For many years, the rise of the middle class in emerging markets has captivated the imagination of investors. We think this is an illusion. It’s the working classes who will be the real engines of consumer growth in developing countries.
Consumer dynamics in emerging markets are often misunderstood. Yes, it’s true that the rise of the middle classes is a defining characteristic of a vibrant, developing economy. But to capture a country’s increasing spending power, it’s a mistake to focus solely on the middle classes. That’s because the fastest growth will be driven by the masses of lower income workers as they improve their lot to join the middle class.
Poorer Consumers Are Upbeat
This is a natural process. In our travels across emerging markets, we found that poorer people were generally more hopeful about new opportunities and keen to seek better education in order to pull their families out of poverty.
Take Bala, a 32-year-old farmer from a small village in Maharashtra State, India. His income has increased by 15%–20% over each of the past five years, owing to more efficient utilization of his time. Simply by having a mobile phone, Bala has been able to find work on other people’s farms or in construction in the village. Eventually, he hopes to save enough to buy a cow and sell the milk. And he’s educating his kids to help them find employment in a service industry, which would provide a more stable source of income and boost their standard of living dramatically.
India has perhaps 280 million people who are benefiting in different ways from improved connectivity, according to estimates based on the rapid expansion of rural cellphone penetration in the last five years. As they move out of poverty, their contribution to GDP will grow dramatically leading to a massive shift in the emerging consumer.
New Challenges for the Middle Class
Younger people from lower income groups are creating new challenges for the established middle class. For example, Marcia, a 36-year-old school administrator from Sao Paolo, recently told us that people like her find it much harder to get a job today than just a few years ago. As competition has increased from younger candidates—who often come from poorer homes—employers want more. “Companies are more demanding,” Marcia told us. “They expect a degree and are looking for people to speak English and Spanish.”
Similar sentiments were echoed across 12 countries that we visited over the last two years, meeting consumers in their homes to understand their hopes, dreams and aspirations. We ask consumers to describe their lives five years ago and today. Forty-something, middle income professionals frequently expressed concern about the employment market. And poorer people were typically much more upbeat about their prospects for growth. The optimism tends to reflect the scale of improvement in their lives in recent years—which has often been more pronounced for lower income households.
Survey data support our findings. According to Euromonitor, from 1992 to 2012, the lowest third of income groups across the top 12 emerging markets enjoyed the largest wage increases (Display). This trend is expected to continue through 2020.
Companies Must Cater to Lower Income Groups
For investors, the message is clear: focus on companies that know how to sell to lower income households—because they will be the big beneficiaries of accelerated growth over time.
In the past, there weren’t many investment options to capture this type of growth. The working classes were more likely to buy goods from local markets or informal outlets. So bigger, publicly traded companies targeted the middle classes, by aiming to sell them developed-world products at developed-world prices.
Times are changing. Today, reaching lower income consumers—who have demanding tastes for quality goods at a fair price—is the key to success. In our view, domestic or multinational companies that figure out how to do this will be the biggest beneficiaries of consumer growth across income groups in emerging markets.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.