Thursday, November 27, 2014

Who Are Tomorrow’s Consumers?

SINGAPORE – Luxury-brand companies’ stock prices plunged in July, after their financial results disappointed investors, owing largely to slower sales in emerging markets, especially in China. Meanwhile, news reports indicate that high-end shopping malls in India and China are increasingly empty.

What is going on? Many analysts had expected emerging markets to generate exponential growth over the next decade. But now there is talk of how the global crisis is slowing down these economies and killing off discretionary spending.

But a slowdown in China’s economic growth cannot really be blamed for slower sales of luxury goods or empty malls. The annual growth rate of China’s $7.5 trillion economy decelerated to 7.6% in the second quarter, from 8.1% in January-March – hardly a cause for panic. Moreover, two-thirds of the decline is attributable to slower investment rather than slower consumption. For all of China’s long-term structural problems, it is not exactly slipping into recession.

The real problem is that many analysts had exaggerated the size of the luxury-goods segment in emerging markets. China is by far the largest emerging-market economy, with 1.6 million households that can be called “rich” (defined as having annual disposable income of more than $150,000). But this is still smaller than Japan’s 4.6 million and a fraction of the 19.2 million rich households in the United States. The number of rich households amounts to barely 0.7 million in India and one million in Brazil.

The point is that developed countries still dominate the income bracket that can afford luxury goods. The explosive growth recorded by this segment in emerging markets in recent years reflected entry into previously untapped markets, with the subsequent slowdown resulting from saturation. The number of high-income households is still growing, but not enough to justify the 30-40% compounded growth rates expected by some.

This does not mean that growth opportunities in emerging markets have disappeared, but expectations do need to be recalibrated. Despite the economic boom of the last decade, China still has 164 million households that can be called “poor” (with annual disposable income of less than $5,000) and another 172 million that are “aspirant” (between $5,000-$15,000). Similarly, India has 104 million poor households and 107 million aspirant households.

The real story for the next two decades will be these countries’ shift to middle-class status. Although other emerging regions will undergo a similar shift, Asia will dominate this transformation.

A study by the economist Homi Kharas of the Brookings Institution gives us a sense of the scale of this change. He estimates that 18% of the world’s middle class lived in North America in 2009, while another 36% lived in Europe. Asia’s share was 28% (after including Japan).

But Kharas’s projections suggest that Asia will account for two-thirds of the world’s middle class by 2030. In other words, Asia will displace not just the West, but even other emerging regions. This is the real business opportunity.

Of course, the rise of Asia’s middle class is not the only change we should expect. We are in the middle of a social and demographic shift that will both destroy and create consumer markets. The aging of developed markets is well known, but the latest data show that emerging markets are aging at an even faster pace.

China’s median age is today 34.5 years, compared to 36.9 years for the US. However, the average Chinese will be 42.5 years old by 2030, compared to 39.1 for the average American. The median Russian will be even older, at 43.3 years.

The impact of aging is already being felt in these countries’ education systems. The number of students enrolled in primary schools in China has fallen by 18% since 1990, and by an astonishing 33% in South Korea. At the other end of the demographic scale, the share of the aged is growing explosively.

Meanwhile, the nature of the basic consuming unit – the household – is also changing rapidly. In most developed countries, the traditional nuclear family is in severe decline and is being replaced by single-individual households. In Germany, for example, 39% of households consist of just one person. Couples with children now account for barely 19% and 22% of households in the United Kingdom and the US, respectively.

Nevertheless, it is not all about consumer atomization. We are simultaneously witnessing the re-emergence of the multigenerational extended family, with as many as 22% of American adults in the 25-35 age group living with parents or relatives. By contrast, the extended family is giving way in India to nuclear families, which now account for 64% of households.

All of these changes will profoundly affect the future of consumer markets. For example, we need to revise our mental image of the nuclear family from American suburbia to fit the rapidly expanding cities of India. By the same token, our mental image of the multigenerational extended family needs to include those in the West. An aging but increasingly middle-class Asia will be at the core of this new consumer landscape.

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    1. CommentedElizabeth Pula

      This article focuses on some interesting facts and aspects of consumerism changes and which nations will have differing demographics that will affect consumption patterns. Hermann's comments focuses on perhaps the values, trends and patterns that affect consumption because of those consumer demographic changes. Sanyal's article and Hermann's comments don't necessarily support the immediate conclusion of system/s failure. As "we" adapt, the very definition of "we" and any system/s change/s.

    2. CommentedMelanie holzman

      Interesting analysis. Thank You. I am curious about how much this nearly developing middle class, both in India and China, are exposed to the type of marketing used in the US. Also, what will be the impact of the ratio of males to females in China. I have read that it will soon be 4 to 1.

    3. CommentedFrank O'Callaghan

      The essay is clear as far as it goes but Zsolt Hermann's comment gets to the point. We are running out of Earth. However I do not agree with the implication that it is a finite zero sum game. On the contrary, a reduction in absolute and relative inequality will spur growth in our technologies and efficiencies.

      Moving our political economy to such an orientation is necessary and to let it to mechanisms such as revolution is insane. Transition is necesary and inevitable.

    4. CommentedZsolt Hermann

      I think the question is different.
      The question is not who are tomorrow's costumers, but what will they consume.
      The pattern what we see is the result of the paradox of our constant growth, expansive system.
      This economic model is built on two illusions.
      1. We can endlessly continue with quantitative growth in a closed finite system, which is naturally impossible, and by today we have passed the tipping point, we have run out of empty markets, free cheap labor and we are depleting our natural resources.
      2. The whole system in order to generate ever increasing profit was built on excessive, luxury products, by certain calculation over 90% of all the products world wide today are simply not necessary for a normal, comfortable and modern human life, we never had any natural desire for these products, we simply "yearn" for them as a result of sophisticated, but brainwashing marketing and subsequent social pressure. Moreover to maintain this excessive, beyond necessity consumption people and nations alike had to extend way beyond their means driving them into deeper and deeper debt problems.
      These two aspects collide today into a spectacular system failure.
      We are still only measuring local markets, regions, superficial statistics, examining the fragmented segments individually instead of putting the whole picture together.
      Of course realizing the whole picture, learning about our attitude and lifestyle and the global, closed, finite, interdependent system that makes this lifestyle unsustainable would force us to change, and we do not like changing.
      The problem is that here we are facing unbending natural laws which we cannot appeal against. Either we adapt, or we suffer further and deeper crisis.