Most companies rely on about 14 percent of the world’s population ? the consumers with per capita spending power of $10,000 per year or greater ? to drive their revenues. Unfortunately, for the foreseeable future, growth in the population of affluent developed economies like the U.S., Japan, and the EU will be stagnant or declining. Fortunately, another 1.5 billion consumers will “emerge” over the next five years, representing the largest consumption boom in human history.
In the title of their recently published book, analysts Jennifer Kent and Norman Myers refer to these people as The New Consumers.1 Kent and Myers define the “consumer class” as those people who use televisions, telephones, and the Internet and who have sufficient income to buy more than the bare necessities of life.
The cut-off for being in the “new consumer” category was $10,000 per year for a family of four on a Purchasing Power Parity basis. In other words, these families earn an income that would buy as much in that country as $10,000 per year would have bought in the United States in the year 2000.
On that basis, Kent and Myers project there will be just over 1.5 billion “new consumers” with combined purchasing power of roughly $11 trillion dollars in 2010. That implies a mean average purchasing power for a family of four of roughly $30,000 per year across this whole population.
We can break down these 1.5 billion new consumers by country, as follows:
China, more than 600 million
India, about 220 million
Brazil, 88 million
Russia, 96 million
Mexico, 80 million
Indonesia, 67 million
South Africa, 25 million
The remaining 300 million or so will be spread across roughly 15 other countries in Asia and Latin America.
Most importantly, between 2000 and 2010, the real spending power of the “new consumers” is forecast to grow from $6.3 trillion to $11.4 trillion on a PPP basis; that’s a net increase of $5.1 trillion. At the same time, the real purchasing power of the rest of the world’s population ? that is, the affluent plus the very poor ? will grow by only about $3.6 trillion from $21.4 trillion to $25 trillion.
Much of the reason is that the rest of the world is made up of mature industrialized economies with stagnant or shrinking populations, as well as the terribly poor pre-industrial economies that offer few short-term opportunities.
On the other hand, China’s purchasing power, on a PPP basis, will rise from $2.8 trillion in 2002 to $4.8 trillion in 2010, a gain of $2 trillion. India’s will rise from $1.8 trillion to $2.8 trillion in the same period. This assumes economic growth conservatively projected to continue at 7 percent in China and 6 percent in India during that period. That’s why China and India are by far the two leading economies to look to when seeking to reach the “new consumer” class. By 2010, approximately 615 million Chinese and 210 million Indians will make up more than half of the 1.5 billion “new consumers.”
For this reason, let’s consider what companies will have to do to win in either or both of these enormous markets. First, it’s important to recognize that in order to reach these consumers effectively, the enormous national markets will have to be segmented much the way the U.S market has been.
Segmenting the Chinese market has proven to be trickier than it might seem at first, because it brings American companies into direct competition with Chinese ones. For example, Procter & Gamble is the most successful consumer goods marketer in China so far, with $1.8 billion in sales there in 2003. It entered that market by offering high-end items to the top tier of consumers.
But P&G has now refocused on the mid-tier consumer segment and found itself in direct competition with regional and national Chinese companies, which can wield their advantages of lower costs and deeper customer knowledge.
To compete in that atmosphere, P&G has tried to gain an understanding of consumers in each target segment and then determine the proper product, price point, and marketing strategy to meet those needs. For example, Crest toothpaste was one of P&G’s premium-brand offerings.
But the company couldn’t simply lower the price and offer the same toothpaste to the mid-tier market. Instead, it had to create a completely different toothpaste under the Crest brand, with a different flavor and even a different scientific basis for preventing cavities.
This type of differentiation prevents the premium customers from trading down and eroding the higher margin segment. And it avoids the losing game of directly competing with Chinese companies on price alone.
It’s not easy. But going to those lengths is apt to prove worthwhile, because each sub-segment of these markets is enormous. Consider that China’s four largest cities represent 30 million people. Dominating market share across those cities will define the future of marketing to these new consumers.
Laurent Philippe, head of P&G’s China operations, recently told The McKinsey Quarterly2 that American companies that want to compete in China will have to offer “Chinese brands” ? in effect, transforming their global brands in the process. This means gaining a deep understanding of Chinese culture and symbols. At the same time, new entrants into those markets have to realize that the Chinese companies are rapidly learning marketing and quickly becoming very serious competitors. For that reason, P&G located its new technical R&D center next door to Tsinghua University so that it can draw on Chinese scientific talent.
Likewise, the pressure is going to be intense in India’s mid-tier market of new consumers. In fact, India is expected to surpass China in population in the next two decades. Any multinational consumer goods company that wants to stay on top globally will have to address this vast market.
Since 1991, when India began to allow foreign direct investment, numerous companies have marketed durable goods and packaged goods to limited segments in large cities with low-risk investments. But other companies are now looking more broadly toward India’s new consumer class, which is large enough to provide a core market for even the biggest multinational. But it is also a class of very picky consumers who demand good value.
The keys to serving that mid-tier market in India involve developing a better sense of those customers’ needs and tailoring products specifically for their tastes. But equally important is pricing those products specifically for their budgets. While there are strong segments at the top of the Indian pyramid and large numbers at the bottom, the real driver of future growth lies in connecting solidly with the 40 million middle-class households there.
A typical middle-class Indian family represents five city-dwelling people with an educated head-of-household working in a small business and earning the equivalent of between $20,000 and $45,000 on a PPP basis. There will be 65 million such households by 2010. That group is responsible for such phenomena as the doubling of Indian car sales in the last five years.
They are also responsible for the explosive growth of the mobile phone business. While there were 300,000 cell phone subscribers in 1996, there are 55 million mobile phone users in India today ? a nearly 200-fold increase in less than a decade.
The mobile telephone business provides a useful snapshot of India and its mid-tier consumers, as well as some lessons in how to win them over.
The first key to success is to develop a product that is tailored to the Indian market. For example, Nokia introduced a special phone model that features a dust-resistant keypad, an anti-slip grip, and a built-in flashlight that helps drivers on India’s badly-lit roads. These features suggest to consumers that Nokia knows something about life in India and cares about them.
The second key to success is pricing. While India’s mobile phone market is the fastest-growing in the world, it’s also the cheapest, at 5 cents per minute.
With those two key strategies in place, the market penetration in eight years equals the penetration that it took television a quarter of a century to achieve.
Nokia’s level of success requires designing for the Indian market from the ground up. A company entering that market can’t simply set a profit target and adjust price accordingly. It must calculate the price point that Indian middle-class consumers will accept, and then adjust the business model to make sure that cost equals price minus profit.
For example, motorcycle consumers will give up speed and power for good mileage, allowing manufacturers to sell at lower price points in India. This so-called “design-to-cost” approach can cut costs by as much as a third.
India is unique among these largest new consumer nations in that its population is extremely youthful. Half is under 25 and a third is under the age of 15, according to an article in India Today.3 Given the right political and legislative atmosphere, India could begin to look very much the way the U.S. did when Baby Boomers were powering the post-war economic and technological revolution.
But The Boston Consulting Group recently predicted that India will have to make some dramatic changes to get there. Its youthful population stands ready to power that new domestic economy. But its out-of-date labor and investment regulations will have to be revamped in order to allow this and let India’s economy rise to the level it is poised to achieve. At present, India’s controls on foreign direct investment have meant that China has received five times the capital in the last five years, some $200 billion. India will have to get over its bureaucratic paralysis if it is to realize the dreams of its young people.
It’s important for multinationals to realize that up to now, the “new consumers” in virtually every country have been poorly served by indigenous producers. But as barriers to trade fall, huge opportunities are beginning to open up for companies that can combine technological sophistication and marketing savvy with an appreciation of the needs of these unique consumers.
Some people see this as a crisis, because rising populations and affluence must be addressed using finite and, in some cases, dwindling resources worldwide. Others see it as an unprecedented one-time opportunity.
The Trends editors see it as the advent of the century of plenty for the world’s poor, beginning now with the “new consumers.” This new era will be brought about by the rapid advance of technology and globalization.
For example, today’s worker produces in a week what it took a worker four years to create in the 1700s. The 40-hour workweek in 1950 produced what we now make in 12 hours. And the cost of a megabyte of computer memory has plunged from $20,000 in 1970 to about two cents now. Those efficiencies, which are accelerating all the time, will lead us into the future.
Given this compelling trend, we offer the five following forecasts for your consideration:
First, as a global economy implies, there will be much more cooperation among nations, leading to changing roles and increased specialization in the coming decade. China and India are both moving rapidly toward becoming premier manufacturing and production forces. The United States is moving from an agrarian and industrial power to being the richest source of technological innovation for the world in everything from IT to nanotechnology and biotech. This will keep the U.S. in the forefront of the global economy, while fueling the growth of the consumer class in advancing nations worldwide.
Second, Western-style consumer credit services and an enhanced “social safety net” will play a big role as marketers work to fully exploit the spending potential of the “new consumers.” As explained in the September issue of Trends, today’s global cash surplus is largely a by-product of China’s extraordinarily high savings rate. As recently as five years ago, the consumer credit services and the social safety net, even for middle-class Chinese, might have been equated to those in the United States a century ago. But this is already rapidly changing. Earlier this year, Gome Home Appliance Co., the No. 1 consumer electronics chain operator in China, launched an interest-free installment payment plan for home appliances, jointly with China Merchants Bank, the country’s first shareholding commercial bank wholly owned by corporate legal entities. More broadly, the ratio of consumer credit as a share of all bank loans rose to 7 percent last year, from just 0.3 percent in 1997. And consumer credit has reached $205 billion in the first six months of this year, more than 90 times that in 1997. But that’s still tiny when you consider that consumer credit usually represents 40 percent of all bank loans in the United States and 20 to 40 percent in the countries of Western Europe. Similarly, China has no robust insurance industry to guard against catastrophic losses. As markets in China and India open up in the coming decade, expect these deficiencies to be corrected, dramatically reducing the savings rate and increasing the consumption rate.
Third, in addition to its greater focus on high technology, the U.S. will have an enormous opportunity to provide consumer goods to the burgeoning middle-class consumers of China, India, and other nations by moving quickly and intelligently into those markets now. Many American companies will follow the lead of such giants as Procter & Gamble, but it’s important to exercise restraint and good judgment instead of being carried away by enthusiasm. As with every really important new market or technology, the market created by “new consumers” will be smaller than most enthusiasts predict in the short term but much larger than those predictions in the long term. This will inevitably result in a “speculative bubble,” as companies rush to serve those markets, followed by a shake-out phase and a rebirth phase ? the usual pattern that disruptive innovation follows. The Trends editors foresee two clear paths to a winning strategy: The first is to get in early and sell out to those who are jumping on the bandwagon late.
The second is to be a “smart follower” for the long term, making only “exploratory investments” in the early stages and being prepared to pick up the pieces when others fail.
Fourth, China will lead the way with the new consumer class in the short term, while India remains hampered by its bureaucratic morass. For example, China has increased its highway infrastructure by 800 percent in recent years. It is building 50,000 miles of new superhighway to connect nearly 250 cities with populations of more than 200,000, according to the Montreal Gazette.4 As happened with the advent of the Interstate Highway System in the U.S., this can be expected to give a tremendous boost to auto production. China sold a record quarter of a million cars this past April alone. Meanwhile, India’s roads have stagnated, and India’s freight costs remain double the average of the rest of the world. But India is on the road to reform, and as the millions of educated young people there clamor for jobs, that reform will only accelerate. India’s aging leadership will be replaced, and when that happens, expect to see India overtake China by 2025 to become a world-class economic player and the home of the world’s largest middle class.
Fifth, a combination of technology and business will usher in a new global age of plenty over the longer term. As Kent and Myers point out, new eco-friendly technologies will allow material prosperity for the masses, and enable those new middle classes to enjoy at least twice as much material well-being as they do today. Those consumers will clamor for cars, houses, televisions, computers, and all of the latest bounty from the world’s companies, and their spending will fuel even more innovation, more progress, and greater wealth for people at all income levels in the world’s population. The new consumers’ spending will enable the world’s poor to rise to standards of living that are undreamed of today. The spread of universal connectivity and new technologies will only further this trend.
References List : 1. The New Consumers by Norman Myers and Jennifer Kent is published by Island Press. ⓒ Copyright 2004 by Norman Myers. All rights reserved. 2. The McKinsey Report, 2004, Special Edition, “Understanding the Chinese Consumer.” ⓒ Copyright 2005 by McKinsey and Company, Inc. All rights reserved. 3. India Today, August 22, 2005, “Getting Real,” by Vivek Paul. ⓒ Copyright 2005 by Living Media India Ltd. All rights reserved. 4. Montreal Gazette, July 10, 2005, “Chinas Boom Might Spell End of the Oil Age,” by Chris Seper and John Funk. ⓒ Copyright 2005 by Montreal Gazette. All rights reserved.
