Over the past few years, the hype of emerging African middle class has made headlines across the world. The Harvard Business Review makes the point that consumer spending power in Africa has risen from $470 billion in 2000 to over $1.1 trillion in 2016.
In Kenya we have seen investors angling for a piece of that pie evidenced by the rise of the mall economy.
Kenya has about 53 malls of which about 30 are in Nairobi; another 19 are under construction. This mall obsession begs the question as to whether the aggressive growth of mall space is sustainable.
HBR states that some multinational companies (many of whom sell products in malls) are finding that their business in the region is underperforming. In a survey of 20 senior executives working in Africa, six said they struggled to hit revenue targets.
So, what’s going on? There are two sides to this story. On one hand, yes it’s true that growing incomes have increased spending power and some of that will be directed to spending in malls.
Some consumers prefer the setting and security of malls as they can let children wander freely, buy items that probably cannot be found elsewhere (think golf equipment or high quality makeup) and enjoy the variety of products on sale in a mall space.
Also as Johnson Nderi from ABC Capital points out, supermarkets in malls also do well because of the convenience, variety and relative affordability of goods offered there.
There is also the Kenyan customer who enjoys the exclusivity of the mall experience and feels that money spent in a mall is money well spent because the experience simply cannot be found anywhere else. Demand for shopping malls will continue to exist.
On the other hand, according to the Deloitte’s 2015 African Powers of Retailing report, approximately 90 per cent of retail transactions in Africa occur through informal channels.
Why is purchase in the informal economy so strong and how does this impact malls? There are several factors that inform purchase in the informal economy; the first is quality and variety.
For example, most Kenyans prefer getting fresh food items from informal open air markets, not supermarkets, and malls because there is a feeling the produce bought in open air markets is fresher and thus of better quality.
Most Kenyans buy clothes from informal second-hand clothes vendors because the variety and quality of products on offer there often cannot be matched by shops in malls at that price point.
This leads to the second issue which is pricing; malls have underestimated how sensitive Kenyans are to value for money.
Kenyans don’t see why they should pay for expensive mall rent added to the purchase price of goods bought in malls. Why are we paying for the rent of stores in shopping malls?
Kenyans are also ingenious in getting value for money. For example, Kenyans prefer to search online for furniture or go to a furniture shop in a mall and then go to an informal carpentry outfit to get a replica made at a fraction of the cost.
Why pay the full mall price when there are alternatives? This purchase psychology eats into the appeal of shopping in malls.
Unpacking the spending habits of the African middle class and the psychology that determine that spending is complex.
Sadly an oversimplification of this complex mind may be leading to some poor investment decisions.