JOHANNESBURG – South Africans spend almost four times more on alcohol than on out of pocket healthcare, over one and a half times more on clothes than on education and about the same on DStv subscriptions as on retirement annuities.

At first glance, the numbers might be hard to swallow, but local consumption expenditure is not as straightforward as it may seem.

Speaking at consulting firm Eighty20’s Conspicuous event, partner Illana Melzer, said South African expenditure patterns are heavily influenced by the delivery of free services by government (such as housing, health care and education), access to credit and the ‘need’ to hide poverty with retail items.

Free services

Melzer said of all the things the state provides for free, its housing programme has had the most impact.

According to Census data, 7.2m households lived in a formal dwelling in 2001. This number increased to 10.7m by 2011.

At the same time, dwellings categorised as “shacks in backyard(s)” have increased from 460 000 to 710 000 during the same period.

Melzer says when a household gets access to a house and services, the best way to generate an income to support it, is often to erect a shack in the backyard. In some cases, only the backyard space is rented out, and the person who moves in, brings his own shack, she says.

Tied to improved access to housing, is services such as toilets, piped water and electricity, which has led to a phenomenal shift in the living standards of many South Africans. AMPS data suggests that in 2004, almost half of households were categorised within LSM 1 to 4. This number has since declined to 28%, she says.

Melzer says there has been a shift in living standards in South Africa that exceeds the shifts in incomes.

Expenditure patterns are significantly affected by free services provided by the government. Data from Statistics South Africa’s Income and Expenditure Survey of 2010/2011, adapted by Eighty20 (see infographic below), suggest that around 2% of the consumption expenditure of households at the bottom end of the pyramid is on healthcare.

However, distortions created by free government services do not only impact low-income households, but all other segments of the market too. Melzer says at the top end, consumers are paying for numerous services that government doesn’t deliver very well (eg public hospitals or schools) and consumers have “bought up” into the private sector.

There is also a so-called ‘gap market’ of consumers who are too affluent to qualify for government housing, but at the same time, can’t access a traditional mortgage. A similar situation is evident in the market for education and healthcare services.

Credit

Melzer says expenditure patterns are also shaped by access to credit.

Data from the National Credit Regulator’s Consumer Credit report shows a dramatic shift in the credit market in South Africa between 2008 and 2012 (see infographic below), she says.

A mortgage bubble?

In 2008, around half of credit extensions were for mortgages.

Melzer says was a positive development because people who have a mortgage have an incentive to go to work to ensure that they keep their house. It sets up incentives to invest in assets and participate in the economy.

However, following the financial crisis, credit extension for mortgages took a dip and secure loans (car finance) has now overtaken mortgages. Moreover, unsecured credit is poised to surpass mortgage lending, she says.

This is a phenomenal turnaround.

“And in fact we focus so much on whether there is an unsecured credit bubble in South Africa that we have forgotten to ask the most important question which is: What are we going to do about mortgages? Because we can’t have an emerging middle class in South Africa that can’t buy houses and if you need to buy a house, you have got to get a mortgage.”

Those who can’t get access to a mortgage might just decide to buy a car. Or if they can’t access secured credit, they might be lured into the unsecured credit market.

Cheaper than therapy

Qualitative data also points to consumers buying items that could hide their actual financial position.

Melzer says spending on clothing in South Africa is phenomenal. Talking to people about their spending patterns, the word “dignity” comes up again and again, she says.

Alain de Botton, philosopher and writer, has written a book on this phenomenon called Status Anxiety, she notes.

The funeral industry in South Africa has also benefitted from this trend.

What this means for business

Melzer says businesses should ask themselves how they participate in the “free” market. Do they have a loyalty programme and, is it working?

They should also think about the impact of free government services. The under-served “gap market” could be a lucrative sector.

Moreover, customers aren’t necessary buying what businesses think they are selling. A clothing retailer might think it is selling clothes, when in actual fact it is selling dignity or status.