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Most of the world’s middle classes already live in emerging market countries and the proportion is set to keep growing. These consumers represent an enormous opportunity, particularly in the digital space – yet many companies have failed to understand their needs and behaviours. This has huge implications for both businesses and investors looking to access emerging markets.
By 2030, 80 per cent of the world’s middle classes will live in emerging markets, according to consultant Roland Berger. Indeed, 75 per cent already live outside advanced economies, including 40 per cent in Brazil, Russia, India, and China. In China for example, by 2030, over 70 per cent of the population could be middle class, consuming nearly $10tn in goods and services; and India could have the world’s largest middle class, surpassing China and the USA.
Businesses and investors cannot ignore these groups.
According to US research group Brookings, the rich spend more per person, but are too few to drive the global economy. The poor and vulnerable are numerous but have too little income to spend. For most businesses, the sweet spot to target is the middle class. This has long been true in advanced economies – it is now true globally.
But why have so many companies failed in this area? One reason is that they have assumed that middle classes are homogenous – but in reality, they vary hugely in their preferences and habits between geographies.
Retail challenge
An example is food retail in China. Many international retailers have failed to establish themselves there as they have been unable to understand consumer buying patterns and tastes and have faced strong competition from local companies.
US retail giant Costco is one of the latest groups to attempt an entry. Costco will be targeting China’s middle class, who know the brand from travelling abroad. But it hopes it can succeed by using a no-frills approach and bulk-buy membership strategy that is familiar to local consumers. Analysts warn that it will also need to adapt to new situations, such as China’s rapid e-commerce and mobile phone shopping craze, quickly.
Newly affluent Chinese consumers may want no-frills groceries, but they also want to start buying luxury goods. A report by consultant Bain says there has been much progress among foreign luxury goods providers in engaging with Chinese customers, but little in e-commerce, despite plenty of attempts. Except in the area of cosmetics, online penetration of luxury goods remains low.
The theme of poor digital strategy also extends to South East Asia.
The digital era has changed middle-class behaviour.
Bain says 50 million South East Asian consumers are set to become middle class by 2022. These will contribute to the region’s $300bn middle-class disposable income, propelled by greater access to the flourishing digital economy. But only 15 per cent of companies surveyed by Bain said they are fully prepared for middle class consumers. More than half lack the right products, services, market strategies and sales channels for these consumers; and 60 per cent do not have a clear marketing strategy.
Given the rise in digital culture, successful companies will have to overcome the tension between traditional and modern cultures and appeal to a new group of consumers with different profiles, consumption habits and media behaviours, says Bain.
Many executives still believe this segment comprises unsophisticated, cost-driven consumers who use traditional channels. They see them as mainly influenced by word of mouth, or TV and other traditional communication channels. But the digital era has changed middle-class behaviour with new and evolving influences and choices.
Investment lessons
Companies will also need to look at how successful local operators have been selling to middle-class consumers. For example, Asia and South America have been developing their own successful e-commerce and social media platforms, often integrating the two and blending in financial services and finance technology such as mobile payments.
Many emerging regions also now have their own travel platforms that understand the travel and tourism needs of the local market.
Investors cannot ignore emerging markets as their share of global GDP is increasing steadily.
Understanding local needs and discarding misconceptions are challenges for any companies. But for those who can overcome these challenges, the benefits will be huge.
Investors must heed these lessons too. As with companies, they cannot ignore emerging markets as their share of global GDP is increasing steadily thanks to middle-class spending power. But investors need to be discerning as to which companies will succeed and which will fail in this burgeoning market.
The emerging market consumer is covered in more detail in our November 2019 investment update. Please click here to download your copy and to watch our briefing session.
