Emerging markets offer $30tr opportunity

14 August 2012

NEW YORK: Consumer spending in emerging markets should hit $30tr a year by 2025, but companies must learn how to serve a new generation of young, urban and inexperienced shoppers, McKinsey has argued.

According to the consultancy, annual consumption in fast-growth economies is set to more than double from the $12tr logged in 2010, while developed markets witness an expansion from $26tr to $34tr.

One driver of this trend will be the rising number of individuals with an income enabling them to spend money on items beyond daily necessities, jumping from 2.4bn to 4.2bn globally over the forecast period.

More specifically, 60% of the approximately 1bn households boasting earnings of at least $20,000 per year on a purchasing power parity basis will be drawn from developing nations by 2025.

Urbanisation is a major trend to watch, as 65m people are moving into emerging market cities each year. Some 440 cities, like Ahmedabad in India, Medan in Indonesia and Huambo in Angola, are also due to yield 40% of expenditure growth over the next 15 years.

Companies similarly need to ascertain where countries are on the demand "curve". Snacks and bottled drinks, for example, typically see the earliest surge in interest as affluence rises, followed by beauty brands, luxury products and then services.

"In many product categories, such as white goods and electronics, emerging market consumers will account for the overwhelming majority of global demand," the study said.

McKinsey's analysis of 2,720 firms found those from emerging markets were growing by 30.7% a year in other developing nations, whereas rivals from mature economies saw 12.6% growth across the same outlets.

"To win in emerging markets, developed market companies must be willing to embrace big changes fast; those unable to reallocate resources radically risk a drubbing by local competitors," its study warned.

As 63% of citizens in developing nations are aged under 35, versus 43% for developed countries, and have less experience with brands, building "trust" and playing an educative role are also essential.

The in-store arena assumes heightened importance in such an environment, as shown by the fact 45% of Chinese customers make final decisions when actually out shopping, falling to 24% for the US.

Additional tactics recommended by McKinsey included pursuing localised R&D schemes, precisely segmenting the target audience, raising salaries to secure the best talent and working more closely with local regulators and stakeholders.

Data sourced from McKinsey; additional content by Warc staff