The Emerging Middle Class

Corissa KoopmansPier LevyPaula PitolVanessa MeyerDaniel Finamore Martins

1. Introduction2. The middle class overview3. Growing middle class in BRIC’s4. Main highlights and trends5. Implications for consumption6. Challenges7. Conclusions and Perspectives

Agenda

Definition & Characteristics

Per capita income of US$2 and $13 a day at 2005 PPP (Ravallion)

Per capita Income of US$6000 and $30,000 a year (app. $16 and $80 a day) in terms of PPP (Goldman Sachs)

Households with annual disposable income of US$5,000-15,000 (Euromonitor)

Per capita income of US$10-20 a day (World Bank)

Income interval from 75% to 125% of the median (Thurow,1987)

“A person who could routinely buy items sold at a typical Western-type discount store” (Miller-McCune, 2008)

Have1/3 of income left for discretionary spending (Dilip K. Das)

Middle Class??

(Milanovic and Yitzhaki, 2002)

Middle Class: $2-$13 a day (2005 PPP)

80 million people in developing world joined “western middle class” (i.e. above US poverty line) between 1990 – 2005

Number of households with annual disposable income of US$5,000-15,000 in selected economies: 2000-2020

Middle Class: Household income of US$5,000-15,000 a year

The total number of households in this income band for EMEs was expected to reach 331 million in 2010 from 104 million in 2000

Euromonitor

By 2030, roughly 50% (4 Billion) of the world population would fall into the $6,000-$30,000 bracket, up from 29% today

The Tortoise & The Hare… and everybody else

The Tortoise & The Hare

By 2020, 1/3 of new entrants to

middle class will come The “others”

Russia’s rising middle class

21% NSE ALTO (A+B)

44% NSE MÉDIO (C)

35% NSE BAIXO (D+E)

Fonte: Nielsen | Homescan e Abep

Brazil’s middle class (class C)

monthly household

income of US$ 900 –

US$ 1,500

(US$10,000 -

$18,000/year)

http://www.ted.com/talks/hans_rosling_reveals_new_insights_on_poverty.html

Main highlights and trends

BRIC: Specific Drivers of Growth

Reasons for the Growing Middle Class

Brazil

India◦ Income levels expected to triple!

Increase in Disposable Income

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

151 180 200 240 260 300350 380 415

465 510 540Minimum Wage USD

1226

Income Growth

2004

19,3% in 5 years

USD 1028

2009

What is BRIC buying?

Source: Euromonitor International from national expenditure

Expenditures of the 10% households with highest annual disposable income in 2006

Unemployment Rates

Source: IBGE

“Brands are fueling the rise of the middle class in China. The Chinese have an aching ambition to climb up the ladder of

success, and brands are the mark of people who have made it.” - Marketing expert Tom Doctoroff told U.S. News and World Report

Change of Lifestyle and Product Awareness

Product Awareness: Importance of Advertising

Region-Media in Russia identified the seven types of consumers in the market.

Times are changing!◦ In Brazil, the United Arab

Emirates, and Russia, the vast majority of college graduates are female.

◦ In Russia, 86% of women ages 18 to 23 are enrolled in tertiary education.

◦ For every year beyond fourth

grade girls attend school, a country’s wages rise by 20% and the child-mortality rate dips by 10%.

-The Women’s Learning Partnership

The trends within BRIC

Source: http://www.newsweek.com/2010/07/06/women-will-rule-the-world.html

Woman make up between 30 and 50% of BRIC workers as a whole

Companies who’d made efforts to empower women in emerging markets, 34% reported increased profits, and another 38% said they expected to see profit as a direct result of those efforts.

Women of BRIC

85% of women in India consider themselves “very ambitious”; in Brazil, India, and China, at least 75 % of women aspire to hold a top job. (compare these figures with the mere 36 percent of U.S. women who consider themselves very ambitious)

Dependency Trend The dependent population

in relation to the working population.

This is important as it illustrates dependency on the working population, which will slow growth as the ratio increases.

China and Russia are following a similar trend as their dependent population is starting to increase while Brazil and India’s dependent

pop. is still decreasing.

Implications for Consumption

Middle classes are increasing access and developing new needs…

1 New services

Split air-conditioners

Frost-free refridgerators

Fully automatic washing machines

Microwave ovens

High-end Flat Panel TV

60

54

35

35

100

% Growth in Sales in India (2006-07)

2Different productcategories

Credit Card Ownership in Brazil

50% Class C136% Class C2

14% Class C2

34% Class C1

Computer

98% Class C2

99% Class C1

TV

(Latin Panel, Brazil, 2007)(Nielsen, China, 2010)(Trendsniff, India, 2010)

% Permanent Expenditures in Brazil(Food, Transportation and Household)52%

AB1 54%

B258%

C2 59%

D 67%E

55%

C1

“The money they earn is either saved or spent on things like televisions, household appliances and education

for their children” (Nielsen, China 2010)

(Latin Panel, Brazil, 2007)(Nielsen, China, 2010)

…consequence of more available income

…since basic needs are being met…

Penetration of Goods

(FAO, 2001)(World Bank, 2008)

ELET

RICITY

TELE

PHONE

REFRIG

ERAT

OR

WAS

HING M

ACHIN

E

TELE

VISION

COMPU

TER

97

65

87

35

90

16

9984

93

44

96

35

2008 2009

…the penetration of new categories is growing faster

“R$ 20 bi in electronics in 2010”

(PNAD, Brazil, 2010)

…and Internet users are increasing throughout BRIC’s

PNAD (2010), ITU (2010)INTERNET WORLD STATS (2010)

Millions of users

2000 2001 2002 2003 2004 2005 2006 2007 2008 20092 4 8 11 21 32 36 42 46 5223 34 59 69 94 103 137 162

253

384CHINAINDIA

INDIA

CHINA

BRAZIL

RUSSIA

5.9

31.6

41.7

42.8

2 x Brazilian Population

North Northeast Central West

South Southeaest

34.330.2

47.2 48.1 45.9

Internet Users: % of total populationInternet Users in Brazil

% of total population

USA: 78%

Companies are investing in Market Research & Segmentation for Middle Class…

“Data popular was establish to build unparalleled knowledge on

low-and medium-income consumers”

…and adapting brands and products

(Data Popular, 2010)

Unilever – Laundry Powder

Chocolate Brands in Brazil(same company)

Class A Class C

Affordable unit prices

Larger packages

Innovations

...and developing new Packaging & Promotions strategies

1 liter beer bottle

Plastic Returnable

Bottle

R$ 1,00 Coke

(Brazilian Examples, 2010)

In Brazil, 84% of the Middle Class has a mobile◦ Pre-Paid system◦ Many people have 2 or 3 “SIM

CARDs” from different companies to enjoy promotions

The same is happening in Mobile Industry

Citibank launched its mobile banking services in Russia

without any additional applications to be installed on their mobile.

China and India are now the world’s 1st and 2nd largest mobile phone markets (2009)

% of households with telephone

Households with telephone

Just lend line Just cell phone Both

15-30% is the growth of this industry each year for the last decade (India and China)

A car takes up to 140% of the buyers’ annual income compared to 35% in the United States

8 million passenger cars sold in China in 2009

more than 10 million private cars in China now - about one car for every 120 people (2006)

“As the middle class expands, car sales in China are skyrocketing”

(Renaissance Capital, 2007)(The Economist, 2009)

“By varying the specifications and prices of

RBrs, we want to serve not only customers

for C-segment cars but also those for the

B-segment in order to achieve the highest

sales in the category of small vehicles,”

said a Hyundai Motor official in Russia.

Growth tendencies are very impressive among retailers…

Bharti-Walmart opened 59 stores in Northern India in 2010

Expected to open 10-15 wholesale locations by 2013

Planning to add 10-15 new brands to its community family shopping centers in Bangalore.

Us$ 674 bi

US$ 393 bi

Retail Sales Expectation

2011

2014

72%

...that needed to adapt their stores...

PLANO REALInflation control

Change of HabitsLess “monthly” purchasesMore reposition purchases

Development of small and local retailers

...but small and local retailers are also

increasing(Nielsen, Brazil, 2008)(Nielsen, China, 2010)

“Local companies will maintain leads in smaller cities in China”

(Nielsen)

…they also adapted the European Cash & Cary into “Atacarejo” in Brazil

From 86 to 291 stores in Brazil

(2000-2009)

(Revista no Varejo, 2010)

McDonald’s in India

Vegetarianism predominance Previous multinational food

companies failure

The chain had 170 stores in 2010 and was due to open other 120 in that year

Vegetarians selection to suit Indian taste◦ No beef or Pork served at all◦ Maharaja Mac replaced Big Mac, Chicken Patty

instead of Beef◦ Potato-based hamburguer

Initial focus on metros- Mumbai, Delhi Entered into two 50:50 JVs with local

companies Extensive management training Adaptation on production process

22% of the middle class borrow credit cards from friends and family

66% prefer retailers to finance their consumption, since they don’t like banks

Long-term payment Paying in advance for later

retrieval of goods

Credit plays important role, but in different ways...

Fidelity Card

(Data Popular, 2009)’

Highest savings rate of any major country

Chinese consumers are much less leveraged than others

Cash society: most cards used solely for ATM or debit purposes

By April 2006, 40 million credit cards had been issued in China

China Taiwan USA

2755

94% Leveraged

In Brazil, the number of Undergraduate students grew from 3,6 to 5,8 millions between 2002 and 2009◦ they spend 60% of their income monthy◦ more than 2.000 universities (90% private)

…helping the BRIC’s university “boom”

2002

2009

350.000 of engineers are graduating in India

and700 .000 in China

– in USA, this number is around 70.000

(Business Week, 2006)(Mundo do Marketing, 2010)

University students by social class in Brazil

80 million Brazilians were building or reestructuring their houses in 2010◦ 15% of Brazilians live in unfinished households◦ 5,2 times was the increase in decoration

expenditures from 2002 to 2010

Construction “boom”

Source:AF&PA China

Infrastructure:

• 4,000 km of new expressways / year

• New 1,000-megawatt power plant / week

• 48 new airports underway

By 2015, half of the world’s new building construction will take place in China*

Construction represent 16% of China’s GDP

China is currently using

o 54% of concrete production

o 36% of steel steel supply

o 40% of world oil demand growth

Luxury goods

• 2015: 29% of all luxury goods sold worldwide• As many Chinese women enter the middle

class, they start to purchase "affordable" luxuries, like skin creams and cosmetics.

• Cosmetics market is estimated to be $5.5 billion per year and grow at an annual rate of 10 to 15%

“Brands are fueling the rise of the middle class in China. The Chinese have an aching ambition to climb up the ladder of success, and brands are the mark of people who have made it.”

*(Goldman Sachs)

“Fundamentally, beauty and luxury is an enduring (middle class) segment in Russia, and Russians have a passion for brands.” (Ernst & Young, Russia, 2011)

Challenges

Steady retreat of poverty Engine of the global economy Jobs creation New consumer market Spur for nations to invest in public

infrastructure, roads, and schools Advocate for social stability In some cases, wholescale political change

Middle class’s hopes

Education: Primary and Tertiary education

Infrastructure: roads, mobile telephones, mainline telephones, Internet users, installed electricity and air passengers

Political and social changes

Challenges for the BRICS

Greater threat of environmental degradation

Increased pressure and competition for resources: fuel, food, water

Challenges for the world

2004 2008 2009

11.5

109.7

EducationLiteracy RateIlliteracy Rate

Technical and R&D workers

Infrastructure – India lags

In Russia, only 22% say they are sufficiently well-off to be considered part of the middle class.

In Western Europe, 40-50% of people say they belong to the middle class

In the United States, it is about 70%

The Russian middle-class and the Self-assessment

Basis of social stability:

Healthy conservatism that saves the country from excessively emotional political decisions.

Environment, China’s threat

Is the emerging middle-class a source of global instability ?

Reflexions

Can Money buy happiness ?

Thank you for your attention !!!

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References (Implications in Consumption)