Research into the demographic shifts occurring among SA’s low-income groups forecasts a new wave of consumption- fuelled growth.
Foreign investors often say that SA doesn’t have a growth story to tell, certainly not like China’s or India’s. But research by Bank of America Merrill Lynch (BAML) suggests otherwise.
“SA has a growth story,” insists BAML economist Matthew Sharratt. He’s part of a team of researchers who believe SA will reap a “demographic dividend” over the next few years as hundreds of thousands of households move above the poverty line for the first time. It will buoy consumer spending and elevate economic growth.
So confident is BAML that SA’s consumption story has legs that it is expecting the country to achieve above- trend GDP growth of 5% by 2013, driven partly by accelerating consumer spending.
Over the past 10 years, consumer spending has been driven by the emergence of the black middle class. In the future, BAML says, the most important new driver of SA growth will come from households moving from just below the poverty line to just above it, and from informal markets into formal ones.
“The near-term cyclical slowdown in global and SA growth may certainly delay this process,” Sharratt concedes, “but we’re talking about a structural evolution that has already begun.”
Between 2001 and 2010, the number of households in the D income category (earning R5000-R9999/month) grew from 1m to 1,9m — a rate of 7,2%/year. BAML expects this to accelerate to 9,5%/year between 2010 and 2013 as 600000 households move off the bottom rung — from the D Low (DL) category (those earning below R4999/month) to the D category (see graph).
Low-income households that migrate up the income ladder have a high propensity to consume. Because of the size of this low-income base — about 9,3m households fall below a poverty line of R4999/month — even a small amount of jobs growth at this level boosts overall spending.
Whether this trend accelerates, as BAML is positing, depends almost entirely on the pace of job creation among semi- and unskilled workers. It believes SA can plausibly create 600000 low-income jobs by 2013 or 2m jobs over 10 years, an assumption the researchers feel is conservative, given government’s ambition to create 5m jobs by 2020.
“People are too pessimistic about the ability of SA to grow and create employment,” says Sharratt. “If the economy averages 4% growth over the next few years, it can create this number of jobs based on past performance.”
Government’s focus on creating jobs, greater credit extension to low- income households and the continued provision of public infrastructure, especially housing, should also help.
Sharratt says the research has generally been favourably received by retailers, though some are sceptical of government’s ability to follow through on its job-creation plans and doubt the economy’s ability to create jobs, even with fiscal support. “Though we believe we have made conservative assumptions regarding job creation, a serious delay or failure could mitigate the shift in household mix we expect by 2013,” he concedes.
BAML has used a unique database of the number and purchasing power of SA households developed by the Fernridge Group, a consumer demographics research company. It performs aerial image mapping and geo-coding of households which allows it to count fast-changing household formation in informal settlements.
It finds the most recent official estimate, Stats SA’s 2007 Community Survey, understates the number of households by more than 10%. Fernridge arrives at a total of 13913907 households.
Moreover, BAML’s research suggests the number of households will grow by over 2% a year, driven partly by population growth but also by one of the fastest rates of household fragmentation in the world, as urbanisation continues.
But while growth in the absolute number of SA households looks set to sustain the momentum of consumer spending, it is the changing mix of households that will act as an additional turbo charge.
This is because household spending rises threefold on average as households migrate from the DL category to D.
DL category households typically live in a squatter shack, survive on social grants, have little access to credit and shop at informal outlets. D category households have one member permanently employed, live in basic formal housing, use formal retail at commuter nodes and qualify for microfinancing.
BAML concludes this migration will be the main driver of retail growth from 2010 through to 2013 and aggregate retail spend will rise by almost a third over this period from R605,5bn to R805,7bn.
As households shift from DL in 2010 to D in 2013, the big winners will be food and groceries (on which spending by this group is set to double); leisure, which the researchers maintain is set to grow tenfold in spending terms; and clothing, footwear, textiles and accessories, on which spending should jump fivefold (see graph).
Applying these trends to Soweto suggests its food and grocery spend will rise by R7,6bn by 2013 — a 42% increase. If formal retailers retain their 26% market share, it represents a gain of almost R6bn over 2010. If they make inroads into the informal and independent market, the upside could be much greater.
Given that Soweto’s current food and grocery spend of R5,2bn is equivalent to the entire food and grocery spend of Zambia, BAML thinks retailers rushing into Africa might be underestimating the opportunity right under their noses.
“It’s not all about moving into Africa,” agrees Pick n Pay chairman Gareth Ackerman. Having visited low- income nodes in Pinetown and Umlazi in KwaZulu Natal this past week, he’s been “blown away” by the vibrancy of trading in these markets.
“People are moving up rapidly in SA; there’s a shift from people shopping in informal to formal, branded stores,” he says. “We’re rolling out as rapidly as we can to these low-income markets. There are big opportunities here .”