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With the steady rise of the middle class in Rwanda, international brands are now setting up shop in the country to get a piece of the pie. Derrick Van Houten, Group Managing Director of Kuku Foods East Africa Holdings Ltd joins CNBC Africa on the recent opening of the first KFC outlet in Rwanda.

Kuku Foods secures opening of first KFC franchise in Rwanda

Henning Melber | University of Pretoria
The African middle class is of huge interest to business. This was confirmed again recently by well attended seminars in South Africa’s big cities to discuss “<a href="http://www.uctunileverinstitute.co.za/research/africa/">African Lions: groundbreaking study on the middle class in sub-Saharan Africa”</a>.
<img loading="lazy" decoding="async" class="aligncenter wp-image-289512 size-full" src="http://cnbc.africa/wp-content/uploads/2017/11/Shopping-Mall_Nigeria_Wikimedia.jpg" alt="" width="1280" height="720" />
The study was motivated by the African Development Bank’s diagnosis that:
<blockquote>(the African middle class) has grown by over 240% in just over a decade, and the bank defines 15 million households as now being middle class.</blockquote>
The narrow focus of the study is guided by a particular interest and echoes a poorly informed narrative about the structure of societies in Africa. It is void of any class related analysis and offers little bearing on reality. People are seen only as consumers with no political relevance.
The study was done by the University of Cape Town’s Unilever Institute of Strategic Marketing and the global market research company IPSOS over 18 months in ten cities – Abidjan, Accra, Addis Ababa, Douala, Dar es Salaam, Kano, Lagos, Nairobi, Luanda and Lusaka.
It defines as middle class someone who has a daily income of between USD$4 and USD$70. He or she also has a disposable income; is employed or is running a business or studying at college; and has some secondary school education. According to this criteria, a whopping 60% of the urban population surveyed fall into this definition of middle class.
The researchers conclude that those who qualify as middle class have an average income of USD$12 a day and an average household income of USD$17 a day. Of these, a third had a full time job, while many ran mainly informal businesses.
According to the study, an estimated 100 million people outside South Africa have an aggregated spending power of more than USD$400 million a day.
It’s clear that the research is motivated by economic interests, targeting the so-called middle class as the object of desire for retailers. As the head of the institute explained, the core of the interest in the estimated ZAR1.3 trillion-a-month market was
<blockquote>a better understanding of the consumer landscape on the continent, (by exploring) aspirations, media consumption, buying patterns, brand relationships and much more (of such middle class).</blockquote>
Similar interests by the private sector exist in business circles beyond the continent. Large companies paid US$1160 and small ones US$510 to gain insights into the investment opportunities at a recent “Middle East and Africa Summit” in Stockholm. The second day was devoted to sub-Saharan Africa, which was described as having
<blockquote>a bulging middle class hungry for inclusion and more sophisticated consumer demands.</blockquote>
Such approaches perpetuate the original hype over the discovery of the emerging middle classes in the global South, defined in terms of higher living standards. They are measured on consumption and lifestyle related to Western products and status symbols. But no insights are offered into how being middle class could be understood in a social context. This would include status and awareness as well as the political choices people make.
This would require a different, analytically much more ambitious grasp of the economic and political realities in African cities and indeed wider societies.
<h2>The fight back</h2>
In the meantime, scholars in a variety of academic disciplines have started to critically explore the middle class notion. They properly investigate its meaning and definition. This is important because a middle class debate reduced purely to the exploration of consumer habits can only be used for self-serving purposes.
In contrast, the new scholarly efforts put an African middle class debate into more meaningful perspectives. They offer a deeper analysis of cultural factors and identities, consciousness, social positioning and relations to other groups as well as institutions and the state. They are on their way to a proper class analysis and the policy options and implications by the social group or groups in formation.
The challenge is to look beyond the superficial number crunching that defines a middle class in purely income and expenditure figures, void of any further analysis of other relevant factors.
Such apolitical perspectives tend to put an ideological smokescreen around socio-economic processes. These rest on the assumption that relatively high economic growth rates suggest “progress” and “development”. Meanwhile, little changes in the daily lives of most people. Crumbs from the table of the haves don’t lift them out of a fragile socio-economic habitat bordering on poverty. Many urban and rural people continue to exist in utter destitution.
<h2>Social change</h2>
Engaging with such challenges, exploring how being middle class could be understood and mobilised for social change, would require a different analytical grasp of the socio-economic and political realities in African societies.
Presumably, such different research findings would most likely not be of interest to the business. But, the more socio-politically motivated analyses might contribute towards raising awareness of the class structures perpetuated. These are not fundamentally changed by a growing number of consumers, who are able to buy goods in the shopping malls and enjoy a “Western” lifestyle.
<img loading="lazy" decoding="async" src="https://counter.theconversation.com/content/85942/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" />Rather, the advocacy and promotion of social justice and equality based on truly transformative social policies with deeper redistributive effects, could in the long run create a much larger and more sustainable market.
Henning Melber, Extraordinary Professor, Department of Political Sciences, University of Pretoria
This article was originally published on The Conversation.

Why the private sector’s hype about the African middle class isn’t helpful

Many would like to consign the polarising debate about “white monopoly capitalism” <a href="https://mg.co.za/article/2017-01-27-00-when-a-catchphrase-trips-you-up/">(WMC)</a> in South Africa to the <a href="http://www.news24.com/MyNews24/why-white-monopoly-capital-is-irrelevant-20170407">margins</a>. They argue that its proponents are nothing more than Marxist ideologues or <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">mischievous political manipulators</a>
But, even if we query the integrity of the term WMC, its introduction into South Africa’s contemporary discourse is indisputably good for the country’s politics.
Above all, it’s an urgent reminder that the <a href="https://theconversation.com/south-africa-needs-to-fix-its-dangerously-wide-wealth-gap-66355">inequalities</a> of wealth, income and <a href="https://theconversation.com/why-white-men-still-dominate-the-top-echelons-of-south-africas-private-sector-44873">opportunity</a> in this country are not only extreme but still highly racialised. It forces people to ask why, even under a black government, a <a href="http://www.statssa.gov.za/publications/P0302/P03022014.pdf">white minority</a> continues to dominate the most productive parts of the economy.
The extremes of racialised inequality in the country are not just an affront to social justice but are also politically explosive. Granted, the implementation of <a href="http://www.labour.gov.za/DOL/legislation/acts/employment-equity/employment-equity-act">employment equity</a> and Black Economic Empowerment <a href="http://www.dti.gov.za/economic_empowerment/bee.jsp">(BEE)</a> has somewhat <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">ameliorated</a> racialised patterns of wealth and ownership. But, no one should be surprised when black people at the bottom of the heap get angry. Neither should people be surprised that there are politicians who, for reasons good and ill, are willing to exploit that anger and mobilise around it.
For the last twenty years, mainstream politics has talked a lot about addressing the extremity of inequality, but has done little about it. The governing African National Congress (ANC) has indulged in much <a href="http://www.anc.org.za/content/economic-transformation-commission-report">egalitarian rhetoric</a> while the opposition Democratic Alliance (DA) has targeted <a href="https://www.da.org.za/why-the-da/policies/job-business/economic-policy/">“equality of opportunity”</a>.
In practice, both have embraced the mantra that a rising tide in the economy will lift all boats. But, today the tide has long been out. The boats are stuck in the mud. And it’s taken the rise of the radical <a href="http://www.ujuh.co.za/flopping-bbbee-might-propel-radical-alternatives/">Economic Freedom Fighters (EFF)</a> to shake the major parties out of their complacency by espousing a revolutionary assault upon WMC.
That’s a major plus for the country’s politics. A serious conversation about the continued racialisation of wealth, inequality and poverty is needed. Yet the problem for the EFF, and those who simplistically target WMC, is the dismal nature of their sociology.
<h2>Monopoly capital under apartheid</h2>
White monopoly capital was at its most cohesive and concentrated during the late phases of apartheid. In 1981, <a href="https://zabalaza.net/.../who-rules-south-africa-an-anarchistsyndicalist-analysis-of-the-a...">over 70%</a> of the total assets of the top 138 companies were controlled by state corporations and eight privately owned conglomerate. These spanned mining, manufacturing, construction, transport, agriculture and finance.
Further concentration followed the mounting political crisis of the 1980s. Foreign companies disinvested and sold their assets locally. Unable to invest abroad during late apartheid, the conglomerates invested their excess capital by buying local assets that were often distant from their core business.
By 1990, just three conglomerates – <a href="http://www.angloamerican.com/">Anglo-American</a>, <a href="https://www.sanlam.co.za/Pages/default.aspx">Sanlam</a> and <a href="https://www.oldmutual.co.za/">Old Mutual</a> – controlled a whopping <a href="https://www.businesslive.co.za/bd/.../2013-11-24-unsexy-mutuals-seek-higher-profile/">75%</a> of the total capitalisation of the Johannesburg Stock Exchange (JSE). Given the overwhelmingly domestic and white nature of the ownership of these companies, as well as the astoundingly high level of concentration of capital in a handful of conglomerates, we could fairly – even usefully – refer to “WMC”. But things have changed considerably since then.
<h2>Changing corporate landscape</h2>
The democratic era that started with the ascension to power of the ANC in 1994 has seen major changes in a corporate structure which had historically revolved around a <a href="http://www.tandfonline.com/doi/abs/10.1080/03768359708439989">minerals-energy-complex</a> dominated by the major conglomerates.
The opening of the economy to the global market post-apartheid, led to major processes of <a href="http://www.tandfonline.com/doi/abs/10.1080/10108270.1996.11435064?journalCode=rsar19">“unbundling”</a>, as conglomerates shed their “non-core” assets in search of “shareholder value”. By 2016, <a href="http://salearnership.co.za/anglo-american-learnership/">Anglo-American’s share</a> of market capitalisation on the JSE had shrunk to as low as 15%.
In addition, foreign money poured in, some to purchase unbundled assets, some to invest in an expanding financial sector. Yet some simply sought to make short term returns from high interest rates. Correspondingly, the role of the banks and private investment institutions increased. By 2010, financial institutions (14%) – along with mining houses (37%) <a href="http://wiser.wits.ac.za/system/files/seminar/Southall2012_0.pdf">accounted</a> for over half of market capitalisation of the JSE by 2010. The economy was now dominated by a minerals-energy-finance-complex.
Alongside the growing financialisation of the economy, there has been a shift in racial patterns of ownership. At the end of apartheid, companies listed on the JSE were almost wholly owned by white South African investors. But, by 2016, (if we accept the calculations done by Alternative Prosperity) white South African ownership was down to just <a href="https://www.jse.co.za/articles/black-south-africans-top-100-companies-listed-on-the-johannesburg-stock-exchange">22%</a>.
Meanwhile, foreign ownership had leapt to 39%, black direct ownership (mainly through BEE schemes) to 10% and black indirect ownership (largely through pension funds) to 13%, with another 16% uncategorised.
Such statistics are always a matter of controversy. President Jacob Zuma recently insisted that black ownership of the JSE was as low as <a href="http://www.sanews.gov.za/south-africa/president-zuma-stands-jse-black-ownership-remarks">3%</a>. Yet the trend towards both greater foreign ownership and increased black ownership is indisputable. Three major issues follow.
<h2>Evolving ownership patterns</h2>
Large scale capital in South Africa is less monopolised and more diversified in its ownership than it was under apartheid (even if major corporates continue to dominate). It follows that the country needs to grasp how the nature of capitalism is changing. For a start, the growth in black pension funds reflects the strong upward <a href="http://ccs.ukzn.ac.za/files/Black%20Middle%20Class%20in%20SA3.pdf">movement of black people</a> into the higher ranks of the public service since 1994.
Even if we continue to refer to “monopoly capitalism” in these circumstances, it makes far less sense to refer to it, uncritically, as “white”. Yes, it’s probable that the major stake of foreign investment is ultimately owned (largely indirectly via institutional investments) by foreigners who are white. But, does this suggest that we would prefer that they were yellow or brown? Surely that takes us on to very shaky territory? Should we categorise the <a href="http://www.ujuh.co.za/guptas-exit-from-south-africa-signals-change-of-fortunes-for-zuma-but-this-war-is-much-deeper/">Gupta</a> empire – the politically-connected family at the centre of state captures – as “brown monopoly capitalism?”
Critics such as <a href="http://www.ujuh.co.za/the-chris-malikane-doctrine-white-monopoly-capital-myth-or-reality/">Prof Chris Malikane</a>, the economic adviser to Finance Minister Malusi Gigaba, have objected that the growth of black investment on the JSE is not significant. That’s because, they argue, black pension funds are largely controlled by white asset managers. And black direct investments via BEE schemes are largely funded through debt owed to white capital. These are certainly very real issues. But, is the main issue here the racial patterns of ownership and control – or the growing power of financial institutions and their lack of accountability?
All this means that it’s simply too crude, too simplistic and too out of date to depict the economy in broad brush terms as under the domination of white monopoly capital. The reality is more complex. It follows that suggestions that the decolonisation of the economy demands the nationalisation of WMC is profoundly bad economics.
The troubled experiences of South Africa’s state-owned enterprises such as <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">South African Airways</a>, <a href="https://theconversation.com/why-south-africas-power-utility-isnt-in-great-financial-shape-68441">Eskom</a> and <a href="http://www.fin24.com/Economy/petrosa-to-axe-staff-to-save-its-skin-20170505">PetroSA</a> do nothing to inspire confidence. What the economy might gain in terms of direct state ownership would be confounded by flight of capital and know-how. Class rule by capitalists would be replaced by class rule by state managers who would be no more accountable to ordinary citizens than their predecessors.
<h2>Innovative solutions needed</h2>
South Africa needs to devise far more inventive solutions than nationalisation to tackle the brutally unequal nature of its economy. Citizens need to pose profound questions about how to make international capital more accountable. They must ask questions about how to make the country’s corporate elite more accountable and how state capital can work productively with private capital while remaining responsive to local communities. And, yes, about how present patterns of corporate ownership can be not only de-racialised but democratised.
Yes, it’s a nice idea to think of overthrowing “white monopoly capital”, but we need to think very carefully of what we might replace it with!

White monopoly capital: good politics, bad sociology, worse economics

ANDREW LAPPING | Allan Gray
Wow, that valuation changed quickly!
A few years ago investors were very excited about investing in Africa outside of South Africa. People spoke of Africa rising, the growing middle class, financial deepening, less reliance on commodities etc. Now the popular refrain is, “How do I get my money out?” The “Get me out” sentiment applies both to corporates that invested in plant and machinery and financial market investors. Andrew Lapping questions this mentality as he discusses where we are finding value in Nigeria.
As you can imagine, the valuations investors put on assets vary widely, depending on whether everyone is desperately trying to buy or rushing for the door. But to what degree do asset prices change? Let’s consider a few Nigerian examples.
<h2>Beta Glass</h2>
Beta Glass is a Nigerian glass bottle business. People generally know how long it takes and what it costs to build a glass bottle facility, so it is a fairly easy asset to value.
In May 2015, private equity company GZI agreed to buy 70% of Beta Glass from its parent company at a price that valued 100% of Beta Glass at US$265m. The deal fell through when GZI could not secure US dollar funding. Move forward to today: the enterprise value for Beta Glass on the Nigerian stock exchange is US$33m. A valuation change from US$265m to US$33m is substantial for an easy-to-value physical asset.
<h2>Nestlé Nigeria</h2>
Nestlé Nigeria (NN) is a very well-run business and the blue chip of the Nigerian stock market. At its peak in December 2013, investors valued NN at 40 times historic earnings on the back of vast growth potential: the Nigerian middle class was growing and Nestlé was only selling a handful of its 50 000 products in Nigeria. As retail formalised, investors anticipated that the company would sell more products to more people at higher prices with lower costs. When a business trades on 40 times earnings, investors are looking at least 10 to 15 years into the future and factors such as recessions and currency fluctuations should make almost no difference to the underlying business value. In December 2013 investors thought NN was worth US$6.2bn. Three years later, after a period when the underlying value should have increased as the business reinvested and grew production, investors think NN is worth US$1.6bn. For us, despite the 75% valuation cut, NN now only looks reasonably valued.
<h2>Focus on financials</h2>
Our area of interest in Nigeria is the financial sector, where the sentiment is truly extreme. The price level and valuation are one measure of sentiment, the very low volumes traded are another, but the best indicator is the incredulous looks on people’s faces when you mention buying Nigerian banks.
Nigeria is a country of 175 million people with a Gross Domestic Product (GDP) supposedly larger than that of South Africa. The potential for Nigerian GDP growth is huge if the Buhari government can get a few things right. The government is focused on reducing corruption, sorting out the electricity supply, growing the non-oil economy and broadening the tax base. Even partial improvements in a few of these areas will have a very positive impact on economic growth.
<h2>Nigerian banks: Out of favour</h2>
Banks are an important part of any economy and tend to do better in good times rather than bad. The Nigerian banking sector is well developed and far more consolidated than only 10 years ago. The quality of lending and oversight is also vastly improved from pre-2008, where the main business of banks was lending money to management to invest in the stock market. Needless to say that ended badly, with a number of banks going bust and most of the remainder being bailed out to some degree.
Investors dislike Nigerian banks for many reasons. It is not currently possible to get money out of Nigeria. Investors are unlikely to put new money into a country when they have no idea if they will be able to get cash out and at what rate. The naira is marked at NGN307/US$, but the expectation is for the currency to weaken sharply if the government allows a free float. It is possible to get small amounts of money in and out of Nigeria at a rate of NGN410/US$ by buying and selling Seplat Petroleum, which is listed in both Nigeria and the UK. Given the recovering oil production, higher oil price and weak domestic demand, I think a fair rate is probably somewhere between the NGN410/US$ and the official NGN307/US$. The naira is already substantially weaker than the NGN163/US$ of October 2014.
A sector-specific reason for the dislike of Nigerian banks is the distrust of the balance sheets. Given the tough economic times and low oil revenues, the Nigerian banks’ non-performing loans (NPLs) seem to be understated. Zenith, the largest Nigerian bank, discloses NPLs of only 3% and took a bad debt charge of 1.5% last year. The most trusted balance sheet belongs to Stanbic IBTC, a subsidiary of Standard Bank, which disclosed NPLs of 6.4% and took a bad debt charge of 5.6% in 2016. Despite this substantial charge Stanbic was comfortably profitable and trades on 7 times historic earnings.
When dollar funding was readily available many banks made the mistake of taking dollar deposits and term lending these dollars to oil companies. As the dollar shortage developed the banks had to pay back the dollar deposits but could not get the dollar term loans back, leading to an acute funding squeeze.
<h2>The investment case for Nigerian banks</h2>
There is clearly a lot not to like, so why do we own Nigerian banks in the <a href="https://www.allangray.co.za/globalassets/documents-repository/fund/factsheet/Allan%20Gray%20Africa%20ex-SA%20Equity%20Fund%20(USD)%20(Class%20A)/Latest/Allan%20Gray%20Africa%20ex-SA%20Equity%20Fund%20(USD)%20(Class%20A)%20Latest.pdf" target="_blank" rel="noopener noreferrer">Allan Gray Africa ex-SA Equity Fund</a>? Clearly we think the businesses will survive. Consider Zenith, our largest position. Zenith’s total loans are only 3.3 times that of its equity. This is a very low ratio by global standards. In South Africa the ratio is closer to 8 times. The low advances to equity ratio means Zenith can take a huge bad debt charge and still have a substantial equity buffer. The large Nigerian banks are also very profitable, which allows for a greater margin of error. In 2016 Zenith could have taken an 8.9% bad debt charge and still broken even. A bad debt charge of that magnitude would bankrupt most developed market banks.
A further positive is that the founders own around 9% of both Zenith and Access Bank, another large Nigerian bank. This level of insider ownership is very unusual in the banking industry. When a person owns 10% of a large business they usually care far more about long-term sustainability than a manager who is just trying to get an annual bonus. The tough times in Nigeria are culling some of the weaker banks leading to a better, more consolidated industry.
Even if the Nigerian economy does not grow much the banks have plenty of growth potential. The Nigerian mortgage and retail lending market is practically non-existent and the vast majority of transactions are still cash rather than electronic. Previously retail lending was difficult as Nigeria did not have a national identity (ID) system. This is changing as a biometric ID system is introduced. According to the World Bank, Nigerian bank loans equate to 23% of GDP, compared to 179% in South Africa and 45% in Kenya.
<blockquote>&#8230;THE NIGERIAN BANKING SECTOR IS WELL DEVELOPED AND FAR MORE CONSOLIDATED THAN ONLY 10 YEARS AGO&#8230;.</blockquote>
Zenith’s return on equity (ROE) has averaged 16.5% over the past 10 years, which includes the recent down cycle and a very difficult 2009. In future Zenith should be able to achieve a similar ROE to that achieved historically. If this is the case, the bank will earn NGN3.63 per share; the current price is NGN14.00. Zenith pays out 50% of its earnings as dividends; this indicates a 13% dividend yield – an attractive prospect.
What investors are willing to pay for a unit of Zenith’s net asset value (NAV) has fallen from 1.4 to 0.6 despite Zenith consistently growing its NAV, as shown in <a href="https://www.allangray.co.za/globalassets/articles/qc/2017/q1/andrew-graph1.png" target="_blank" rel="noopener noreferrer">Graph 1</a>.
<img loading="lazy" decoding="async" class="alignnone size-full wp-image-121427" src="http://cnbc.africa/wp-content/uploads/2017/05/andrew-graph1.png" alt="" width="960" height="425" />
<h2>A reasonability check</h2>
The 10 largest banks in Nigeria have a market capitalisation of US$6.5bn. These 10 banks account for almost the entire sector, so it is possible to buy the Nigerian banking sector for US$6.5bn. Yes, some of these banks may be insolvent, but if they close down the deposits and customers will move to one of the other banks in the top 10. These banks have value for a few reasons: they hold US$50bn in customer deposits; they have significant infrastructure and provide banking services to the largest economy in Africa with a population of 175 million and they generated US$1.5 billion in profits over the past 12 months. To me US$6.5bn seems fairly cheap. In 2008, investors thought these 10 banks were worth US$35bn when they were much smaller, inferior businesses.
For context Capitec, a bank that offers low-cost transactional banking and microloans to the low and middle market segment in South Africa, is valued at US$7.5bn, 15% more than the entire Nigerian banking sector, as shown in <a href="https://www.allangray.co.za/globalassets/articles/qc/2017/q1/andrew-graph2.png" target="_blank" rel="noopener noreferrer">Graph 2</a>. Capitec generated US$240m in profits in the year to August 2016, only 16% of the profits of the top 10 Nigerian banks. Either Capitec is somewhat expensive or Nigerian banks are very cheap. Will Capitec or the sum of the current largest 10 Nigerian banks be worth more in 2027? I know where my money lies.
<img loading="lazy" decoding="async" class="alignnone size-full wp-image-121428" src="http://cnbc.africa/wp-content/uploads/2017/05/andrew-graph2.png" alt="" width="960" height="425" />
Some may argue that all banks in Africa ex-SA deserve to trade on low valuations because the risks are so great. Consider Commercial International Bank (CIB), commonly regarded as the best Egyptian bank. During the Arab Spring in 2011 when risks were high and there was literally blood on the streets, CIB traded on 1.3 times net asset value. Now that investors like Egypt, CIB trades at 4.2 times NAV.
<h2>When is the best time to buy a share?</h2>
The time to buy a share is when earnings are low, those earnings are on a low multiple and the currency the asset is denominated in is weak. These opportunities don’t arise when things are going swimmingly, but rather when the risks seem overwhelming. Fortunately the risks to Nigerian banks are well reflected in the extremely depressed valuations.

middle class

Kuku Foods secures opening of first KFC franchise in Rwanda

Why the private sector’s hype about the African middle class isn’t helpful

White monopoly capital: good politics, bad sociology, worse economics

Nigeria: Finding opportunities where others fear to tread

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middle class

Kuku Foods secures opening of first KFC franchise in Rwanda

Why the private sector’s hype about the African middle class isn’t helpful

White monopoly capital: good politics, bad sociology, worse economics

Nigeria: Finding opportunities where others fear to tread

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