Kenya’s middle class thinned out in the past five years as more households dropped into the low-income brackets, widening the gap between the rich and the poor and pulling back growth in the consumer goods market, a new survey shows.
A Target Group Index (TGI) survey conducted by Consumer Insight, found that the lower middle and bottom class income groups now constitute 80 per cent of Kenya’s homes up from 73 per cent five years ago, thinning out the middle income segment to a mere 18 per cent from 27 per cent in 2005.
Consumer market players attribute the trend to the failure of the benefits of recent growth to trickle down to lower income groups, leaving household incomes to lag far behind the rate of inflation and the cost of living.
“This outcome implies that the proportion of households with a decent amount of disposable income is shrinking,” said Mr Ndirangu wa Maina, the managing director at Consumer Insight.
“Should the economy fail to grow at the expected rate this year, companies will find it hard to sell and will have to use expensive promotions and marketing drives to reach consumers,” he said.
Economists said the study explains a recent finding by another consumer market research firm TNS that although consumers have reported some improvement in economic conditions in the past three months, retailers have only reported flat sales in both rural and urban outlets.
“This kind of outcome only arises in a situation where the ranks of consumers have thinned out,” said Stefan Moeller, a consumer markets analyst based in London. “It means that there are less heads in the middle class who may be consuming more in the recovery but cannot make a big impact because of fewer numbers.”
Expansion of the middle class that is backed by a strong buying power and rapid urbanisation should ordinarily open up huge sales opportunities in key sectors such as consumer goods, financial and business services including telecoms and manufacturing.
In recent months, however, the erosion of middle class purchasing power has shifted emphasis to the low income groups with kiosk owners as the major beneficiaries.
“The reality is that the middle-class now shops from the supermarket once a month, but goes to the kiosk more often to replenish,” Mr Ndirangu said.
Kenya’s economy recorded robust growth between 2005 — expanding at the rate of 5.8 per cent— and 2007 when it peaked at 7.1 per cent, raising hopes for stronger consumer markets growth.
Official data indicates that household incomes grew at the rate of 6.4 per cent in 2005, 7.5 in 2006 and 8.7 per cent in 2007 before peaking at 8.4 in 2008.
Ordinarily, such level of income growth should have left households with more disposable income and stimulated consumer markets growth but high inflationary pressure that almost tripled from 11.9 per cent in 2005 to 29.3 late last year eroded much of the purchasing power.
Consumer market trackers said a squeeze on the middle class has broad implications on the economy, especially for producers of consumer goods who must change the way they market and sell their products to the bottom of the pyramid buyers who now dominate the marketplace.
“This shrinkage of the middle income group is the main driver of Kenya’s flourishing Kadogo economy,” said Mr Ndirangu.
More recently, some companies have been re-packaging their products into smaller units to capture the bottom of the pyramid consumers but researchers warn that inflation is already stretching this segment of the market to the limit.
“While the lower middle-class and low income households has been the engine of growth for years, a company cannot overlook the fact that they are getting poorer,” said Mr Ndirangu.
Tabitha Kiriti-Ngan’ga, a lecturer at the University of Nairobi’s School of Economics, described the gap between the rich and the poor as the biggest threat to Kenya’s growth prospects.
“The imbalance is a time bomb that needs to be tackled urgently as it deepens Kenya’s exposure to social and political tension putting economic stability at risk,” she said.
Consumer Insight’s findings are in agreement with a UNDP survey released last year which found that Kenya is the most unequal country in Eastern Africa compared to neighbouring Rwanda, Uganda, Tanzania and Burundi.
The latest findings are expected to stoke the old debate as to whether the recent economic growth has had any impact on Kenya’s proverbial mountain of poverty that has left more than half of the population in the bottom income band.
It should also temper recent enthusiasm over Kenya’s economic prospects, which the Central Bank described as promising but fraught with downside risks.
Businesses have been counting on higher consumer demand for goods and services to boost sales and lift the economy this year, but changing fortunes of the middle class means that growth in demand will be much slower and will require fresh strategies to realize.
Shrinkage of the middle class – who are the main consumers of mass-market products and services – means that only a smaller proportion of the total households has the disposable income to drive growth.
Companies that have adopted bottom-of-the-pyramid sales strategies include Equity Bank, whose idea of banking the poor has left a mark on the banking industry.
Mobile phone service provider Safaricom has also introduced airtime scratch cards for as little as Sh5 having come down from the lowest denomination cards of Sh250 five years ago.
Declining purchasing power should be bad news for businesses that have for more than two years grappled with depressed demand for goods and services even as the costs of production remained on an upward trend.
Treasury is expected to announce a new tax structure when it tables the national budget before parliament in June that raises the minimum taxable income and widens the tax bands to reflect the current income trends and cost of living levels.
With the bottom-of-the-pyramid households increasingly becoming crucial target market for mobile phones, radio, TV, newspapers, bread, and bathing soap, the survey says, companies will have to consider repositioning their brands in tandem with the shifts in income levels.
“We are likely to see companies go more into differentiation of products to fit the income structure which could make them slightly alter the pricing, ” said Dr Kiriti-Ng’ang’a.
“These consumption patterns are no doubt driven by an increasingly younger population – the 18 to 34 years-olds —who have surged from 53 per cent of the urban and peri-urban population in 2005 to 91 per cent in 2009 while the other age groups seem to be fast disappearing from the urban landscape,” says the TGI survey report.
Most business leaders are optimistic of better economic times and earnings this year with their focus shifting to product and service innovation to lift consumer demand and expansion into regional markets, ditching cost cutting, freeze in capital spending and restructuring which were the growth strategies last year.
While financial services players had for the whole of last year cut credit supply to shield themselves from default risk in a soft economy, experts said consumers might take longer to resume to big-time borrowing.
“Only a quick rebound that can save banks from high loan defaults as most of those who borrowed are slowly sliding into poverty, ”said Mr Ndirangu.
“Some people in the middle-class are realising the mortgages they took and the cars they bought are an expensive affair,” he said.