In Search of the Middle

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INTERNATIONAL MARKETING RESEARCH

middle

IN SEARCH OF THE

While economists, political pundits and business executives fret over post-recession income inequality in the United States and the resulting bifurcation of the consumer landscape, other marketplaces across the globe offer middle classes with increasing spending power—fueling U.S. marketers’ desire to venture farther afield

BY CHRISTINE BIRKNER | SENIOR STAFF WRITER

 cbirkner@ama.org

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Seven years ago, the Great Recession shook up the global

economy, and its reverberations are still felt. Income distribution and the consumer landscape in the United States and abroad have changed drastically, prompting another global economic phenomenon: The once-mighty U.S. middle class is shrinking, while consumers’ spending power in emerging markets such as Brazil, India and China is growing. And while economists caution that emerging markets’ growth hasn’t been immune to the post-recession forces that continue to plague the North American and European marketplaces, the fact remains that these markets’ changing consumption patterns and increasing purchase power warrant a closer look, marketing experts say.

While the Great Recession certainly widened the gulf between the “haves” and “have-nots” in the United States, the share of U.S. adults in middle-income tiers actually has fallen in each of the last five decades, from 61% in 1971 to 51% in 2011, according to the Pew Research Center. Pew reports that the percentage of Americans who consider themselves middle class is declining, from 53% in 2008, a year after the start of the recession, to 44% in 2014.

Meanwhile, the middle classes in emerging markets continue to expand as people move from rural areas to urban centers and become more active and acquisitive consumers. By 2020, Brazil’s market will top $1.6 trillion, and the consumer market in India and China is projected to be worth a combined $10 trillion, according to Boston Consulting Group’s 2013 Global Consumer Sentiment Survey.

Consumers in emerging markets feel more financially secure and more confident about the future than those in developed economies, and express greater enthusiasm for brands, according to BCG’s study. Seventy percent of

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consumers in China and 67% of consumers in India cite “brand name and reputation” as key reasons for trading up to higher-priced goods and services, and more consumers in emerging markets than in developed nations are now trading up to higher-priced, higherquality products, especially big-ticket items such as housing, cars and large appliances, BCG found.

“Consumers are trading up and they’re more selective versus a few years ago. There’s growth in services, in everything that relates to experiences,” says Olavo Cunha, partner and managing director of BCG’s São Paulo office and co-author of BCG’s research on emerging markets.

The U.S.’s Shrinking Middle

According to research from the University of California-Berkeley, 95% of the wealth gains experienced between 2009 and 2012 have gone to the wealthiest 1% of the U.S. population.

That group’s incomes grew 31.4% from 2009 to 2012, while incomes in the bottom 99% grew by only 0.4%, according to UC-Berkeley.

Since 2009, inflation-adjusted spending by the top echelon has risen 17%, compared with just 1% among the bottom 95%, according to Steven Fazzari, professor of economics at Washington University in St. Louis, whose research focuses on income inequality in the U.S. and who contributed to the UC-Berkeley study on wealth inequality.

The shrinking middle class in the U.S. will lower consumer spending power overall and have broader socioeconomic implications, Fazzari said in an e-mail.

“The standards of living in the middle class are stagnating, while the affluent are doing well. Consumption spending by the top 5% of the income distribution is about the same as consumption spending of the bottom 80%. If so much of our demand is coming from the affluent, the traditional view that the American economy serves the ‘mass market’ is no longer correct.”

This consolidation of spending power has had far-reaching impacts on the marketplace. With the middle class beginning to thin, the low and high ends of the market are starting to influence brand decisions. In 2011, Cincinnati-based

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Procter & Gamble Co. introduced lowercost versions of Gain dish soap to appeal to bargain-conscious consumers. The company also launched higher-priced versions of its Olay and Gillette product lines in 2009 and 2010, respectively, to appeal to the higher end of the consumer spectrum.

“The booms and busts in the economy come out of the middle, and without those people investing and going to restaurants and buying consumer goods, you either have to market to the very high end of the market, or you have to market down or cut costs to stay alive in the middle part,” says Michael Englund, principal director and chief economist at Boulder, Colo.-based Action Economics, a market analysis firm.

With the majority of U.S. consumers holding tight to their purse strings, marketers would be wise to look elsewhere for new opportunities, Englund says.

Brazil’s Revolutionary Spirit

Brazil is in the global spotlight these days, with its hosting of the 2014 FIFA World Cup and its preparations for the 2016 Summer Olympics in Rio de Janeiro.

While much of the media attention has highlighted the country’s income disparities and millions of residents who live below the poverty line, recent reports have shown that Brazil’s middle class continues to grow.

Of Brazil’s estimated population of 190 million residents, 42 million have joined

the country’s middle class since 2003, as the per-capita income has risen 78%, according to The Guardian. By 2020, 36% of Brazil’s 68 million households likely will have joined the middle and affluent classes—compared with 24% in 2000— and represent a $1.6 trillion consumer market, according to BCG. Sales of luxury goods in Brazil are expected to grow 12% in 2014, according to the Financial Times.

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consumption is still growing, and that will change the market significantly in the next 10 years.”

Conspicuous consumption also is common among much of Brazil’s middle class. Fifty-three percent of Brazilians like to buy products with prestigious brand names and 85% of Brazilians make impulse purchases. “As a culture, they tend to spend rather than save,”

I“f so much of our demand is coming from the affluent, the traditional view that the American economy serves the ‘mass market’ is no longer correct.”

- STEVEN FAZZARI, WASHINGTON UNIVERSITY “What has happened in Brazil over the last 15 years is a major entry into consumption markets. We still view a continuous process of consumption growth going forward,” Cunha says. “We believe that one-third of the future growth of Brazil will come from cities that have below 500,000 inhabitants, which is a big historical shift. Historically, growth was centered in large cities. There are lots of things happening: Income is still growing,

says William Palley, trends strategist at New York-based advertising agency JWT, who works with JWT’s clients in Brazil and wrote JWT’s study, “The Brazil Opportunity: A Guide for Marketers.”

“The historical precedent for that is, during their years of inflation, putting your money in the bank wasn’t a smart move because the value of your savings would evaporate overnight because of inflation. Putting your money into a car

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or a refrigerator meant you got better value out of it. That mindset of spending rather than saving persists today.”

It follows, then, that like many American middle-class consumers before the recession, Brazilian middleclass consumers have spent the past half a decade racking up debt, says Daniella Giavina-Bianchi, managing director of the São Paulo office of New York-based brand consultancy Interbrand. “Until five or six years ago, people didn’t have access to mobile phones, cars, TVs, simple goods that are considered normal in America. We have a system here where one person can pay for a simple good in five to 10 installments. … Now the middle class has a lot of debt.”

Moreover, while Brazil’s middle class has grown significantly, marketers should be wary of the hype, she says.

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“The emerging middle class has been the talk of the town in Brazil since 2008 or 2009. There are crazy expectations about the amount of money and the growth, that this middle class can help the economy in Brazil … and I would say that these expectations probably were too high. Now we’re adapting our expectations to reality.”

Brazil can be a tough market for foreign marketers. The country’s different regions represent distinctly different cultures and approaches to consumption, Giavina-Bianchi says.

“It’s very difficult to compare consumer behaviors in São Paulo with consumer behaviors in the northeast of the country.

This is something that Brazilian brands have already learned, so if you’re entering this market, you have to know that your local competitors are already prepared to deal with diversity.”

Plus, outsider brands often must be positioned differently than in other global markets, she adds. “Gap here is not as cheap as it is in America because of the taxes and other reasons. It doesn’t appeal to the masses. It’s in very high-end shopping centers.”

Suwon, South Korea-based Samsung Electronics Co. has had success in appealing to Brazilian consumers by sponsoring local sports teams, she says.

“It’s an international brand that, for many years, wasn’t known in Brazil but now has a huge reputation in this market because it has connected very well to the local culture and addressed regional issues. They sponsor a lot of local teams and sports. They’re connected to day-to-day life.”

Vevey, Switzerland-based Nestlé also has found success in Brazil after entering

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the market 60 years ago and working to connect with consumers through cause marketing efforts, Giavina-Bianchi says. “It’s so connected to the culture that many people don’t even know it’s a Swiss brand. Some of the products were adapted to Brazilians’ reality, especially during the years that the country was really developing. They were present here since the dictatorship. There were basic problems within the population; even delivering food to people was a problem.

Nestlé had all of these platforms dealing with hunger, corporate sponsorship programs, efforts to help with diseases here. They always were connected to the national agenda.”

Staying connected with the national agenda means working with local partners to deal with infrastructure and government challenges, Giavina-Bianchi says. “If you want to get into this market, you’ll need a lot of flexibility. It’s not easy and it’s not always beautiful. Don’t expect that the infrastructure problems are over because they are not. The taxes and the politics behind it are not for beginners in the sense that you have to be brave and get to know the market, and get help. It’s easier to start with a local partner than from scratch. You can be faster, more efficient and assertive, and conquer the hearts of consumers much better if you have a local view.”

These factors have slowed growth in consumer spending, but India’s longterm prospects remain strong, BCG reports: The household incomes of more than one-third of India’s population are projected to reach $7,500 to $18,400 by 2020, and consumer spending is expected to be more than three times higher in 2020 than in 2010.

About half of India’s population are mobile subscribers, and according to a United Nations study, more people in India have mobile phones than toilets, so targeting consumers via mobile is

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critical. “The middle class is spending three hours a day on mobile, more time than they’re spending on TV,” says Prasun Basu, managing director for South Asia at global research firm Millward Brown, a division of London and Fairfield, Conn.-based Kantar Group. “What they learn on TV, they’re checking out on mobile. Mobile’s big, and it’s only going to increase.”

Moreover, 287 million Indians are illiterate, according to a 2013 report by the United Nations, and 32.7 million still live below the poverty line, according to

India’s Diversity, Youth and Mobility

India has turned Western marketers’ heads in recent years because of its growing middle class and its population of 1.27 billion, but its economic growth has since slowed. India has a young population: 27.6% of Indians are between the ages of 25 and 44, and 41% of the population are younger than 18, according to the Indian government’s 2011 census.

India’s economy grew at an annual rate of 7% during the worst years of the global recession, but GDP growth forecasts for the next two years have been revised downward to around 5%, while inflation is expected to reach 8 to 10%, according to BCG.

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UNICEF. India’s regions are culturally and economically diverse, with richer, more literate areas around Mumbai and Bangalore, and poorer, less educated areas in the east, Basu says.

To appeal to newly acquisitive consumers, car brands are adapting not only their messaging, but also their offerings. Tokyo-based Honda Motor Co. Ltd. entered the Indian market 20 years ago, but its market penetration still pales in comparison to local competition.

Honda has 170 dealerships in India, versus New Delhi-based Maruti Suzuki’s 1,300, according to The Wall Street Journal. In 2013, to tap into India’s growing middle class, Honda, which traditionally was considered a luxury car brand in India, launched a lower-cost sedan, Amaze, and sold more than 88,000 units within one year, according to the company. Amaze’s sales nearly doubled Honda’s market share in India to 4.7%, the Journal reports.

China’s Economic Might

“You have as many consuming-class people in China as the total population of the U.S.,” says Milton Kotler, president of Washington, D.C.-based Kotler Marketing Group and Kotler Marketing Group China, which provides strategic marketing and brand consulting services for Chinese brands, with offices in Beijing, Shanghai and Shenzhen. Kotler also is a columnist for the AMA’s Marketing Insights magazine.

“The Chinese middle class is expanding, wages are going up, discretionary income is going up. Middle-class people own a home, have a car, and spend money on travel and education for their children,” he says.

By 2040, China’s middle class is projected to double, reaching 500 million people, according to BCG. Chinese consumers with household incomes between 106,000 to 229,000 renminbi fall into the country’s upper-middle class. In 2012, this segment accounted for just 14% of urban households and was dwarfed by the middle class, with household incomes from 60,000 to 106,000 renminbi, according to McKinsey. By 2022, the upper-middle class will account for 54% of urban households and 56% of urban

private consumption, while the middle class will dwindle to 22% of urban households, McKinsey projects.

By 2022, urban household income will at least double and China’s upper middle class will become the engine of global consumer spending over the next decade, according to McKinsey. And China is an increasingly influential market for luxury goods, McKinsey’s research has found. By 2015, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry and ready-to-wear clothing will come from Chinese consumers.

The Chinese middle class are typically teenagers and people in their early 20s, born after the mid-1980s and raised in a period of relative abundance, and their parents, who lived through years of shortage, focused primarily on building economic security. McKinsey research also shows that this generation of Chinese consumers is the most Westernized to date, prone to regard expensive products as intrinsically better than less expensive ones, and also is more likely than previous generations to check the Internet for other people’s usage experiences or comments.

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Fortune 500 brands that appeal to many Western middle-class consumers are succeeding in China, but they’re beginning to face more competition from Chinese brands, Kotler says.

“You’re seeing more McDonald’s and Wal-Marts. Gap closed 80 stores in the U.S. and opened 80 stores in China, so the mid-level foreign consumer brands are doing well. Over the next five years, we’ll see tremendous local competition for the U.S. companies, as the Chinese people appreciate the improved quality and value of their own domestic brands.”

While the same brands might appeal to middle-class consumers both in the U.S. and China, distinctions in consumption behaviors and favored product attributes necessitate unique marketing strategies for both markets. For example, in the U.S., dryness and convenience are key selling points for P&G’s Pampers line of diapers, but P&G’s marketers had to rethink their positioning to appeal to Chinese mothers, says David Aaker, vice chairman of San Francisco-based marketing consultancy Prophet, author of Aaker on Branding: 20 Principles that Drive Success, and a Marketing News columnist.

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“They weren’t getting traction in China because people didn’t care about dryness or convenience, so they did research and found out that Chinese mothers were interested in the quality of the baby’s sleep. They believed that that would affect their children’s ability to perform in school later in life.”

Pampers’ marketing team then conducted a study with Beijing Children’s Hospital and found that kids wearing Pampers went to sleep faster and slept longer, with fewer interruptions.

Those findings served as the basis for Pampers’ new approach to the Chinese marketplace.

Moreover, Chinese middle-class consumers’ perceptions of price and prestige tend to differ from their U.S. counterparts, says James Fox, CEO of New York-based branding agency

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Red Peak Group, who has experience developing branding campaigns for Chinese companies including pay-perview service You On Demand. “A lot of brands in China have found that it’s very bad to be in the middle. Gap didn’t do very well by emphasizing that they were a middle-ranking brand. Chinese consumers either save up to buy a high-priced brand like Louis Vuitton or Tiffany, or they trade down to discount brands,” he says. “A lot of home appliances are usually cheap, discount Chinese brands because it’s within your own home and you don’t have to show it off to anybody, while for bags or jewelry, people will save up for those so they can take those brands outside.”

of consumers in Brazil, India and China are optimistic about the future, compared with only 48% of respondents in developed markets, according to BCG. Moreover, 55% percent of consumers in the three markets feel “financially secure,” compared with only 35% in developed markets.

“The U.S. middle class is shrinking in median income, and it is also saturated with products and debt,” Kotler says.

“They are de-leveraging their debt, rather than growing their spending. The key premise is that U.S. marketers have to become less U.S.-centric and more globalcentric because greater growth is going elsewhere, not here.” m

Optimism and Opportunity

Optimism reigns among the emerging global middle class. Seventy-two percent

For more on Chinese consumption habits, turn to page 88.

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