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Rise of purchasing power in emerging markets

Page history last edited by Brian D Butler 13 years ago

 

Table of Contents


 

 

 

 

Quotes:

  • "The region’s economic performance over the past few decades has been nothing short of remarkable. Asia now accounts for about a third of the global economy, up from under just a fifth in 1980. This trend has been reinforced by the crisis, with the emerging market powerhouses leading the global recovery...  Asia has also made tremendous progress with poverty reduction. China alone has pulled hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization." Dominique Strauss-Kahn, Mar 31, 2011.[1]  

 

 

Why is Economic Development important?

 

facts:  4 billion out of 6 billion people on the planet are poor.  50% of them (2 billion people) live on less than $1 a day.   Moving these people up the economic pyramid is not just a moral issue, but its also an economic one.  There is a massive potential market of consumers waiting to be tapped.  See our discussion on economic development for more....

 

 

Rise of purchasing power in emerging markets

 

 

Around the globe, in many emerging markets, we are seeing a phenomenon occurring where millions of poor people are suddenly emerging as consumers and moving up along the social chain.  This trend is leading to opportunities with consumers of low income on a scale as never seen before.   In countries such as Brazil, and in many emerging markets, there is the growth of the "third class" of consumers, which suddenly find themselves using credit and other mechanisms to join the global consumer market.  As this trend occurs the world over, there are massive opportunities for marketing "at the bottom of the pyramid".  

 

As technology and travel  becomes more affordable, we are seeing a booming auto market in Brazil, and the expectation that this emerging class of consumers will want more appliances, electronics, and international travel. 

 

This, in turn, gives a boost to the commodities market, and can explain why more construction materials, and industrial commodities are needed in India, China, and in many emerging markets.  

 

This is also the basis for the "decoupling" theory that holds that countries like Brazil (which are big commodities exporters) are not as effected by a US recession as they would be in the past, because a big part of those commodity requirements are now needed to feed this swelling of the purchasing-class.

 

Example:  Brazil

 

This trend has led many businesses to adapt their commercial strategies in order to meet the needs of newly empowered consumers. Retailers such as Casas Bahia or Insinuante in the north-east have expanded quickly by offering credit to poorer customers. Consumer goods companies are tailoring their sales offers to the less well off, mirroring the tactics of Indian companies that have pioneered sales to the bottom of the pyramid.

Nestlé, for example, sells powdered milk in affordable sachets rather than more expensive cans and employs working-class women to sell yoghurt and dairy products door-to-door, reaching consumers for whom a journey to the supermarket is prohibitively expensive.

 

 

 

Impact of this trend on the Travel Industry: 

 

The Travel Industry will be significantly changed by this trend.  According to the United Nations World Tourism Organization, the number of international tourists is expected to double from 2008 (800 million tourists) to 2020 (1.6 billion tourists).  Get that?  Double in the next 12 years.  Why?  The biggest reason is that there will be hundreds of millions of new entrants into the middle class as " Indian call centre employees, Russian engineers, Chinese middle managers and Brazilian salesmen" suddenly have enough money to travel.   source

 

 

 

Threats and Opportunities from this trend:

 

  • “First, most tourism-related prices, such as hotel room rates in popular cities, will continue to escalate as demand outstrips supply.”
  • “Second, rationing, and the resulting waiting lists, will become commonplace. Some groups, for example, are already calling for limits on traffic to ecologically sensitive destinations, such as the Incan ruins at Peru's Machu Picchu.”
  • “Finally, jaw-dropping prices and decades-long waiting lists will prompt the creation and the expansion of destinations in both developed and developing economies. The Chinese, for example, are developing Hawaii-like Hainan island and Macao, a gaming paradise on China's southern coast.”
  • “Companies and governments are also creating facsimiles of popular destinations.”
  • “Just as sites and structures can be successfully replicated in new locations, so can institutions. If the swelling ranks of global travelers can't all come to you, you can go to them.”
  • “As the scarcity of places grows, many companies will find opportunities to profit by meeting new levels of demand for authentic, and inauthentic, experiences.”
  • “A billion or two additional international travelers represent both a massive potential headache and an opportunity for business.”
  • "Real estate in both urban and suburban areas is one of many investments that may benefit from this explosion. As demand increases, tourism and hospitality businesses should also perform well, and there are many new businesses that could be created to cater to international tourists. An entrepreneur’s imagination is the only limit.

 

 

Impact of this trend on Economic Development:

 

One example is the regional Economic Development boom that is planned between 2008-2010 in the Brazilian NE state of Pernambuco.  As a result of rising incomes, available credit, the "Bolsa Familia" program, and of the strengthening currency (vs the weak dollar), suddenly Brazilian consumers are feeling wealthy as never before, and they are buying cars, and commercial goods like never before.   In response, you see massive developments in and around the port of Suape, such as the massive wheat mill from Bunge, or the auto distributors, oil refineries, ship building, steel mills, etc.  (see more in our coverage of Pernambuco). 

 

see more in our discusson:  Brazil: Economy

 

Risks that could end this trend:

 

  1. inflation, if it gets out of control could cut into the purchasing power of this new class of consumers, and limit the growth of this segment.  We see risks here with the rising inflation worries 2008, rising food prices, and High Oil Prices
  2. if the commodities bubble were to burst, could hurt countries such as Brazil or Peru, and such macroeconomic troubles could lead to budget problems, and cutbacks in social welfare programs.  watch out for this one!

 

 

 

Market potential index - which emerging market should you consider for starting a business?

 

see related pages from GloboTrends:  emerging markets  and  marketing opportunities in emerging markets  and Investing in emerging stock markets  and Private equity and venture capital in Emerging Markets  and Rise of purchasing power in emerging markets and International IQ

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"You started your business, you exploited the opportunities in your local markets and now, like all entrepreneurs, you are looking for other avenues of growth. In today’s economy, emerging markets are booming and providing many great opportunities for entrepreneurs looking to expand their brand.

 

However, with so many choices which market is right for your business?

MSU-CIBER has created a resource for small to mid-size companies designed to help solve this dilemma called the Market Potential Index (MPI). The MPI scores the market potential of the 26 countries considered emerging markets by The Economist - all of which are experiencing rapid economic growth and positive social change. The Index uses eight dimensions and takes into consideration size, growth, potential capacity and risk. The index has been published annually since 1995 and has been successfully utilized by many companies and investors to identify sustainably fast growing emerging countries. 

 

Two well-represented regions in this year's rankings are Asia and Central Europe. Asia is home to the top three countries: Hong Kong, China, and Singapore. These three countries have held the top spots for five years running and have been fueled by exports to developed markets and an emerging middle class. Central Europe also has three countries in the Top 10 including Czech Republic in fifth, Poland in sixth and Hungary in eighth.  Many Central European countries have recently experienced accelerated growth rates and a rising standard of living through the exportation of goods to established European countries, the privatization of state-owned corporations and the introduction laws that encourage new business development.

 

Egypt has been in the news recently for its government overthrow and is therefore a great case study for the MPI. In this year's rankings, Egypt ranked particularly high in growth (7th) and capacity (6th) and relatively low in risk (21st) and freedom (22nd). Overall, one could interpret this country to have a relatively high market potential, but the index calls into question its risk and freedom. The protests demanding greater democracy could drastically increase their freedom rankings if Egypt is able to translate its new government into a more open economy. Egypt currently ranks 16th overall and would be a great place to research more thoroughly if conditions improve. 

 

If your business is looking to expand abroad, make sure you are well informed and start your learning process with the MPI and globalEDGE’s Diagnostic Tools.

 

Most recent year:  http://globalEDGE.msu.edu/resourceDesk/mpi/

Past years:  20092008, 2007, 2005, 2004, 2003, 2002, 2001, 2000, 1998, 1997, 1996

 

see related pages from GloboTrends:  emerging markets  and  marketing opportunities in emerging markets  and Investing in emerging stock markets  and Private equity and venture capital in Emerging Markets  and Rise of purchasing power in emerging markets and International IQ

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More related pages from GloboTrends:

 

 

 

 

 

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Footnotes

  1. Originally published at iMFdirect, http://www.roubini.com/globalmacro-monitor/260743/nanjing_and_the_new_international_monetary_system

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