The nineteenth century industrial revolution created a substantial Western European and American middle class. Today the same is happening in emerging markets. Over the next two decades, the global middle class is expected to expand by another three billion, from 1.8 billion to 4.9 billion, coming almost exclusively from the emerging world. In Asia alone, 575 million people can already count themselves among the middle class — more than the European Union’s total population, explain Jack Neele and Richard Speetjens, managers of the Robeco Global Consumer Trends Equities strategy.
This crossover from West to East in terms of size and spending of the middle class has large implications for expected consumption growth:
Adapt to shifting local demands
The aging population in China will need new financial services to help them save for retirement. In addition, the pressure from urbanization will lead to growing demand for green technologies. The transformation is most dramatic in China, but there will be shifts across many developing economies. What these households want may be very different from the consumer demands seen in previous periods of rapid economic development. Businesses will need to tailor the products they offer to shifting local demands.
More money to spend
Over the past decades, developed economies have dominated sales of durable consumer goods. Penetration is still relatively low in many rapid-growth economies. Once household incomes approach USD 10,000, however, demand for durable consumer goods picks up. As more households in these economies move into higher income bands, they will have more money to spend on discretionary items. Demand for services such as communications, culture and recreation will grow at almost twice the rate of food spending.
Strong local positions or strong Western brands
However, this higher growth in consumer spending in emerging markets has not been an easy win for consumer companies. Many local companies prioritized sales growth, but intense competition, value-focused consumers and rising costs are making it difficult to boost the bottom line. Amid rising volatility, companies must be more careful and strategic in how they approach these markets. This is the reason why within our emerging consumer trend we focus on companies with very strong local market positions or strong Western brands.