beyondbrics

By Michael Geraghty of Citi Investment Research

As income levels rise in emerging markets, spending patterns  - and lifestyles – are also changing. Consumers are increasingly shifting from basic necessities to more sophisticated goods and services.

Perhaps the most immediate form of trading up involves expenditures on food. As incomes rise and diets change, three things typically occur. First, the percentage of income spent on food declines. Second, the dollar value of food expenditures increases, reflecting the fact that consumers trade up to better-tasting, more expensive foods. Third, there is a shift in the types of food products purchased, with, for example, consumers favoring products that offer convenience.

Obviously, modern retail formats facilitate the purchase of packaged consumer products offering convenience. Fast food companies also benefit from the fact that urbanization in emerging markets is leading to greater numbers of harried office workers with less time to cook at home.

Changing lifestyles have other implications too. So, for example, while penetration of personal care products such as toothpaste and shampoo is high in many emerging markets, penetration of items such as deodorants and cosmetics, while rising, is still relatively low.

Turning from goods to services, in countries such as China and India the share of services consumption in GDP is relatively low, and should rise significantly. This growth has implications for financial services companies, healthcare providers, and education companies.

Despite advances in banking systems, large numbers of consumers in emerging markets still lack access to various financial services, including credit cards. This is to some extent a question of logistics, including a lack of credit histories, which partly reflects a cultural aversion to credit. Organization is another issue, reflecting the vast size of countries such as China and India, and the challenge of creating cross-country branch networks.

In part reflecting these factors, debit cards have proved very popular in many emerging markets. Income growth and asset ownership are also generating demand for the services of insurance companies. Income growth leads to demand for a broader range of financial products (including life insurance), while increased ownership of property (including automobiles) creates awareness of the need for risk protection.

Rapid rises in populations, urbanization, and the growing incidence of associated diseases are pressuring healthcare systems in many emerging markets. With regard to communicable diseases, HIV/AIDS has been a cause for concern in India, while the H1N1 flu has been a particular focus in China. As for non-communicable diseases – including cardiovascular diseases, diabetes, and cancer – lifestyle changes are resulting in growing prevalence of these conditions throughout Asia. Rising incomes should mean that consumers in emerging markets dedicate more resources to healthcare.

Consumers can also afford to spend more on education as income levels rise. So, for example, in China’s intensively competitive society, many parents spend on educational services with a goal of differentiating their children academically. In India, by contrast, an under-resourced public education system means that middle class parents often look to the private sector to ensure an adequate level of education for their children.

In summary then, emerging market consumerism – including the ‘trading up’ trend – creates a range of opportunities for both local companies and multinationals. Even so, it is important to acknowledge that, in many cultures, traditions are deeply embedded, and some habits are slow to change.

Michael Geraghty is themes strategist at Citi Investment Research & Analysis in New York

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