George Polymenakos, managing director at Nigerian Bottling Company, told OBG.
In addition to that income bracket, Nigeria has 115m people earning less than $2 per day, 18m at $4-20 and 27m above $20. That last figure is almost double the amount in South Africa, at 14m, an indication of the sheer scale of Nigeria’s market.
Having the biggest group in the wealthiest income bracket helps to explain why Nigeria, and Lagos in particular, increasingly pops up as a destination in the luxury segment of the global retail market. That demographic means making a choice, however, between malls, which are aimed at a broader group than just high-net-worth individuals, or going it alone. Ermenegildo Zegna established a standalone boutique on Victoria Island, for example, whereas brands like Hugo Boss, TM Lewin and Thomas Pink are found in malls and imported by franchisees.
Nigeria’s population-based investment logic is a long-term proposition, however. For the short term, the foreign exchange issue has highlighted the risks to investors of expecting too much too soon. The drop in footfall at the malls, such as the 8% slump seen in The Palms, which is the country’s flagship mall, indicates that customers are having as much difficulty spending as retailers are having in importing raw materials and inputs. Yet as Nielsen’s polling shows, Nigerians are among the most optimistic consumer groups in Africa, with a more positive collective outlook about job prospects and personal finances despite the currently restrained atmosphere. One thing that would help retailers would be more growth in the market for credit cards, which is currently in its early stages, according to Sajan Suvarna, the director of operations for the retail arm of Persianas Group, a Nigerian retail developer and franchisor. He told OBG, “We will see a stronger middle class blossom when people can get credit cards. We are not seeing that just yet.”