Market segmentation of the consumer market in South Africa

The consumer market can be segmented in various ways. This article concentrates on the calculation of the size of the South African consumer market, segmented by geographical area and demographic characteristics of households. Geographical segmentation is shown by province while the size of the South African consumer market is shown by population group, income group, life stage and life plane. The determining factors in segmentation of households by life plane and life stage are the level of education and age of the head of the household. Six life planes and five life stages are distinguished. In the absence of national expenditure data by Living Standards Measure (LSM®)* group, segmentation by LSM group is explained by means of expenditure data of households in Gauteng. Ten different LSM groups can be distinguished, depending on the amenities owned by the household, services used by them and where they live. Segmentation by type of outlet where consumers spend their money is explained in the article according to two major types of outlets namely, formal and informal outlets, each further subdivided into four groups. * LSM, SAARF and AMPS are all registered trademarks. For covenience, these are indicated as such only on their first occurrence in the text. Later occurrences are deemed to refer to the registered trademarks. Business people often use the term market to cover various customer groupings. They talk about need markets (e.g. the diet-seeking market), product markets (e.g. the shoe market), demographic markets (e.g. the youth market) and geographic markets (e.g. the Botswana market); or they extend the concept to cover other markets, such as voter markets, labour markets and donor markets. Kotler (2003:10) distinguishes five basic markets as shown in Figure 1. Figure 1 Structure of flows in a modern exchange economy 62 The impact of cobranding on customer evaluation of brand counterextensions Manufacturers go to resource markets (raw-material markets, labour markets, money markets), buy resources and turn them into goods and services, and then sell finished products to intermediaries, who sell them to consumers. Consumers sell their labour and receive money with which they pay for goods and services. The government collects tax revenues to buy goods from resource markets, manufacturer markets and intermediary markets, and uses these goods and services to provide public services. Each nation’s economy and the global economy consist of complex interacting sets of markets linked through exchange processes. The structure of the South African consumer and business market is shown in Figure 2. Manufacturers go to resource markets (raw-material markets, labour markets, money markets), buy resources and turn them into goods and services, and then sell finished products to intermediaries, who sell them to consumers. Consumers sell their labour and receive money with which they pay for goods and services. The government collects tax revenues to buy goods from resource markets, manufacturer markets and intermediary markets, and uses these goods and services to provide public services. Each nation’s economy and the global economy consist of complex interacting sets of markets linked through exchange processes. The structure of the South African consumer and business market is shown in Figure 2. OBJECTIVES OF THE PAPER The purpose of this paper is to look at the size and structure of and means of segmenting the South African consumer market. This kind of information is vital for, inter alia, retail companies to take decisions on the location of their outlets. The consumer market represents expenditure on products and services by private households and non-profit institutions. However, non-profit institutions will be excluded in the rest of the paper. Private households can be segmented according to a wide variety of characteristics, which will be discussed in the next section. There are also various ways of segmenting the business market, the most common being segmentation according to the Standard Industrial Classification (SIC), segmentation according to geographical location and segmentation according to size group. The latter can be measured by employment, turnover and/or electricity consumption. However, segmentation of the business market falls outside the scope of this article. Figure 2 Structure of the potential consumer and business market in South Africa International Retail and Marketing Review 63 SEGMENTATION OF THE CONSUMER MARKET Churchill and Peter (1998:201) describe market segmentation as a process of dividing a market into groups of potential buyers who have similar needs and wants, value perceptions or purchasing behaviour. The particular market segment that a marketer selects to serve is called a target market. Kotler (2000:263–71) distinguishes five types of consumer market segmentation, namely behavioural, demographic, geographic, multiattribute and psychographic segmentation. Churchill and Peter (1998:205–17) distinguish the following types of segmentation: types of segmentation: demographic and psychographic segmentation, segmentation based on thoughts and feelings, segmentation based on purchase behaviour and multiple bases for segmentation (geodemography). Strydom, Cant and Jooste (2000:106–18) distinguish four types of segmentation, namely geographic, demographic, psychographic and behavioural segmentation. The most common means of segmenting consumer markets is to use demographic segmentation, which involves dividing the market on the basis of population characteristics. This may be because of the relative ease with which the approach can be applied. Information about variables such as gender, age, race or ethnicity, income level, occupation, education level, and household size and composition is readily available from population censuses and other official statistics. With geographic segmentation, the market is divided into different geographical units such as provinces, regions that may extend across provincial borders, countries or a group of countries such as the SADC countries, metropolitan areas, cities or neigbourhoods, suburbs or townships. Population density or type of township (formal vs informal) and climate may also be important in segmentation. While demographic and geographic segmentation are relatively simple and straightforward, psychographic segmentation is not. People are divided into different groups on the basis of lifestyle, personality, social class and/or values. Kotler (2000:266–7) distinguishes six categories, namely strivers, devouts, altruists, intimates, fun seekers and creatives. Churchill and Peter (1998:211) refer to the following five psychographic categories as identified by Global Scan: strivers, achievers, pressured, adapters and traditional. Strydom et. al. (2000:114) refer to the following five value groups as identified by AC Nielsen MRA’s Sociomonitor Value Groups’ Survey: conformists, traditionals, progressives, nonconformists and todayers. Parker (1998) suggests market segmentation by life stage and life plane, which can be seen as a combination of some elements of demographic and psychographic segmentation. A matrix approach may be used to combine both measures in order to develop a single easy-to-use tool that retains all the qualities of the measures individually, and adds a substantial depth of perspective. Segmentation of markets by life stage or age group shows how a person’s lifespan can be divided into five-year periods as shown in Table 1. In each of these periods, peoples’ circumstances, interests, activities, buying behaviour and levels of consumer expenditure change. Let us take one specific socioeconomic group and look more closely at peoples’ activities during three of these life stages. In life stage 6 (age group: 16 – 20) people are generally finishing high school or busy with tertiary education. A few work full time; many have part-time jobs. They mainly live with their parents. Their income consists mainly of allowances and they spend most of this on petrol and entertainment. Life stage 7 (age group: 21 – 25, the ‘freedom years’) encompasses wonderful years with newly qualified people just starting out in their careers. They live in flats or possibly communes. These are courting years, and fun and entertainment feature strongly. Expenditure is self-indulgent – they spend their money on fashionable clothing, steakhouse meals, travelling, audio and video equipment, and a second-hand car on instalment purchase. Sport and outdoor activities are a great attraction and a considerable quantity of beer is consumed. People in life stage 8 (age group: 26 – 30) are 64 The impact of cobranding on customer evaluation of brand counterextensions Table 1 Life stage model the ‘newlyweds and baby blues’; they are people with new responsibilities. Many are newlywed, live in flats and both partners commute to work. The first baby arrives and these young parents need to change their lifestyles drastically as they learn to cope with nappies, disturbed sleep, doctors’ bills, toys, baby-sitters and playgroups. They spend most of their income on meeting practical needs – they buy washing machines and nursery equipment, and entertainment is more than a little curtailed. Educationis the key element of segmentation by life plan or sociopolitical group. Buying behaviour, store choice and consumer expenditure levels are a function of life plan. While education influences attitudes and perceptions and plays a major role in shaping expectations and aspirations, it is also the key to a person’s choice of career, and there is little doubt that education influences performance. To reflect the socioeconomic strata in the South African market adequately, Parker (1998) distinguishes between six life planes based on education levels. People at these different planes can be described as follows: • Life plane A: People in the top life plane are doctors, lawyers, accountants, architects and engineers. They are usually graduate professionals. • Life plane B: Plane B people are generally found in business. They do not have university degrees, but have studied beyond school and have been awarded a diploma. Many reach senior positions in business. • Life plane C: Plane C people have completed their schooling, but have not studied further. They tend to be found in sales or clerical positions in business. • Life plane D: Plane D people generally International Retail and Marketing Review 65 have completed three or four years of senior school education and tend to follow technical careers. Many become artisans (plumbers, electricians, mechanics, etc.). • Life plane E: Plane E people have completed only one or two years of senior school education, and many find jobs as factory workers and artisans’ assistants. • Life plane F: Plane F people have no secondary schooling and many are barely literate. Most people in this category find employment as domestic servants, gardeners and labourers. The importance of education is reconfirmed when household income is analysed by social class across the life stages. The better educated a person is, the more he or she is likely to earn. An analysis of expenditure by life plane shows that the magnitude of expenditure is not in line with income across the life stages, and the patterns shown between the planes are very similar, with peaks and valleys at the same points as shown in Figure 3. This finding is extremely important. Simply because a household earns a certain income does not mean that they will spend that income in the same way and on the same things that other people with the same income would. Expenditure is very clearly a function both of life stage and life plane. Particulars of the head of the household (age and qualification) determine the cell into which a household falls. As mentioned earlier, market segmentation denotes the division of a market into identifiable parts. The ESOMAR Social Grade (ESOMAR 1997) has attempted to lay down guidelines for such identifiable parts for households living in the European Union (EU). The development of the ESOMAR Social Grade is based on the philosophy of comparability of segments of people across nations in the EU. The ESOMAR Social Grade is a composite variable constructed from: • the occupation of the main income earner in the household (the MIE) • the terminal education age (TEA) of the MIE following a period of employment and, • in the case of non-active MIEs, the economic status of the household, based on the household ownership level of ten selected consumer durables During 1988/89the South African Advertising Research Foundation (SAARF®) developed a measure called the SAARF All Media and Products Survey (AMPS®) Living Standards Figure 3 Household expenditure on clothing, footwear, accessories by life stage and life plane 66 The impact of cobranding on customer evaluation of brand counterextensions Measure (LSM®), which was better able to distinguish living standards than any single demographic variable (SAARF 2001). The LSM is a scale used for indicating the wealth status of a group. The eight levels initially distinguished were later extended to ten. During 2001 SAARF decided to create an improved Living Standards Measure and launched a new SAARF Universal LSM structure (SAARF 2001). The new SAARF Universal LSM is based on universally applicable variables only. This means that all respondents can answer all the LSM questions, leading to a new universal index applicable to all adults of age 16+ years, without introducing a bias such as the one created by the “supermarket shopper” in the past, which sometimes led to a husband and wife not being in the same LSM category. The new SAARF Universal LSM is similar to the old version, but starts out with ten groups. What was previously referred to as LSM 7 low, 7 high, 8 low and 8 high are now known as groups 7, 8, 9 and 10 respectively. As South Africa’s society develops, the SAARF Universal LSM has the ability to be extended beyond ten, and groups 11, 12 and so forth will be added as time goes by. Of the original list of 20 variables used to determine a person’s LSM category in the previous LSM system, 15 household variables have been carried through to the SAARF Universal LSM. In addition, the total number of variables has been extended to 29 to give finer definition to the scale. The 29 variables are as follows: Hot running water, fridge/freezer, microwave oven, flush toilet in/outside house, no domestic in household, VCR, vacuum cleaner/floor polisher, no cellphone in household, traditional hut, washing machine, PC in home, electric stove, TV set, tumble-drier, home telephone, less than two radio sets in household, hi-fi/music centre, rural outside Gauteng/W Cape, built-in kitchen sink, home security service, deep freezer, water in home/on plot, M-Net/ DStv subscription, dishwasher, electricity, sewing machine, living in Gauteng, living in the Western Cape and motor vehicle in household. For more details the reader should refer to the AMPS technical report that is available from SAARF or on the Internet (SAARF 2001). Market segmentation by type of outlet can also play an important role in distribution decisions by suppliers of goods and services. Lucas, Bush and Gresham (1994) state that increased competition, new technology, and changing demographics challenge retailers to develop new strategies for success. The effect of these forces is apparent in the changing structure of retailing. In the 1980s, as growing numbers of retailers vied for a share of the consumer’s dollar, many firms were forced to merge or were bought out by stronger firms. New technology enabled retailers to devise new ways to meet customers’ needs, which were also changing. In the 1990s, as retailers struggled to survive the turmoil of mergers, acquisitions, and liquidations, their future lay in their ability to meet customers’ needs and desires creatively. As always, customers gravitate to those retailers with which they feel most comfortable. As customers’ needs and wants change, retailers will have to change with them or cease to exist. Whereas retailers in first world countries have to adapt to customers’ sophisticated needs, traditional retailers and informal retailers in third world or developing countries are increasingly having to adapt to different needs. Informal retailers play an important role in South Africa. Ligthelm and Masuku (2003) state that 58.3% of total consumption expenditure (ie expenditure of households on goods and services) was spent on goods and 41.7% on services in 2002. Potential retail sales (ie expenditure on goods minus expenditure on personal transport equipment such as cars, tyres, petrol, paraffin and household fuel and power such as electricity) amounted to R316 581 million. Of this R206.7 billion or 65.3% was channelled through formal retail outlets such as Pick ’n Pay, Checkers, Spar and other retail outlets. Just more than a third (34.7% or R109.9 billion) was channelled through the following outlets: • informal retail outlets such as spazas, hawkers and township general dealers International Retail and Marketing Review 67 • non-store retailers such as mail order services and vending machines • non-retail establishments such as wholesalers and agricultural and manufacturing outlets • e-commerce/e-tailing services It is estimated that approximately 10% of potential retail trade, amounting to approximately R32 billion, was channelled through informal outlets in 2002. A substantial portion of these sales can be attributed to spazas, hawkers and township general dealers. TOTAL HOUSEHOLD EXPENDITURE Total household expenditure or consumer market potentials can be calculated by using household expenditure data obtained through consumer surveys (direct method) and/or by using statistical series (indirect method) (Martins, Loubser & Van Wyk 1996:496– 500). • Consumer surveys In consumer surveys the expenditure patterns of households are usually determined from a random sample of households, and then the total consumer market for a specific product in a particular region or regions is calculated by raising the sample results to the universe. Ordinary consumer surveys reveal the size of the current market for a particular product; future market potentials are determined over the short term by including questions about future buying intentions in the questionnaire. Unlike most of the other methods, consumer surveys reveal the demographic characteristics of consumers. Consumer surveys may be single-call surveys, consumer panels, or buying intention and purchasing probability surveys. • The index method The index method of calculating market potentials involves the application of statistical series that reflect the relative potential demand for a specific consumer product or service, or a group of products or services, or consumer products and services in general. The relative demand for a specific product in various geographical regions can be reflected by a single index, such as population, or by several series of data combined into a single statistical index. The series are usually expressed in percentages by area for the total market and therefore indicate the share of each geographical region in the potential consumption of a specific consumer product or service, or group of products or services, or products and services in general. Total household expenditure in South Africa, calculated by household income and expenditure surveys, will be discussed according to geographical segmentation, population segmentation, income group, life stage and life plane, LSM group and type of outlet in the paper.