Middle Class Purchasing Power Set to Triple by 2030 Due to Rapid Growth in Emerging Markets
Ernst & Young - Apr 21, 2012
Strong Growth in the Africa Middle Class, attracting FDI in Financial Services, Retail and Telecoms.
Companies will need to change their strategic direction to capitalise on new demands from a fast-growing global middle class, particularly in the emerging markets. This will involve creating entirely new products and services if they are to truly innovate and grow. These are the main recommendations from a new Ernst & Young report, Innovating for the next three billion: The rise of the global middle class, based on a survey of 547 executives worldwide and in-depth interviews with some of world-leading entrepreneurs.
The survey highlights that the majority of companies from developed economies currently direct most of their energies and activities towards the premium end of the market in their main high-growth markets. Even among high-performing companies in these markets that proportion remains as high as 40%. The report argues that this focus on luxury goods will have to change.
With new middle-income customers expected to grow by three billion by 2030, representing a growth in demand from US$21 trillion to US$56 trillion, the report identifies the capabilities necessary to innovate: customer insight, people culture, research and development and operations and business model – combining local relevance with global scale.
Maria Pinelli, Global Vice-Chair Strategic Growth Markets for Ernst & Young explains: “There is a huge potential for middle class consumerism in rapid-growth economies, and this report demonstrates the scale of opportunity for companies that develop innovative products. Companies need to think about fundamentally changing the way they work in order to take advantage of these changing demographics.”
Michael Lalor, Leader of the Africa Business Center at Ernst & Young comments, “Much of the growth in spending of the global middle class over the next 20 years will be in Asia, but this is also a rapidly growing group across Africa. Currently, the middle classes constitute a significant 11% of the African population, and strong growth will push this number up by 2030 in line with the global trend. As this section of society grows in number, it is catalysing developments for Africa.
Democracy, governance and the business environment have all improved. And as global companies start to recognise the growing spending power of Africans, foreign direct investment has begun to grow and diversify. Between 2003 and 2010 alone, spurred partly by 7% annual growth in the African middle classes, investment in retail grew by 17%, financial services by 15% and telecoms by 30%. Middle class growth in Egypt, Ghana and Nigeria – some of the countries covered by this study – is likely to be in double digits over the next 20 years, as their economic growth accelerates into the future.”
Frugal innovation The survey demonstrates that companies are at least beginning to innovate in these markets. More than three-quarters of the respondents think that adopting “frugal innovation” – or economical use of resource to provide products affordable by those on a lower income – is a major opportunity. And companies in the survey with higher-than-average earnings before interest, taxes, depreciation, and amortization (EBITDA) growth seem more likely to recognise the scale of the opportunity, with 81% of the high performers thinking frugal innovation is a major opportunity, compared with 68% of those with lower EBITDA growth.
Pinelli continues: “Companies – regardless of market – are currently missing a significant and increasingly important opportunity in developing economies and must bring products in line with the income distribution in rapid growth markets. This requires a fundamental re-thinking of innovation and go-to-market strategies.
“It’s no coincidence that those companies leading the way with innovation in rapid-growth markets are headquartered in rapid-growth markets, where they have an advantage in generating ‘frugal innovations’, or those that can be sold to the emergent middle class. Companies in rapid-growth markets have long operated under an environment where there is a shortage of resources and poor infrastructure and these constraints have forced them to be highly creative and entrepreneurial.”
The report identifies four capabilities needed for companies to “frugally” innovate for the next three billion consumers:
Customer insight – Successful innovation requires the companies to get close to their customers and understand the problem that needs to be solved.
People and culture – Companies need to adopt a culture and mindset that are willing to tailor products to customer’s needs.
Research and development – A global network of R&D centers enables companies to leverage global resources and re-apply innovation across multiple markets.
Operations and business model: combining local relevance with global scale – Rapid product innovations are important, but equally as important is the need for companies to think about the business model and ensure that it is appropriate for a lower-income customer base.
Pinelli concludes: “Each of the key capabilities identified by our report comprises various components that are either local or global in nature. The key to success will be for companies to combine these local and global components to ensure that their products and services will be relevant to local customers, while still enabling the company to leverage global resources.”