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Credit Suisse Publishes Fourth Annual Emerging Markets Consumer Survey
Outlook less confident than a year ago but the structural story persists as incomes grow and wealth accumulatesThe Credit Suisse Research Institute today published its fourth annual Emerging Consumer Survey – a detailed study profiling consumer sentiment and its drivers across the emerging world against the current backdrop of investor scrutiny of emerging markets, this study provides a timely insight regarding the sentiments and consumption patterns amongst emerging consumers and their role in driving global growth.
To undertake the project, Credit Suisse has again partnered with global market research firm Nielsen to conduct nearly 16,000 face-to-face interviews with consumers across nine economies. These include: Brazil, China, India, Indonesia, Russia, Saudi Arabia, Turkey South Africa and, for the first time, Mexico as it progresses its reform agenda. The research is unique in benchmarking consumer behavior across these countries in a consistent and detailed manner; posing more than 120 questions to help establish a detailed profile of consumers’ spending habits, future intentions, and the factors that influence them.
Stefano Natella, Global Co-Head Securities and Analytics Research at Credit Suisse, said: “Our survey provides a unique and detailed analysis of consumer sentiment in the emerging world. While many are actively scrutinizing the macro outlook for emerging markets amidst the current volatility, the granular bottom-up analysis in our survey provides a reminder of how mismatched top-down views alone can potentially be. Understanding them both is key for both companies and investors.”
Giles Keating, Credit Suisse’s Global Head of Research for Private Banking and Wealth Management, said: “The survey is particularly timely given the currency and stock market pressures some of the Emerging Markets surveyed are currently experiencing. Against this backdrop, having a detailed analysis of consumer sentiment on the ground in important markets ranging from China to Mexico provides information that is not accessible anywhere else about the drivers of local consumption. The analysis delivered in this report and the accompanying Emerging Consumer Databook underlines the ambition of the Credit Suisse Research Institute to provide our clients unique and proprietary insights to assist their investment and corporate strategies. The survey builds upon the Research Institute’s detailed knowledge of trends in emerging markets and follows our recent study on Latin America, “The Long Road”.”
1. Cyclical backdrop more challenging… but structural optimism retained
Our 2014 survey was conducted against a backdrop of unease as to the fortunes of emerging markets as an asset class, their currencies and the economic growth premium they offer relative to developed economies and markets. The findings of this year’s consumer study are consistent with this more sober picture.
The net percentage of consumers surveyed across our nine countries who believe their financial position will improve relative to those who feel it will deteriorate stands at a net 26% compared to 28% a year ago. Perhaps more reflective of the current economic data, we find a fall in the number of consumers seeing now as a good time to make a major purchases. For example, in Brazil nearly two-thirds of people regarding now as not a good time to make a major purchase.
To reflect a-rounded and relative assessment of the health of each of these emerging economies, we introduce the “Emerging Consumer Scorecard” that assesses the consumer’s perception of the current environment, his/her medium-term finances, income prospects and the threat from inflation. China tops the list with, Brazil and Indonesia displaying strong structural attractions, whilst Mexico, Turkey and South Africa look the more challenged. The differences between the “have’s” and “have-nots” in South Africa is a major ongoing theme with the gap in perceptions only widening.
2. Profiling the emerging consumer
The profile of the emerging consumer differs vastly within and between countries. Understanding this fact is key to unearthing relative growth opportunities and identifying risks. Our survey uniquely allows us to analyze the distribution of income as well as its relative level across these key economies.
In analyzing the distribution of income within our data, the rise in the emerging middle class is apparent. In our 2011 survey, we estimated 27% of BRIC households earned between USD 1,000 and USD 2,000 a month. This figure has now risen to 32%, which represents an increase of roughly 60 million households into this middle income bracket.
The nature of the holders of this income is a key influence on the pattern of consumer spending. As highlighted in the 2013 survey, demographics are a key factor. The high income earners in the emerging world are typically young consumers. For example, the survey highlights that in China, an 18-29 year old typically earning nearly a quarter more than a 46-55 year old. All things being equal, the age of the income earners should influence the outlook for elements of discretionary spending (e.g. branded products and property) versus more precautionary spending such as healthcare. Younger, wealthier consumers are likely to spend more on the former, while older wealthier consumers arguably the latter.
In the case of China, where this pattern is most pronounced, there is an added and highly significant consideration stemming from the potential ending of the one-child policy, which by definition will have an impact on the spending patterns of a specific demographic with property certainly relevant. The 18–29 and 30–45 age groups in our survey represent China’s most likely young parents or parents “to-be”.
A new emerging theme for 2014 is also the recovering “rural” consumer. Consumer expectations for wage increases in two of the largest and most populous economies – India and China – are significantly higher in rural communities than in urban areas. Relative to 2013, we see better momentum in income expectations in the rural areas for six of the nine countries surveyed. The new rural middle class is a theme to watch.
3. Consumer focus now more product-specific and country-specific
The study underlines the structural potential for consumption growth given growing income and wealth accumulation, particularly in Asian economies where consumption shares of GDP are very low and savings ratios high.
However, adverse cyclical factors have impacted this story with a weaker outlook for the big ticket discretionary categories such as cars and consumer durables. If economic uncertainty persists, these bigger ticket items seem to be the areas to be most concerned about. However, there is still consumer appetite for spending in lower ticket discretionary areas such as sportswear, watches, jewelry and fashion. Property price expectations are also bullish with 8 countries of 9 recording expectations of increasing house price inflation.
The results do of course vary country by country. The study analyses which categories show untapped potential in specific countries. A short cut to consider investment opportunities would be to focus on areas where penetration rates are low and spending momentum remaining robust. Asia in general offers strong potential. A broad range of opportunities tend to emerge in China (specifically in spirits and holidays), India (cars and internet) and Indonesia (dairy, cars and computers). Higher meat consumption, smartphones and potential for sportswear cut across all country boundaries. The potential for financial services such as insurance is also a key theme.
The study drills down into the outlook for three specific segments of spending with the help of Credit Suisse’s industry analysts:
Technology: A desire to use mobile apps and access the internet are leading the charge in handsets, particularly smartphones. With ample opportunities for increasing smartphone use in emerging markets, the survey underscores the sub-$200 segment of the smartphone market continuing to see the greatest growth in the coming years. This growth is driven by the fact that it is by far the most popular consumer electronic device to buy.
Travel: Although we note a slowdown in some others areas of spending, a desire to travel stands out across. As emerging market consumers grow richer, we expect this desire to trickle further down the income scale and overall spending to strengthen more broadly. We highlight a series of points in our survey that suggest an inflection point may have been reached with positive consequences for international travel in particular. The greatest changes were seen in China and Saudi Arabia.
Healthcare: We note that there is a trend towards government programs increasing access for the consumer. Within the environment of a growing GDP, we would expect this to be supplemented by increased individual spending. Mounting concern over the safety of local brands is mirrored by a foreign brand “premium” beginning to take hold, as consumers look more towards the products offered by multinationals.
4. Evolution of brand consumption -The Domestic vs Global brands battle
The study provides a unique perspective on brand evolution and potential in the emerging world. The survey details the specific brands gaining and losing momentum across the emerging world whether local or global brands.
We believe the practice of trading-up to branded goods and premiumization, particularly in discretionary categories, is a secular trend among emerging consumers across the income scale. The survey supports this view with a detailed analysis across product categories. This survey interestingly highlights this growing trend amongst lower income consumer.
A new feature of the survey is to gauge consumer’s attitudes to domestic brands. Emerging consumers generally register strong domestic brand loyalty – Russia and Saudi Arabia are the exceptions to the rule. However, in the consumer discretionary space international brands still have a significant edge over local brands and we find “niche” luxury brands emerging relative to the global and highly marketed and mega-brands of recent years.
However, in staple items such as food and beverage, it is a different story. There is an ongoing erosion in the perception of international brands. This remains a trend to observe along with the risks and challenges to the strategies of global consumer goods companies that it poses.
Brazil: Missing a beat
The structural optimism among Brazilians again comes across in our survey, but near-term risks do emerge. Brazilian consumers remain the most upbeat when judged by the balance of respondents who see their personal finances as likely to improve in the next six months.
However, the more immediate perceptions are less bullish. When asked whether it was a good time to make a major purchase, Brazilians were the third most pessimistic in our survey – with a net –10% figure claiming it was a bad time. This would be consistent with the prevailing environment of slower economic growth (2% in 2013), social unrest, higher inflation and lower real income growth. To a large degree, the buoyant nature of the longer-term optimism might be explained by the ongoing low unemployment rate and its broader underpinning of real wage growth.
Unsurprisingly, the actual year-on-year decline in the degree of optimism has been most acute at the lower end of the income spectrum, as evidenced by a 16% and 36% year-on year decrease in confidence in the two lowest income brackets we surveyed. This may be primarily explained by the substantial increase in food inflation during 2013 (5.5% in the last 12 months – the highest level among all the economies surveyed).
With regard to consumption, momentum continues to favor the discretionary end. The following sectors showed the greatest momentum in spending: smartphones (+17% versus +11% in our 2012 survey), fashion apparel (+10%), computers (+6%), internet access (+5%) and smartphone penetration is still relatively low at 45%, suggesting further ample room for growth.
China: Consumer reforms ahead
China emerges across a wide range of indicators in the survey as robustly positioned, despite some broader macro concerns about growth that prevail in China. Our broad barometer of optimism measuring the perception of financial conditions six months ahead has remained unchanged at 38%. This is also backed by a rise in the percentage of respondents who thought now was a good time to make a major purchase, which at over 15% is the highest in the survey.
For most Chinese, incomes are still rising. 40% more respondents said that their income was better rather than worse. Their future expectations are ranked third in the survey. However, compared to the 2012 survey, there are signs of income growth beginning to slow as in other economies.
The ongoing momentum behind discretionary spending – notably on cars, holidays and smartphones – is marked both in terms of China’s own history and the other emerging economies surveyed. However, while the latter should continue, we note that penetration rates are now relatively high, potentially constraining future growth.
This survey was conducted before the recent announcement of structural reforms at the Third Plenary Session of 18th CPC of the Central Committee. These have the potential to support the theme of growth rebalancing towards consumption in the medium term, not least via the influence of the planned changes to China’s one-child policy.
India: Rural revival
With a net percentage of Indians expecting their financial position to improve in the next six months, India ranks fifth in our list of countries, despite optimism slipping four percentage points since last year. However these headlines conceal a great deal about India.
Beneath the headline readings, there are signs of an underlying improvement. More people believe this is a good time to purchase big ticket items (a net balance of 7% versus 5% last year) and more people now expect inflation to fall – a sign that that entrenched high inflation expectations may moderate.
The rural versus the urban consumer emerges as a key contrast in this survey. The responses show rural areas seeing a much bigger improvement than urban in most categories, in turn closing penetration gaps (out of 15 categories, rural areas outscore urban in 11 of them for forward-looking spending intentions). Driving this is far greater optimism with regard to incomes between the rural and urban communities. For example the net balance of those expecting income to rise rather than fall was +6% in rural areas versus –15% in urban areas. 11% of respondents saw increases in excess of 20%.
In terms of spending categories, we have seen more growth in discretionary categories such as smartphones (supported by more investment in internet access) and cars in 2013. However, the improving trend is expected to continue going forward, alongside areas such as watches and branded goods. More generally, trading up seems to be the theme. People are buying smartphones rather than conventional mobiles and fewer people bought entry-level cars.
Indonesia: Structurally strong, cyclical nerves
Indonesia is still one of the most positive structural stories in the consumer survey with broad-based optimism supported by strong momentum in future income expectations. However, the confidence level has slipped slightly since last year’s survey. The net proportion of consumers who expressed confidence in their finances for the next six months stands at 38%. While this is enough to rank Indonesia third in our survey, it represents a 2% drop compared to a year ago.
However, we would stress that these nearer-term observations should be set alongside the positive structural story. Indonesian consumers have the most optimistic view of their income prospects. Around 44% of those surveyed expect their household income to improve in the next twelve months, building on the ongoing momentum of previous years.
Indonesians are still spending more on food than other emerging economies. It accounts for around 35% of the household budget. Food inflation was higher in 2013 than in 2012, mainly due to the removal of a fuel subsidy in June. Structurally, this has a relative impact on other areas of household spending (e.g. autos, housing, entertainment, healthcare, and education) and also on the money that can be set aside for savings.
Spending on discretionary items continues to be reflected in preferences. Notably, spending on autos is higher than the average for the countries surveyed because public transport is limited. Technology is a standout theme in the survey, with a huge increase in spending on internet access, and a shift from conventional mobile phones to smartphones.
Mexico: A future Brazil?
This is the first year we have included Mexico in our survey. There is a natural tendency to benchmark it with Brazil. Indeed, our team of economists and analysts in the region can identify demographic, socioeconomic and political factors capable of driving a steady rise in the middle-income bracket, similar to that seen in Brazil over the last decade with a similar potential impact on the fortunes of the Mexican consumer as we look ahead.
However, there are headwinds today that stand in the way of this structural potential, which are reflected in the cautious near-term measures of optimism. With a net 25% of consumers expecting an improvement in their financial position in the next six months, Mexico ranks fourth in the survey.
Interestingly, Mexico scores the lowest in the survey in terms of the number of respondents that perceive their government to be very effective or quite effective at solving problems that relate to the population (17% of the total), which might be an indication that we are in the very early stages of the new administration’s reform agenda and the structural changes proposed in areas such as education and labor markets, among others. A fierce debate on reforms and perhaps some skepticism is natural, although it is still too early to forecast positive results.
Given this is Mexico’s initial inclusion in the survey, we cannot assess spending momentum. We can, however, gauge the backward looking penetration of spending and also the forward looking intentions. Although carbonated drinks (unsurprisingly) have been bought by much of the population over the past 12 months, only 16% plan to do so going forward; categories that look to have stronger growth going forward, however, include smartphones and internet. Spending on cars has been high (29%), but is set to decline next year (10%).
Russia: Haves and have-nots
Although Russia exhibits the greatest structural weakness in consumption among the BRICS countries, it has demonstrated some improvement in expectations this year. Going forward, we expect a strong performance in a number of discretionary areas. We expect this to be driven entirely by the higher income bracket, as we note that a further divergence between rich and poor is taking place. We note a 5% drop in lower income earners expecting an improvement in their personal finances since the last survey.
The net percentage of people expecting an improvement versus a deterioration in their own financial position rose marginally from 16% last year to 18% this year. On average, income growth expectations grew marginally this year, with nominal growth of around 2.3% (from 1.9%). Again, the richest expect the biggest growth, with about 4% nominal growth estimated for this year. However, with projected inflation above these levels – Credit Suisse forecasts 6.7% for 2013 – we believe any income growth will be negative in real terms, even for the wealthiest end of the spectrum.
Internet access and smartphone spending have shown the greatest momentum relative to other sectors, each having grown more than 10% in 2013. On the ground, an almost complete 3G network, growing 4G network, and declining handset prices should all support further growth in smartphone penetration and the data market. Categories geared to the poorer consumer such as beer, dairy and carbonated drinks largely showed insignificant increases, while those areas related to higher income individuals (e.g. autos, computers and holidays) have seen at least 5% growth over 2013.
Saudi Arabia: Spending potential narrowly based
The Saudi Arabian consumer has slipped in our survey and is now the second least optimistic, with a weighted balance of just 18% of respondents expecting to see improvements in the state of their personal finances. This is the second consecutive drop in optimism seen within the region.
The fall in optimism goes hand in hand with a decline in income. Saudi real household income growth over the next 12 months is only positive for the upper half of earners, with the wealthiest expecting around 3% growth. The picture is less rosy for the lowest earners, and even with the growth in higher income brackets, when averaged across the sample, household income growth is flat in real terms (a drop of 2% since this time last year).
Against this backdrop of income pressure, discretionary spending looks challenged. Smartphones, internet access, computers and healthcare stand to suffer in 2014. Whilst these categories registered positive momentum last year, this was again most likely driven by the wealthy “local” population. The holiday/travel market also displays potential growth and is most likely driven by the aspirational value attached to it by wealthier consumers.
One key theme this year was the deportation of illegal workers in Saudi Arabia – amounting to over 500,000 people. Worries as to whether this would have a negative effect on consumer demand are unfounded, given that in reality these people generally belonged to the very low income bracket. However, this certainly has had an effect on the cost side for some consumer companies utilizing this cheap labor and which may now have to pay more for legal labor. The question is whether the extra cost is going to be passed to the consumer or not. The third highest inflation reading in our survey would suggest so.
South Africa: Contrasting fortunes
This is the second year in which South Africa is featured in our survey. Consumer optimism levels in South Africa have gone up relative to last year, but with high income earners entirely driving this momentum.
Consumers, on a net weighted-average calculation, expect their financial prospects to improve by 28% over the next six months, compared to 26% in the previous survey. Similarly, high earners expect a 35% improvement. Low income earners, however, continue to expect their financial prospects to deteriorate, but by an even greater amount than in the previous survey – those earning around ZAR 1,500/month expect a sizeable 31% drop in the state of their upcoming personal finances. This is likely a reflection of an economy that, despite creating jobs, has not done so at a pace sufficient to absorb all new job entrants at the low end.
With regards to spending, activity has been supported in most categories over the last year. A large percentage of the expected increase in income looks likely to be spent on essentials such as housing (with net +4% expecting to increase spending over the next year), utilities and food, which together account for approximately 40% of monthly spending. Expenditure in these areas has been driven higher by large increases in administered prices (electricity, fuel, municipal taxes, etc.) in recent years.
Discretionary spending, again driven in most part by the upper end of income earners, was robust. Consumption of smartphones, holidays and autos was strong over the last 12 months – with around net +5% of respondents increasing spend in each area – and looks resilient going forward.
Turkey: Underlying potential remains
On the broad gauge of optimism we use across the survey, reflecting future confidence in the consumer’s financial position, Turkey remains at the lower end of our rankings. The political backdrop doesn’t help. However, this fact conceals some positive underlying messages in Turkey, which are in keeping with the degree of optimism our analysts and economists hold with respect to Turkey’s macro outlook.
We highlight three positives. First, the views of high-income earners have improved markedly, making them the most optimistic in the survey, though we note that low-income earners are under pressure. Second, there was a sharp improvement in the percentage of respondents who said now was a good time to make a purchase. Third, Turkey displays the lowest expectation for price increases in the survey, though this now pre-dates the sharp currency depreciation the lira has seen post-December 2013.
Expenditure on more discretionary items continues to beat spending on more essential goods, such as carbonated soft drinks, dairy products and alcoholic drinks. Low-income consumers are the drivers of the latter trend and higher-income earners drive the former development.
The recent political developments in Turkey will likely yield another cautious consumer environment. However, we continue to believe the underlying drivers of Turkish consumer spending (particularly for underpenetrated discretionary items) will remain strong. Spending appetite should quickly turn into actual sales once the political visibility improves. In terms of the spending mix, smartphones, computers, internet access, holidays and (despite the high base of previous years) autos have recorded some of the strongest gains. The modest level of auto, smartphone and holiday penetration suggests further scope for growth.