GDP per capita – the economic pizza

• South Africa
• July 9, 2020

The attractiveness of a country to investors and corporates is rarely a simple assessment. For consumer-facing businesses in particular, much of the analysis depends on population demographics and wealth trends.

A number of wealthy countries have little or no population growth and slow GDP growth. The absolute level of wealth is attractive for new market entrants, but the trend is not. In some cases, the trend for population growth is negative e.g. Japan’s population has shrunk by around -0.2% every year since 2010.

These wealthy countries have a high GDP per capita (GDP divided by number of people), but low overall growth. They drive Porsches, but Porsche sells a similar number of cars every year (obviously ignoring the impact of competitors etc.) – any new entrants to these markets would need to fight for market share, as they cannot rely on the overall market growing significantly to make space for them. Of course, I’m simplifying things (e.g. ignoring trends in car sales by type of car), but you hopefully get the picture.

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At the other extreme, emerging markets typically offer a combination of two useful trends for FMCG (fast moving consumer goods) businesses:

• Population growth; and
• LSM migration and urbanisation aka the “rise of the middle class”

Population growth gets corporates like Unilever and Tiger Brands excited, because people buy stuff. It’s as simple as that. More people means higher sales. Unfortunately, higher sales doesn’t always mean higher profits, as many large companies have learned the hard way.

The profit question requires deeper analysis based on the second trend: LSM migration and urbanization. The two are inextricably linked, as people flock to cities in search of better jobs and therefore more money.

LSM refers to Living Standards Measure and is a reasonably helpful way to segment and analyse a market, although it isn’t a perfect framework by any means.

For example, large premium grocery stores sell food to LSM 10 customers and township spaza shops sell to LSM 1 customers. It’s never that simple though, as people with low-paying jobs in the LSM 4 – 5 categories often shop at spaza shops near their homes. Similarly, LSM 6 customers sometimes buy products from supermarkets in premium malls. No business has consumers from solely one LSM group.

Understanding demographics and wealth trends are key to getting it right in whatever market you operate in as a FMCG company. International FMCG companies and investors consider various metrics, but GDP per capita is among the most important of them all.

If GDP is the pizza, GDP per capita is the size of each slice

The extent to which a pizza fills you depends on how many people you are sharing it with. Even the most delicious pizza with extra toppings won’t touch sides if you cut it into 32 pieces. There’s a point at which you need to order more pizzas.

If you can’t afford to order more pizzas, then people are going to feel dissatisfied. At worst, they may go hungry.

Get out the pizza cutter

Almost as a rule, emerging markets have higher population growth than developed markets. There are always more people looking for pizza. Even among emerging markets though, the population in South Africa is growing quickly.

The latest Stats SA release suggests population growth of approximately 1.4% in the past 12 months (a net gain of 800,000 people, taking the total population to 59.6m). For comparison purposes, Brazil is growing at just under 1%, India is growing at just over 1% and China is growing at around 0.5%.

Among frontier markets (less developed than emerging markets), it’s worth highlighting several important African countries with growth rates of around 3%: Angola, Uganda, Congo, Tanzania and Zambia. That’s why Africa has been a focus area for FMCG companies desperate to provide pizza slices to the masses.

Paying for the pizza

This is where GDP per capita comes in, or the number of pizza slices per party attendee. Someone needs to pay for all this pizza. If most of the people at the party are unable to contribute to the kitty to buy pizza, everyone gets less pizza.

If population growth is outpacing GDP growth, you just don’t have enough pizzas.

South Africa finds itself in an unpleasant situation where we have hundreds of party guests and only a small order en route from the local pizzeria. It barely has the toppings we love, because things are tight and we have to spend money wisely. In fact, we are hoping that two margheritas will feed 40 hungry people. Soon, just one dry focaccia will have to do.

This isn’t the recipe for an enjoyable party with happy attendees. Many attendees will riot, burning the few pizzas available and probably the house as well. This will stop anyone from wanting to host any more parties.

If our economy was growing, high population growth would be good news economically. Unfortunately, our economy was shrinking well before lockdown. This means we are running out of pizza and running out of it quickly. We keep borrowing money to buy more pizza, but our credit with the local pizzeria is starting to reach its limit.

You might want to order a pizza to help you deal with the trauma of this chart. It shows the period just after the .com crash until the Soccer World Cup, or the BZ period (Before Zuma). The downward slope that looks like a fun ramp at the skate park is DZ (During Zuma).

This chart only run until 2019 and is from the World Bank. They measure GDP per Capita in USD, so this is our wealth by global standards and would be impacted by a depreciating Rand. 2020 isn’t on this chart, but you can rest assured that it will be a nosedive of note.

Just because we have population growth doesn’t mean we are attractive to international investors at the moment. Our current level of population growth is a serious concern for me, as we just don’t have the economic growth to support it and feed all these people.