What investors don't understand about Kenya's middle class

Second hand cars at shipping yard in Japan. (Photo: Courtesy)

Last year, a few Kenyans made their way into different showrooms in the country and bought a total of 276 brand new salon cars. A mere 276 nice-looking and cozy sedans, hatchbacks, compact cars and minivans whose riders would enjoy a gratifying muted hum, were bought last year!

Of course, a year before, 119 more of such cars were sold, but it was still an unimpressive number for a country that boasts the fourth largest middle class population in Sub-Saharan Africa, according to a much-criticised 2011 paper by the African Development Bank (AFDB).

This is not to say the not-so-rich Kenyan consumers, like any other typical middle-class around the world, are not fond of cars. As XN Iraki, a lecturer at the University of Nairobi puts it: “A car is a status symbol.” And, if only to fit that status, Kenyans did buy a lot of cars in 2016, just not from the glossy showrooms.

Official figures show 12,490 saloon cars and 54,120 station wagons were registered in 2016. A good number were fairly sleek and powerful, but a few others were squeaky and rusty. A huge chunk of these cars, over 80 per cent, were second-hand cars. Of course, if you add in commercial vehicles, the number of both brand new and second-hand vehicles surges up to more than 10,000 for the former and over 90,000 for the latter.

Brand new cars - an ostentatious mark of an archetypal middle class lifestyle characterised by an affinity for comfort and luxury - are just not being bought. At least not from Kenyan showrooms.

Instead, cheap, imported second-hand cars mostly from Japan are pouring en masse onto the Kenyan roads. With improved global supply chains- thanks to the Internet- Kenya like most other African countries has become, according to a UAE publication, a place “where old bangers go to die.”

It is not people struggling with the basics of life that are taking up these rejected cars. It is salaried employees with a medical insurance and retirement plan; those fortunate enough to remain with some extra cash after ensuring there is enough food in their refrigerators, rent is paid, fees is wired to the children school’s account, and all the family members have clothes to keep warm.

The money they remain with - which economists call disposable income - can be used in different ways, depending on an individual: save it to build a home or just splurge it on booze. The money can also be left to pile up to the point when it is enough to get them started on the process of severing links with the discomfiting matatu transport.

But as Development Economist Anzetse Were told Weekend Business in a recent article, lack of a strong welfare programme means that these individuals’ disposable income also goes into paying school fees for their siblings or hospital bills for their ailing parents in their rural homes. With a ravaged disposable income, most of these individuals will go for cheap second-hand cars that their owners in Europe and North America and Japan find, as The Economist succinctly put it: “good to have but better to sell.”

True, most would love to drive better cars that are well-configured for tropical environment and which will not embarrassingly develop mechanical breakdowns every now and then. But the cost of this convenience is a significant deterrent.

Pricing, says Charles Munyori of the Kenya Auto Bazaar Association (KABA), is the main reasons Kenyans prefer prowling the internet for a secondhand car in Japan for a visit to one of the many showrooms in the country. But, Munyori insists, even as Kenyans go for secondhand cars they are also very keen on quality.

While they can afford the cheapest car in a show-room, they also realize they can get a much better second hand car at the same price.

Munyori gives an example of VW Polo which is going for around Sh1.6 million and a second hand Toyota Premio going at Sh1.2 million. He says, given a choice, most Kenyans would go for the second-hand Toyota Premio which is “bigger and of better” quality than VW Polo.

“The cheapest Toyota Corolla being sold in Toyota showrooms in the country is going for Sh2.6 million, and yet you can get a Toyota Axio which is less than eight years with better mileage at Sh1.2 million,” says Munyori.

Maurice Ochieng’, one of the many second-hand car dealers in Nairobi, says he just sold Mitsubishi L200 pick up double cabin at Sh2.4 million “some few weeks ago.” “People buy second hand cars for different reasons, but mainly because we sell cheap and quality cars,” he says noting that in a showroom, the pick-up he sold would go at between Sh3 million and 3.5 million.

“Look, if you go to a show-room you will find the cheapest car going at Sh1.5 million, out here that is enough to get you a posh car such as an Audi or Mercedes Benz that is in good shape,” he adds.

Iraki agrees that cost is a big factor. “Kenyans will do Maths: If a locally assembled car goes for Sh1.6 million and a 4WD mitumba will cost slightly more, they go for the bigger car. After all, they are driving a new car. The eight years of use in Japan or wherever it is imported from is irrelevant,” explains Iraki.

Generally, a combination of a poor credit system and a slowdown in the private sector has also ensured that show-room cars remain elusive to the many salaried workers in the country. “Car sales are typically financed by banks and Saccos so a slow-down in bank lending is likely to affect vehicle sales,” says Corporate Finance Manager at ABC Capital Johnson Nderi.

Just as car sales have gone down, so has the growth of credit to the private sector which for the last two years has been sluggish, with the slowest uptick being experienced in July 2017 when credit extension to the private sector grew by 2.1 per cent, according to Central Bank of Kenya (CBK).

CBK Governor Patrick Njoroge has insisted that the slowdown has nothing to do with the Banking Act 2016 which proscribed banks from arbitrarily charging interest rate of loans. Indeed, the slowdown started before way before the controversial legislation took effect in September 2016.

Today, all loans charged by financial institutions have been capped at not more than four per cent above the Central Bank Rate, which currently stands at 10 per cent.

Banks have also come under attack for reportedly sitting on cash that they could easily lend to borrowers. But financial analysts such as Nderi insist that with heightened regulations against lenders- the latest being a new financial reporting standard that requires lenders to provision for loans based on predicted losses- borrowers will be ultra-vetted for their ability to repay.

It might also be that as much as banks would like to lend, they find it difficult to do so in a constrained business environment in which a number of firms have offloaded workers to stay afloat even as some publicly listed ones have issued profit warnings. “The economic slowdown in the private sector is the other culprit,” adds Nderi.

Squeezed between a heavy-handed regulator and a credit-hungry, battered private sector that is copiously shedding jobs, a number of banks have been forced to turn down a payslip as a security for loans. Most banks have resolved not to process unsecured loans, making it even harder for salaried people to buy any car, not just brand new ones.

“They (banks) are not making money from that (lending) line. Every banking product has a cost and price,” explains Nderi, noting that if the price is less than cost “then it does not make sense.”

Despite these difficulties, the market of brand new cars continues to attract new players. German car-maker Volkswagen and France’s Peugeot have made a come-back, lured by the prospect of Kenya’s growing middle class. They might be wrong, at least in the short-run.

According to a recent article by the Harvard Business Review, Volkswagen and Peugeot might have thrust themselves headlong into “the conundrum facing multinational corporations (MNCs)” operating in Africa, most of which have been enticed by the narrative of “burgeoning middle class.”

Despite the narrative, fewer and fewer cars have left show-rooms just as shopping malls have remained eerily empty for extended periods. This, says the Harvard Business Review article, is because products being sold in these places “are too expensive for residents to afford.”

Cultural attitudes

The authors seem to be scoffing at most of the MNCs desperately flocking into Africa for product, pricing and marketing strategies that are informed by myths, such as that “Africans are conspicuous consumers.” As a result, noted the authors, MNCs have “overestimated demand for status-enhancing products” on the continent.

Noting that African consumers value saving and education, and prize durability over flashiness when buying higher-cost items, the article tipped Kenyan consumers to perform well in the future. “Consumers there (in Kenya) will continue to spend cautiously due to cultural attitudes prioritizing saving and support for extended family networks,” reads part of the article which also ranked 49 Sub-Saharan African markets in terms of how easily wealth would filter through society.

They regretted that headline economic indicators, such as gross domestic product (GDP) or demographic data, they argued, has for long been misleading some of these MNCs.

“In many of the fastest-growing African markets, average purchasing power is very low because economic growth has not created well-paying jobs, but instead has created a small elite class and a large poor population with little spending power,” noted the US-based publication.

Nothing demonstrates this unequal growth better than sales of new sports utility vehicles (SUVs) compared to salon cars. Brand new SUVs such as Ranger Rover, Jeep, Volkswagen Toureg, RAV4, Toyota Land cruiser, BMW X5 and many others that for long have been seen as rich-man’s toys were sold more than salon cars. In 2016, there was one brand new salon car bought for every seven SUVs that left the show-rooms.

It is not surprising given that in the same year, as the going got tough for ordinary Kenyans, the economy suddenly produced more multimillionaires. 9,400 people were valued at more than one million US dollars in 2016-an increase from 8,500 in 2015, according to Property consultancy Knight Frank’s The Wealth Report.

Thus to get a better picture of African consumers’ purchasing power, the Harvard Business Review team used “thousands of aggregated data points” came up with the Consumer Class Conditions Index (CCCI) that sought to rank 49 Sub-Saharan African countries for consumer class (not middle class) growth.

These data points included, but were not limited to, employment conditions, welfare, social exclusion, health, education levels, level of economic diversification, business environments and quality of governance. With a score of 55.35 Kenya was ranked eighth in the region, behind Mauritius, Seychelles, South Africa, Botswana, Namibia, Cape Verde and even Rwanda.

Kenya’s consumption prowess is far from glamorous as had been shown by the AFDB report which ranked Kenya’s middle class the fourth largest on the region, with 44.9 per cent of Kenyans falling spending between $2 and $20 (Harvard Review placed the minimum threshold at $3.90- the point at which you can spend beyond mere survival).

Fix the price

In the Middle of the Pyramid: Dynamics of the Middle Class in Africa, Kenya was even ahead of South Africa. The truth, as the Harvard Business Review article puts it, Sub-Saharan Africa markets “sales and profits...have not lived up to businesses’ expectations.” But, why are the likes of Volkswagen, who are most likely to overprice their cars and scare away a huge chunk of the Kenyan consumers, still trooping in?

Munyori thinks it is because they have a captive market in Government, and this also explains why they are charging exorbitant prices even when the franchise and contract assemblers are bringing in the car parts duty-free.

“The Toyota Corolla that they are now selling at Sh2.6 million, if I were allowed to bring it from a show-room in Japan at Sh1.2 million- even if I were to pay all the freight charges and taxes, I would still not pay Sh2 million,” says Munyori, alleging that a Government procurement officer and the car dealer conspire to fix the price astonishingly high. Weekend Business could not independently verify these claims.

But, these automakers, and indeed other multinational corporations flocking into the Kenyan market, might also be having different reasons for defying the warning signs. Iraki would like to believe they are looking at “the future market.”

“As we get wealthier, they know we shall shift away from mitumba cars and start buying new cars. We do that with clothes and other items,” says Iraki.