How the fallacy of growing consumer class was born
By Peter Theuri | August 31st 2021
When Peter and Sue Muraya made forays into the property market in 2006, their plan was to build affordable apartments, town houses, villas as well as malls for the middle class. And they did.
They criticised the then developers who had allegedly forgotten the millions of middle-class families that were also eager to be part of what the former chairman of the United States Federal Reserve, Alan Greenspan, described as the ‘new normal’ of owning a home.
At first, critics, including financiers doubted them. “Everyone said it was impossible. When we started talking in 2009 of building 1,000 houses, everyone thought we were being crazy,” Mr Muraya told The Standard in an earlier interview.
But soon they would surmount the hurdles. Banks, which had frowned on them, were fawning around them. Every lender wanted to be part of Suraya’s success story.
Then things started to unravel. The so-called middle class never moved into the high-end apartments that Suraya Property, owned by the couple, and many other developers, had built.
Suddenly, the Murayas were besieged, running away from irate investors while sparring with banks and contractors in courts.
But so were other developers who had built huge malls on the back of a burgeoning middle class.
The façade of a growing middle class that had attracted luxurious cars, drinks and clothes was falling apart.
Most of the investors were lured by rave reviews of Africa’s 300 million-strong middle class, and The Economist magazine’s “Africa Rising” catch-phrase which was informed by the commodity boom.
Kenya’s gross domestic product (GDP), or the size of the national cake, picked up at a furious pace with the election of President Mwai Kibaki, lifting millions of people out of poverty and spawning a strong consumer class with a penchant for luxurious products.
In 2017, Koome Gikunda, a director at private equity firm Actis that built Garden City Mall, told The Economist that before constructing the shopping complex, they employed a unique way of determining that their catchment area was populated with “a middle class affluent enough to shop at the mall.”
“We hired a firm who flew over the area in a plane and literally counted TV satellite dishes,” he said.
They too had miscalculated. The middle class turned out to be way less broad than they had imagined, with a “floating middle class”- those who are not poor but for whom a slight disturbance can plunge them back into the abyss of poverty - appearing to have been a big percentage of what was widely considered middle class by the African Development Bank.
So, as the economic turmoil of the Covid-19 pandemic swept across the country, wiping out consumers’ purchasing power, Nairobi was left with ghost malls. High-end residential units remained empty.
Many businesses at Garden City, including restaurants, a clothes and shoes store and a beauty parlour, faced the auctioneers’ hammer owing to rent arrears. Since, several businesses have exited.
Which begs the question: where do all these middle-class customers vanish to when the businesses open to tap into the market?
“The problem is that we have a lot of people who want to live above what they can afford. They can afford these goods, but they are looking elsewhere, for what should be above their reach. It is a peculiar Kenyan behaviour,” says Toyota Kenya Sales, Marketing and Logistics general manager Andrew Omolo.
“You will find someone going for a 10-year-old car that costs the same as a new car but whose model is superior and which will satisfy his ego.”
He says such overblown egos are the undoing of people who shun the comforts they can afford for the luxuries above them.
Peter Kahi, an experienced insolvency practitioner and partner at consultancy firm PKF, says the failure of businesses that bank on a promising middle class but end up frustrated is deeply rooted in poor feasibility studies.
“You have to do your market studies well prior to opening that business. Identify your potential clientele before starting. You cannot force a good on consumers and then blame them when they fail to purchase,” he says.
The behaviour and culture of the target market, and the environment they live in, have to be well studied.
“A supermarket was stocking dog food in their Jogoo Road Branch while their Westlands Branch did not have the same commodity,” says Mr Kahi.
“How could you then blame customers for not buying when you set your priorities just so wrong?”
He says Deacons, a company which operated retail establishments including franchise and department stores, erred by going into expensive malls, thus losing customers who are keen on accessing shops as casual walk-ins.
“When supermarkets in the malls crumbled, leading to a drop in footfall, the businesses also suffered,” says Kahi.
Bitange Ndemo, professor of entrepreneurship at the University of Nairobi’s Business School, says as a junior lecturer back in the day, he could afford to live in Kileleshwa, Lavington and Spring Valley estates.
Current wages for lecturers in the same position cannot enable them to live in such prestigious places.
“There is an erosion of the middle class,” Prof Bitange says. “There is a housing shortage in Nairobi but flats in Kileleshwa are empty.”
The assumption that there is a middle class capable of occupying such houses misled investors into burdening such prime areas with what is now turning out to be dead stock.
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