Where to establish your business
There are two ways to reach your target market. The first is to hit the road and take your goods or services to your potential customers and the second is to set up shop and have potential customers come to you. Financial services professionals employ both tactics in their quest to write new business. The trick to a successful practice is to understand your target demographic. You must consider factors such as age, race, location and spending habits. You’re not going to impress clients from shoddy offices – nor will you close too many deals if you’re canvassing in the wrong target market.
Real estate agents often chant the mantra “location, location, location” – a catch phrase that applies for every client-facing business. You’re not going to open an upmarket hair salon next to a corner café for example, nor would you open a financial services practice alongside a meat market. Where can you get information about the business potential of a certain area? We turned to a recent Bureau of Market Research (BMR) report titled Market Potentials for South Africa by Province, Municipality and Population Group (2008) for some answers.
Calculating market potential
Before we take a closer look at the report findings we need to consider how BMR conducted its research. In their press release they state that market potential was calculated using information from previous surveys of income and expenditure in the various areas. The BMR assessed the number of potential buyers, population distribution and average annual consumption of products and services in each area. An area with large numbers of affluent people achieves higher market potential for specific products or services.
Race and buying power still linked
If you’re sick and tired of race classification you might wish to skip the following paragraph. The report analyses buying trends by different population groups. Despite making up only 10.8% of the South African population, whites still dominate household consumption expenditure, accounting for 40.2% of the total in 2008. Blacks are still playing catch-up, increasing their share of household consumption expenditure from 38.6% in 1993 to 47.1% by the end of 2008. These statistics vary significantly from province to province. So, for example, in the Eastern Cape 63.8% of this expenditure is attributed to blacks, 26.9% to whites, 8.1 % to coloureds and 1.2 % to Asians.
Focus remains on urban areas
The majority of economic activity is confined to centralised areas and developed municipalities. Returning to our Eastern Cape example the report observes that 46% of all expenditure in that region originates from just two municipalities, namely Buffalo City Local Municipality (East London) and Nelson Mandela Bay Metropolitan Municipality (Port Elizabeth). In the Free State province Mangaung municipality (35.2%) and the Matjhabeng Local Municipality (14.7%) account for the bulk of household consumption expenditure. Add the next three biggest municipalities and you find 75% of the province’s buying power rests in just five municipalities. The situation repeats in each of the provinces. Households in the eThekwini Metropolitan Municipality area in KwaZulu-Natal make up 52 % of consumption expenditure in that province.
The City of Cape Town Metropolitan Municipality is responsible for more than three quarters of household consumption expenditure in the Western Cape and accounts for 10.7 % of all household consumption expenditure in South Africa. Meanwhile, the total household consumption expenditure of the Northern Cape comprises only 2 % of South Africa as a whole. Expenditure distribution is more spread out in the Limpopo and Mpumalanga province due to a lack of major metropolitan areas.
Gauteng remains the undisputed business hub
Professor Carel van Aardt (Research Director of the BMR Income and Expenditure Division) noted that Gauteng accounted for 35% of expenditure across South Africa. “The three large metropolitan areas (Ekurhuleni, Johannesburg and Tshwane) jointly accounted for household consumption expenditure of R441bn in 2008. This works out at 31.8% of all household consumption expenditure in South Africa and approximately 90% of household consumption expenditure in Gauteng,” said Van Aardt. Mrs Marietjie Coetzee (BMR Senior Computer Scientist) expanded on this finding. She noted that the six metropolitan municipalities in South Africa are also the top municipalities with regard to household consumption expenditure.
Van Aardt and Coetzee believe the study shows clear patterns and trends with regard to market potentials in South Africa. Marketers must consider the growth and shift in household consumption expenditure since 1993 and the large per capita consumption expenditure differentials between provinces. Per capita consumption expenditure in Gauteng tops R52 000 per annum, while the comparative figure is just R15 000 in Limpopo. These differences repeat in metropolitan areas too. Per capita consumption expenditure was as high as R60 636 per annum in the City of Johannesburg Metropolitan Municipality and as low as R6 780 per annum in the Ntabankulu Local Municipality in the Eastern Cape!
You have to make sure your business is located in an area where average per capita consumption expenditure is high. Failing to do so is like casting fishing nets in an empty sea!
Editor’s thoughts: The Market Potential for South Africa 2008 study contains few surprises. Most business owners are aware of the concentration of spending power in urban areas, particularly the country’s largest metropolitan areas. Is the financial services industry doing enough to extend services (marketing, advice and distribution) in poorer communities? Add your comments below, or send them to [email protected]
