Barclays – 7 September 2015

The Middle and the Middle Class

How do we do it?

• Qualitative focus groups

• Quantitative questionnaires

• Analysis of research data

• Workshops and think tanks with academics and South African

marketing experts

• Creation of ground-breaking segmentation models

• Dissemination of research to the South African marketing

community

• Analysis of existing data sources

• National Income Dynamic Survey - 17,600

• Income and Expenditure Survey - 24,000

• AMPs - 25,000

• Nielsen

• Eighty20 Credit Portal

• Frontline

• Bureau of Market Research, UNISA

• Collaboration with academics

How do we do it?

On the Menu

Setting the scene

Survivors: The Mass Market

In-Betweeners – Skilled Strugglers

SA’s new Black Middle Class

Setting the Scene

Extracts from Wake Up, Shake Up 2011

Era of Exuberance

1999 – 2007

Era of Hurt

2007 - 2010

Era of Uncertainty

2010 onwards

Era of Exuberance 1999 - 2007

Era of exuberance

• Booming economy - GDP 6%;

• Rampant consumer

spending

• Soaring consumer and

business confidence

• Exuberance and spending

straddled all sectors

100 Golden Months

• Property values through the

roof

• Huge growth in employment

• Black middle class increases

from 1.7 million to 2.8

million between 2005 and

2008

• Strong Rand

• Easy access to credit

Era of Hurt 2007 - 2010

Two years of pain

• The wheels come off:

Global economic meltdown

GDP falls and the economy contracts

869,000 jobs lost between 2008 and 2010

Debt, debt, debt!

Two years of pain

• Fallout from pre-National

Credit Act scramble to

extend credit

• Interest rates soar

• 18 million have active debt

and 9 million are in arrears

• Nearly 4 million consumers

have orders or judgments

• Banks and retailers hold

back on lending

Era of Uncertainty 2010 Onwards

Where to now?

Intro from Winners & Losers 2015

What is clear is that there have been winners and losers...

Professor Haroon Bhorat

• Professor of Economics at

the University of Cape Town

• Member of the President’s

Economic Advisory Council

• Director of the Development

Policy Research Unit

Haroon Bhorat - Growth Incidence Curve

6

7

8

9

10

11

0 20 40 60 80 100

73rd percentile of population

32nd percentile of population

87th percentile of population

An

nu

al p

er

cap

ita

gro

wth

in in

com

e

Income deciles ranked by per capita income

Growth incidence curve Mean of growth rates

%

mean

median

richest

poorest

Source: Haroon Bhorat, UCT

Growth incidence curve

73rd percentile of population

An

nu

al p

er

cap

ita

gro

wth

in in

com

e

Income deciles ranked by per capita income

Growth incidence curve Mean of growth rates

%

Survivors TopEnd

70r% of SA

Population

Middle Class

Skilled strugglers

9% of SA

Population

22% of SA

Population

3% of SA

Population

Survivors: A Mass Market

Extracts from The Majority Report 2012 and Connecting with Survivors 2014

Intro Connecting - Umlazi

Why Survivors are important?

• The biggest market segment by number

• It has received a huge cash injection

• It is ignored, misunderstood and poorly served

• More affluent markets are becoming saturated

• So they are turning to Survivors as it is a market of the future

• This market represents a massive opportunity

Who is in the Majority?

• Individuals (“Survivors”)

living in households which

have income under

R6000 per month

and they make up 70%

of population

The income blind spot

• Using income as a determinant of market opportunities is problematic because

• disposable income does not always correlate with actual income

• incomes are not always reported or are under-reported; credit also has a constraining effect

• remittances are not always cash-based

As incomes rise…

• The proportion spent on ‘marketable or discretionary goods’ (e.g.. food and clothes vs. electricity and transport) should rise at a faster rate (Engel’s Law) . Instead, it rises at a slower rate

• And Survivors are taking on more expensive formal debt, which ‘crowds out’ available spend due to interest, other fees, penalties and other ‘legal’ charges

Income blind spot

less than R1000 R6000 Household income

Income

Disposable income

Spending on ‘public goods’ e.g.. water, electricity, education and debt

Income

Economies determine marketing models

(Typical of Europe, USA, Australia and SA’s Top End)

• Formalised approach to business

• Appealing to governments - tax revenue

• Dominance by few organisations (e.g... retail chains)

• Consumers have consistently high levels of disposable income

• Predictable demand

• Strategically sophisticated, measureable long-term approach to marketing

Developed economies

(Typical of India, South East Asia, Bangladesh, DRC)

• Informal approach to business

• Limited government controls and support

• Consumers have less, inconsistent income

• Therefore demand is more volatile

• Strategically, a more flexible approach that’s responsive to consumer and community needs

• Successful international marketers learn to adapt using hybrid models

Developing economies

• South Africa is an upper

middle income country (World

Bank)

• But income distribution is one

of the most skewed in the

world (GINI coefficient)

• Hence the high gini-coefficient

30th LARGEST economy (out of 180)

David Neves and Haroon Bhorat – peculiar nature of SA poverty

‘People need to start realising that the South African model is more like Bangladesh with a bit of Australia thrown in,

not the other way around.’

CEO, major FMCG brand

113

85

57

28

0

S o u r c e : W o r l d B a n k

69

83 82 85

31

Percentage of population living on less than $2 a day

India Zambia Mozambique Nigeria South Africa %

In South Africa the mean (average) household income is almost double the median (midpoint) household income

Social grants

• SA spends over

• 70% of these are child

support grants

• *3.5% of GDP vs. 0.7% for

Brazil

R145 BILLION* on social grants in

2015

Social grants

More than

40% of Survivor

households depend on grants

for more than half their income

Why grants are a key factor

• Stability of income

• Influence social contracts

• Buying behaviour

Rollout of services

15

11.25

7.5

3.75

0

S o u r c e : S A I R R M e d i a r e l e a s e , S e p t 2 0 1 2

6

11

5

12

13

Household living in formal housing Household with access to electricity %

7

G R O W T H I N M I L L I O N S ( H O U S E H O L D S )

Household with access to piped water

1996 2010

Service Delivery

• Improves the welfare of

households:

- brings new product categories into play

- housing can provide a source income, whilst also reducing the pressure of paying rent

So-called ‘asset’ inequality

(electricity, water, housing) has

reduced, distorting SAARF’s

LSM tool

Survivors Urban Rural

Hot running water 11% 26% 4%

Fridge 71% 87% 63%

Microwave 38% 60% 27%

Washing machine 15% 31% 8%

Television 78% 90% 75%

Electric stove 46% 65% 37%

Did you know?

Percentage of each LSM made up of Survivors

100

75

50

25

0

LSM1 LSM2 LSM3 LSM4 LSM5 LSM6 LSM7 LSM8 LSM9 LSM10

Distribution of survivors

30

22.5

15

7.5

0

S o u r c e : W o r l d B a n k

LSM1 LSM3 LSM4 LSM5 LSM6 %

LSM9

% O F S U R V I V O R S I N E A C H L S M

LSM1 LSM7 LSM8 LSM10

What does this mean?

• ‘Bottom of the Pyramid’ thesis is

not always relevant:

- stable incomes (from formal employment and grants) are more of the norm than in most developing countries

- access to services

- shapes spending patterns

- creates demands for durables e.g.. fridges and associated products (washing powder) which require long term and regular commitments (debt, electricity)

• Compared with most developing countries Survivors are • relatively better off in income terms • have better lifestyles

• Survivors are asset rich and cash poor • but assets are not easily tradable and aren't useful as collateral

• Which explains why they are relatively poor

• And why the typical ‘Bottom of the Pyramid’ marketing models aren’t always appropriate

• Why we must develop our own!

Survivors - the bottom of the pyramid

BULK

A calabash is more apt

70% of the population are

in the calabash

Spending power underestimated?

Our 2014 study showed that, for those living in the ‘Calabash’:

• Survivor incomes had grown,

• and economic activity had increased still further

Mrs. Sibiya Alexandra, Gauteng April income

Visible:

wages - none

disability grant – R1200

Hidden:

alcohol sales – R7000* (net)

food parcel – R100 (value)

* Inconsistent & annual average does not impact her HH status as a Survivor

Real Income (April)

Grant

AlcoholSales

FoodPackage

‘Hidden’or just unrecorded income?

• own small business

• informal loan income

• lobola income

• sale of produce

• sale of sheep / chicken

• employer gifts

• ad hoc employment

• rental

Employment Status

0

5

10

15

20

25

30

35

1994 2002

2008 2010

2013

9.5 11.2 14.8 13.9 15.2

2.4 4.9

4 4.4 4.8 2.2

3.2 1.2 2.2 2.2 9.8

8.9 12 12.7 12.8

Economically inactive

Unemployed not looking

Unemployed

Employed

millions

Working age adults: StatsSA

How DO people get by? If needs must ..

Sustainable Livelihoods Foundation video

Ivory Park, Gauteng

& if rent

included…

2366 businesses in just over 1,5km²!

SLF research found one enterprise for every ten households

= estimated one million + enterprises countrywide!

STATSSA: R120 billion

Prof Haroon Bhorat (UCT):

R280 billion Loane Sharp (Adcorp):

R680 billion

Different Estimates

Just how BIG

is the informal sector?

Haroon Bhorat – Growth in informal, as big as mining

73rd percentile of population

An

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al p

er

cap

ita

gro

wth

in in

com

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Income deciles ranked by per capita income

Growth incidence curve Mean of growth rates

%

Survivors TopEnd

70r% of SA

Population

Middle Class

Skilled strugglers

9% of SA

Population

22% of SA

Population

3% of SA

Population

In-Betweeners – Skilled Strugglers

Extracts from Wake Up, Shake Up, 2011

Willy Maelane video

Skilled strugglers: Characteristics

• This is the upper end of the

“middle” but not yet Middle

Class

2,7 million adults

9% of the population

Roughly LSM 8

13% of SA spend

Average household income

R13,700

Skilled Strugglers: Crisis of aspiration

• Arguably the most

‘frustrated’ consumers:

Reasonably high levels of education

Aspirations for a middle class lifestyle supported by access to credit

Skilled Strugglers: Crisis of aspiration

• But less attainable:

Salaries not keeping pace

Few hand outs; high costs

Over indebted - ‘catch up’

Difficulty accessing housing, health, education etc.

Levels of confidence at an all time low

Skilled strugglers: Response

• Frustration spilling over -

strike action

• Collective bargaining the

battleground

• Lack of access to credit will

continue to fuel frustration

• This group largely shapes

our public discourse

73rd percentile of population

An

nu

al p

er

cap

ita

gro

wth

in in

com

e

Income deciles ranked by per capita income

Growth incidence curve Mean of growth rates

%

Survivors TopEnd

70r% of SA

Population

Middle Class

Skilled strugglers

9% of SA

Population

22% of SA

Population

3% of SA

Population

SA’s new Black Middle Class

Extracts from 4 Million and Rising, 2013

Before 1994…

Group Areas Act

Bantu Education

Travel restrictions

Job reservation

Repression

Intro Vid

A thriving middle class is crucial

to the wellbeing of the country:

✎ a vibrant, stable civil society

✎ a healthy economy

✎ broader skills base

✎ jobs

Our Definition

Must be Black African adult, 18+ Either live in household with income between R16,000 & R50,000pm OR Must meet at least two of the following criteria:

own a car

tertiary qualification or currently studying (student aged 20-34)

work in white collar/’professional’ job

live in metropolitan area in decent housing or pay rent of R4000+ (For comparative purposes, we used a similar definition to our previous ones)

OR AND

2004

• SA’s total middle class –

5 million adults

• Black middle class –

1.7 million adults, in

590,000

households

• Black middle class notably

absent from top LSMs -

only 15% in LSM 9 - 10

Black middle class

adults in 2013

4.2 MILLION

2012

Upward Bound

• Since 2004...

• the number of households

has trebled to

1,62 MILLION

Since 1994, proportion of

black adults in middle class has

doubled from 8 % to 16%

12% annual compound

growth rate

White Middle Class

White middle class stagnant

over same period, from

2.8m adults in 2004

to 2.86m in 2012

Growing the Middle Class

4500

4000

3500

3000

2500

2000

1500

1000

500

0

B L A C K W H I T E C O L O U R E D I N D I A N

2004 2008 2012

1,747

2,872

4,224

563 657 721

307 406 506

2,800 2,798 2,868

No

of

adu

lts

(00

0’s

)

Average personal income

R8,191 Average household income

R20,583 Overall spending power over

R420 billion (White R380 billion)

Spending power black middle class 2013

income Personal Income

R5 793

R10 329

R8 191

R11 345

0

2000

4000

6000

8000

10000

12000

Black White

2004 2012

30% increase 18% increase

income Household income

R13 675

R22 634R20 583

R25 014

0

5000

10000

15000

20000

25000

30000

Black White

2004 2012

35% increase 10% increase

Driving Growth

Driving Growth Supported By:

Credit education BEE economic growth

Purchasing of household assets results in mass entry into upper LSMs (8 -10)

Black middle class car ownership up

by 1,1 million since 2004

Expect congestion to get even worse

32% say they are a professional

51% say they are in managerial

positions

White collar

40% of skilled black

professionals work for

government

13% of whites

Labour Force Survey, Q2, 2012

However, massive

from government & banking sector

Rather stay comfortably employed

to entrepreneurship:

Harley Davidson pt 1

Our parents told us over and over again

that the way to succeed is to be educated

Education moves you from working class to

middle class – it gives you choices

• Only 14% don’t have a matric

• Nearly half (46%) have a post matric qualification

• Since 2004 the number of black middle class members

with a tertiary qualification has grown by 1.25 million

There is a clear difference between those born and those

not born into middle class families

Where the journey begins

matters

‘mafikizolos’ 2nd wave

forerunners

aspirants

1.9 million aspirants with household income between R10,000 and R16,000 who don’t qualify as middle class (these people are part of the 2.7m skilled struggler segment) But desire ‘to get there’ and will fuel future growth working towards perception of a middle class lifestyle confronted with • debt burden • scarcity of jobs • gap market

S you just arrived yesterday

recent experience of hardship overcame huge odds often had some level of advantage still on sharp learning curve still growing in confidence super-charged expectations

younger grew up in a middle class environment better prepared & often better educated more confident less fearful of slipping back more realistic aspirations less pressure from extended family

“I could have chased any dream because although we weren’t rich, we had the resources”

First wave to reach middle class remember hardship pride in achievements fear of slipping backwards have learnt from recession, more realistic and discreet recession’s forced move away from ‘catch-up’ lifestyle big dreams, believe anything is possible

Martin classmate clip

lifestyle choices are being made amidst

Independence Family responsibility

Invisibility Recognition

Lifestyle Debt

Conspicuous Intrinsics

Legacy Catch - up

FAMILY AT HOME FAMILY OUTSIDE THE HOME

• Household size often relatively large:

• Nearly 40% live in

households with

five or more individuals 15% for

whites

• Average HH size over

four

RMR

Composition of the household

LEGACY CATCH UP

Around 60% send children to

ex-Model C or private schools

70% are not happy with the

standard of education in government schools

I don’t want them to

suffer like we did

RMR

Suburb Township

Roots Modern

Mother tongue English

To achieve Fear of falling back

Debt as enabler Debt as noose

Stable job Own business

TOWNSHIP SUBURB

28% say they still live in townships,

but typically

‘burbs in the township’

The line between townships and suburbs is becoming

Township developments

make a middle class

lifestyle more

possible

Middle class people only really shop in the shopping malls The mall is the middle class fish bowl

MOTHER TONGUE ENGLISH

are fluent in English

Over 90%

RMR

Black middle class White middle class

SABC 1 (90%*) DSTV (64%*)

SABC 2 SABC 2

e.TV SABC 3

SABC 3 e.TV

DSTV SABC 1

WIDE TV REPERTOIRE

*watched last 7 days

30

20

10

0

1 5 – 1 9 2 0 – 2 4 2 5 – 3 4 3 5 – 4 4 4 5 – 4 9 5 0 – 5 4 5 5 - 6 4 6 5 +

The Market of the future

4 . 3 5 . 5

%

A G E R A N G E O F M I D D L E C L A S S

A G E R A N G E O F B L A C K M I D D L E C L A S S

A G E R A N G E O F W H I T E M I D D L E C L A S S

Reflects a ‘normalisation’ trend (increasing numbers born into

middle class)

Toxic assumptions

Toxic assumptions

• Poor people are not (or won’t be) connected

Internet Access in SA 2012, World Wide Worx

Total sub-Saharan cable capacity

(Gb/s)

• Universal wifi on taxis & at ranks within 3 years

• Myciti, public transport

• City of Cape Town – 130 public hotspots

• Project Isizwe - Twane

Landmark handset launched in 2014: MTN-branded 'Steppa’ At R499, it’s one of cheapest android devices available

devices

Internet Access in SA 2012, World Wide Worx

Project Isizwe

Greater connectivity

Empowers

Informs

Drives choice

Makes critical

Breaks boundaries

Enables business

Toxic assumptions

• Poor people are not (or won’t be) connected

• The progression from informal to formal is straight-

forward

• Poor people are ‘uneducated’ about their purchases

• As South Africa grows, the informal economy will

shrink