By Fidelity Worldwide Investments
Over the next few decades, about one billion people are expected to ascend to the global middle class. Such a number explains why so many companies are developing presences in emerging markets; from Asia to Brazil, from sub-Saharan Africa to Russia. They want to capture rates of consumption growth that are unimaginable in mature western economies.
Asia’s potential consumption is especially huge, even if the outlook is complicated by a preference for saving that is partly due to the lack of a social safety net.
While China may be one country everybody is watching to see the consumer revolution take hold, they shouldn’t forget about India where rising incomes and readily available retail credit have encouraged consumption growth of 5% in recent years.
The outlook for further growth is compelling thanks to India’s rising proportion of young workers. As this occurs, Indian spending habits are likely to change. At present, spending in shopping malls is a tiny percentage of total spending because most money is spent with small traders in public markets.
While consumerism is still to fully grip China and India, it is embedded is some emerging markets such as Brazil. The South American country, for example, is now one of the world’s biggest markets for beauty products.
As incomes grow in emerging markets, the proportion that is spent on necessities shrinks. As the disposable income of emerging consumers grows, so too does the allure of the coolest fashions and the latest gadgets. Consumption patterns in emerging markets are already changing as this trend develops.
While western consumers grow resistant to advertising, forcing companies to be more innovative, multinationals are using time-tested aspirational advertising to build brands in emerging markets.
Guinness, for example, is what the upwardly-mobile Nigerian man ought to be drinking, according to an advertising campaign in the African country. And drinking it he is. Nigeria has become a large market for Guinness.
Another area reliant on advertising that is growing strongly in emerging economies is western-style fast food. Yum! Brands, whose portfolio includes Pizza Hut and KFC, has around 4,600 KFC outlets in nearly 1,000 cities and about 1,200 Pizza Huts in China. In India, the company has opened more than 600 restaurants including 345 KFCs. Incredibly, the company sees the potential to have 2,000 restaurants in India by 2020.
Tourism and leisure are classic areas of discretionary spending that are set to surge thanks to the growth in the middle class. Companies such as Nasdaq-listed Ctrip.com, which is China’s dominant online and telephone travel agency with 140 million registered members, stand to benefit.
And then there’s the potential for the luxury goods market. The elite in emerging markets are happy to indulge in ostentatious purchases to underline their status and reward themselves for their endeavours. This invariably means luxury western brands are in great demand from a relatively small, but high-spending, portion of the population.
The western luxury goods companies have noticed. They have expanded their presence in key financial centres where wealth has accumulated, such as Shanghai.
These companies benefit from the fact they have no local competition. In the low- and mid-market areas, there are abundant local competitors who can compete on price. The top end, however, enjoys the exclusivity and allure that comes with high prices. Companies such as Burberry, LVMH and Richemont are poised to benefit as the top strata of the emerging middle class expand.
While industrial investment themes may reward investors only over specific parts of the investment cycle, the steady growth in consumption represents a compelling and enduring theme over the 21st century that deserves long-term inclusion in any equity investor’s portfolio. After all, every few years there’s another Japan worth of new middle-class consumer to target around the world.
References to specific securities should not be taken as recommendations.