The growing importance of consumers in emerging markets could be the big investment theme of the next 20 years. But how can plan sponsors benefit from this exciting new area of opportunity? The traditional top-down approach of defining a benchmark, filtering out consumer plays and then researching them from the bottom up will lead you to the success stories of yesterday.
However, there is a third way, beyond top down and bottom up. This requires a shift in analytical mindset and an understanding that, if consumer demand is driving long-term trends rather than companies, then investors must stop looking at companies and start looking at consumers.
This grassroots research requires the investor to forget benchmarks and company listings and think like a company entering a new market. Try to forecast the shape, size and timing of the opportunity, and then work out how to access it. Aim to learn about consumers’ hopes, dreams and aspirations. Try to forget received wisdom and common myths. This means going out to meet consumers on their home ground. For instance, street stalls are a key part of the retail infrastructure in India and Ghana, so it’s important to look at examples in both countries and speak to consumers.
For example, our research shows that low-end consumers have two unexpected traits. First, they are very brand aware: around half of the goods they bought were global brands made by companies domiciled in developed markets. Second, they are loyal: they don’t want cheap products, but quality at a fair price.
So consumers choose a retailer on price, but once in the shop or stall they prefer known brands — loyalty is with the brand, not the retailer. This means retailers cannot earn the high returns associated with private labels and are vulnerable to the entry of a lower-priced competitor. The implication for investors is that brand-name producers from developed markets may be a better way of riding the rise in the emerging-market consumer.
This on-the-ground research also sheds light on wider consumption patterns. For instance, because food is the largest expenditure category for emerging consumers, it is critical to understand people’s changing eating habits. It is generally assumed that as people get richer they shift from carbohydrates to protein, but the reality is not that simple. Even for less well-off consumers, food can be discretionary. If fixed costs rise, such as travel to work, consumers can spend more or less on food as their budgets allow, switching from protein back to carbohydrates when money is tight.
Another insight is related to communications. While physical infrastructure and transport links played a key role in the industrial revolution in Europe, it is telecommunication that is having a transformational impact on emerging markets. Our research found villages of 2,500 people with only two cars, yet they also had a mobile phone tower. Telecommunication is a major source of empowerment for landless labourers in India, for example, giving them the ability to maximize their productivity by seeking further or better-paid work. The result is that they have seen their incomes increase by 18% to 20% per year through better use of their labour.
Grassroots research can also reveal how little we used to know about these consumers and it has opened our eyes to the vast size of the opportunity. However, research into emerging-market consumers also shows that it is only those investors who truly understand and can forecast consumer trends that will find success. Those who do may find that today’s minor players among emerging markets could become the global leaders of tomorrow.
Tassos Stassopoulos is global growth and thematic portfolio manager, AllianceBernstein