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Credit Suisse Publishes Fifth Annual Emerging Markets Consumer Survey
Outlook less confident than a year ago with a varied picture of consumer optimism across the developing economies. India tops the Credit Suisse Emerging Consumer Scorecard 2015.The Credit Suisse Research Institute today published its fifth annual Emerging Consumer Survey – a detailed study profiling consumer sentiment and its drivers across the emerging world. The study provides a timely insight regarding consumer sentiment and future consumption patterns at a time when emerging economies are under a spotlight of concern with growth rates slowing and the prevailing commodity price and foreign exchange volatility posing new challenges.
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, Mexico, Russia, Saudi Arabia, South Africa and Turkey. The research is unique in benchmarking consumer behavior across these countries in a consistent and detailed manner; posing approximately 100 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 highlights how far from uniform consumer sentiment is. Differentiation not generalization is key for both companies and investors. The analysis delivered in this report and its related proprietary database underlines the ambition of the Credit Suisse Research Institute to provide our clients unique insights to assist their investment and corporate strategies.”
Giles Keating, Credit Suisse’s Global Head of Research for Private Banking and Wealth Management, said: “The survey shows the contrasting impact of the oil price collapse on Emerging Markets. Consumer sentiment in Russia and key Latin American economies is under pressure, in contrast to India where the consumer looks robust, helped by reforms. Overall, structural investment opportunities in these economies have not disappeared, but nor have their vulnerabilities.”
Credit Suisse Emerging Consumer Scorecard 2015
The breadth of the survey question allows Credit Suisse to gauge consumer sentiment across our nine surveyed countries by looking in turn at their medium term expectations of personal finances, expectations of inflation, household income trends alongside their immediate spending intentions.
India tops the Credit Suisse Emerging Consumer Scorecard 2015, moving up from fourth in last year’s scorecard. India was rewarded for its consistent performance; being the only country to score in the top three for each of the key metrics mentioned above. China falls from first in last year’s Scorecard to fifth this time round and while it tends to dominate the debate surrounding EM, Credit Suisse analysts would note that, although the gloss may have come off this story, it remains far from the greatest source of consumer vulnerability in emerging markets. That lies in Russia and South Africa.
The report analyses which of these economies and consumers are most exposed to the current commodity and currency volatility. India, Turkey and China are less directly exposed versus Russia, Latin America and South Africa.
1. e-Commerce and the emerging consumer
This year’s survey provides very positive support for the outlook of e-Commerce across the countries surveyed, with feedback from this year’s study indicating that e-Commerce across the nine countries could become bigger as a share of total retail sales than in developed economies.
Some of the reasons for this are: the relatively underdeveloped “bricks and mortar” retail sector, especially in more rural areas, the rapid increase in the share of consumers with smartphone-related internet access creating new verticals of spending and the underlying driver of expanding disposable income. Today’s survey estimates that this could lift total annual online retail sales across our surveyed markets to as much as $3trn, which would impact companies across multiple sectors including retail, finance, security and technology.
Of particular note is the growth in online behavior amongst Indian consumers. For example, the share of respondents in India that have used the internet for online shopping increased to 32% from 20% in 2013, while the share that is likely to use the internet for online shopping in the future is now higher than that of China. Sizeable potential also lies in Latin America.
2. Travel & leisure and the emerging consumer
The desire to increase future spending on holidays and travel has been a consistent theme of all our previous surveys, and this continues into 2015. The propensity to travel has risen again in this survey with consumers holidaying rising from 45% to 65% during the life of our surveys with multiple holidays now a feature. The short-term trends manifest themselves differently by country. For example, the desire to travel more has accelerated most meaningfully in Mexico and India but has slowed in China, Turkey and South Africa.
The interaction with technology is a related theme and visible in the survey. Global travel distribution channels are evolving rapidly, with more emphasis on web-based bookings via both direct (company owned) and indirect channels (third party online travel agents). The associated changes in consumers’ chosen booking channel are having profound effects upon the industry value chain, especially for hotels, where margins are coming under pressure, though presenting great potential for the online platforms themselves.
3. Autos and the emerging consumer
Mobility is another key trend for economies where GDP per capita is rising. The largest car market in the world, China, has continued its strong positive trend in car ownership, growing at a compound annual growth rate (CAGR) of 13% since our 2010 survey, the strongest growth in our survey. Turkey is also moving up the curve rapidly with a CAGR of 6%. Ownership rates have remained broadly stable in other regions. India and Indonesia have the lowest household car ownership rates, at 19% and 7% respectively, and in that respect are a source of great potential.
However, it is important to note that the development of the car market in the emerging world, and particularly in China, cannot be looked at in isolation from regulatory developments in areas of pollution control, energy efficiency and also, if to a lesser extent, safety requirements. Where emissions are concerned in China, 2020 targets for CO2, for example, require a 32% reduction from the 2013 actual level (versus 25% in Europe). This underlines the significance of technological developments in the auto component field addressing these needs.
4. Healthcare and the emerging consumer
Healthcare in emerging markets is seen as a structural growth opportunity by both companies and investors alike. Indeed the relationships between healthcare spending and rising GDP per capita are well established. The reality is that the picture is far more complicated than the simple relationships would suggest, particularly when translated into the revenue projections for companies. The nature of healthcare provision (public versus private), local versus global brand positioning and who is ultimately paying the bills are key considerations. Our survey provides a perspective on each of these issues and comes to a cautious view as to how the structural story translates to the corporate bottom line.
Access to healthcare growing: There is growing government involvement in most countries, with reported access to free medicines increasing from 26% of the emerging market population in 2011 to 48% in 2014.
Out-of-pocket spending remains stable: As a share of overall spending by consumers, out-of-pocket spending on healthcare has remained broadly flat at around 5% of income, but income that is of course growing.
Trust in local brands, safety concerns abating: We have seen an increase in overall trust for local brands (57% to 59% on a population-weighted basis, with increased confidence in India and China. The correlation between a lack of confidence in local brands and a willingness to pay for international brands continues to be a key feature.
The age/income conundrum: Both income and spending on pharmaceuticals increase with age in developed markets. The purchasing power and needs are aligned. Our survey continues to suggest that this is not the case in emerging markets in a world where disposable income continues to be more concentrated in the hands of the young. The need for healthcare and the location of purchasing power are not well aligned.
5. Brands and the emerging consumer
The report updates its unique brand analysis and draws out several key themes. The battle between domestic and global brands is a key focus, highlighting which products and preferences are skewed domestically.
The relevance of technology and e-Commerce is a new feature to this debate and highlights the significance of domestic rather than global e-Commerce brands and platforms and the challenges it poses to the global software companies and networks. In the hardware space, the analysis underpins the brand momentum of Apple, though Samsung displays the widest penetration and growing recognition across the emerging world. It is a standout brand across the widest range of categories.
Away from technology, a key theme from the survey is the accelerating penetration of the more typical “high street” brands such as H&M and Zara, at a time when luxury brands have been losing some of their gloss.
Brazil: Steady decline continues
In Brazil much has changed versus previous surveys and indicators below the surface resonate with pressures on the consumer. The percentage of consumers expecting their personal finances to improve appears a heady 49%. However, this net balance has dropped 9% since last year and is the lowest reading since our 2010 survey, with the severity of the decline matched only by Russia this year. Income expectations are ranked highly in the survey. However, a caveat here to note is that the trailing momentum to income growth is at a less impressive fifth place in the survey and far lower than we have seen from Brazil in the past. It is also worth noting that Brazilian respondents were recorded as having experienced the second-highest level of food and beverage price inflation in the survey at 6.3%, something specifically unhelpful for low-income consumers. We believe some of the more optimistic readings, particularly with regard to income, might be explained by the still record-low unemployment rates (which stood at 4.7% in October 2014), which continue to contribute to real wage bill growth (2.9%). In our view, the consumer market will continue to be pressured by rising unemployment rates, monetary tightening, relatively high inflation rates, less credit growth and, even the tail risk of energy rationing.
China: Shifting online
While the structural story for the consumer in China remains robust, 2014 has not proved to be a good year for China’s consumers. In our survey, China has fallen from top place to fourth in our consumer confidence scorecard, with most barometers slipping closer to mid-range among emerging market countries. The prevalence of anti-corruption measures has doubtless had a significant impact on “grey income” and related expenditures, resulting in the declining optimism of personal finance improvement over the next six months. Only 39% of respondents believe their personal finances will improve, lower than over 40% in the last two surveys. Among the different income groups, the middle-class earner with income in the range of RMB 5,500–9,000 showed the greatest change, with optimism declining 7%-16%, while other income groups proved to be less affected. We believe the anti-corruption measures also affect broader expenditure sentiment where only 9% of respondents acknowledged now as a “good time to make a major purchase,” compared to 15% the year before. A notable exception is the rising expenditure on automobiles in 2014, with 37% respondents having bought or owned automobiles. Elsewhere, we would note that smartphone growth is showing relative strength in China, though off a higher base and thus at a slower growth rate. Looking ahead, we see the increase in minimum wages enhancing household income. Our survey has seen obvious evidence of this, given improving sentiment among the low-income household versus the middle-class and high-come brackets. China also retains the cultural differentiation and structural positives of higher spending on extra education and higher savings than other emerging market countries.
India: Stable government, strong consumer
Consumer optimism has seen a sharp turnaround in 2014, after a few years of adverse macro conditions (e.g. high inflation, slowing growth) led to a steady decline. The formation of a strong government at the center (the first single party majority in 30 years) has triggered a major revival in consumer sentiment. India ranks first on our scorecard – a big improvement over the year before when it was ranked fourth.
More people believe this is a good time for making big ticket purchases as average household income increased by around 10% in 2014 after being relatively steady the two previous years. There was a sharp increase in the proportion of respondents who expect both salary to increase and the state of their personal finances to improve in 2015. Fewer people are expecting inflation to increase – a sign that high entrenched inflation expectations have finally started moderating.
Another pattern that emerged in previous years was the sharp divergence between rural and urban India, with rural India booming and urban India deteriorating. In 2014, while the rural areas continued to do well, there was considerable improvement in urban India too. This revival in consumer sentiment has primarily been driven by urban India as parameters such as the expectations of increasing incomes, moderating inflation expectations, improvement of personal finances, etc., resulted in a sizable jump for urban respondents. Urban household income also increased at around 12% in 2014 after remaining stagnant for two years.
More people are buying smartphones and fewer people are buying entry level cars. As we highlighted in our previous survey; the long-term structural growth potential of India remains intact as it has one of the lowest penetration rates across categories in the nine emerging markets surveyed. With the exception of selected countries like Indonesia, most other emerging markets are well ahead of India in terms of market maturity. India is one of the countries with the lowest consumption of items such as beer, spirits, meat, cigarettes and the lowest ownership of cars as well as the lowest access to internet.
Indonesia: An under-penetrated market
Indonesians have remained relatively optimistic versus their emerging market peers despite experiencing a slowdown in the economy in 2014. At an expected 5.5% in 2014, GDP growth is at its lowest in the last five years. While income optimism going into 2015 has moderated, Indonesians are ranked second in terms of expectations of future income and personal finances. The depreciation of the rupiah since August 2013 and the subsidized fuel price hike in June 2013 (with another round of increases in subsidized fuel in November 2014) will have affected overall purchasing power.
Indonesians’ higher optimism is most likely due to the successful parliamentary (April 2014) and presidential (July 2014) elections. The currency and fuel price hikes will have impacted purchasing power, more Indonesians have seen their incomes increase in 2014 compared to 2013 (40% versus 38%), particularly the middle-to-higher-income earners. The lower-income earner, however, has seen less of an increase as the Indonesian government did not raise minimum wages to the same degree due to the base effect.
Consistent with other low-GDP-per capita countries, food still represents the highest share of Indonesians’ monthly income even though, in proportion, this figure is lower compared to the previous survey. Food and beverage inflation has moderated since 2013 as most of the consumers (71% versus 66% in the previous survey) have seen an increase in prices for basic food and drinks of below 7%, and hence below the wage increases many will have experienced.
The second largest amount of spending has been on housing and public utilities, most likely given the increase in electricity tariffs and rising housing prices. Our 2015 survey shows Indonesians are spending more on smartphones, internet access, property, two-wheelers, and mobile phones, compared to the previous year’s increase in spending on internet access, dairy products, carbonated drinks, TV and smartphones. Indonesians remain cautious on immediate spending plans, ranking only fourth in terms of “time to make a major purchase,” which may reflect the prevailing macro environment.
Mexico: Structural potential, cyclical hurdles
Our survey points toward a weak consumer environment in the short term. Most consumer-related companies agree that the much-awaited recovery in consumption is only expected to happen gradually. According to our survey, only 18% of respondents expected an improvement in their personal finances over a six-month period (the third-lowest figure after Turkey and South Africa).
Importantly, expectations for improvement diminish as income levels decrease (from 64% of respondents in the highest-income segment who expect a better state of personal finances in the next six months to none in the lowest-income segment), which may be the result of the implementation of excise taxes on certain basic items (sugary drinks, high calorie food) at the beginning of 2014. Presumably, lower-income households, which allocate a larger percentage of disposable income to these categories, have been more affected. According to our survey, food represents 28% of Mexicans’ monthly spending. We believe the weakness among lower-income consumers explains the low spending recorded in 2014 versus 2013 in most non-discretionary categories such as carbonated drinks and beer.
However, discretionary categories such as smartphones, computers and cars performed relatively better. We think the middle- and high-income consumers in Mexico have been relatively less affected by the fiscal reforms. Similar to last year, a large percentage of consumers are reporting that they have no extra money for savings (47%). Only Brazil (62%), Turkey (59%) and Russia (55%) have a higher percentage. Mexicans allocate 11% of their monthly spending to savings (up from 4% last year), but still significantly below our survey average of 14%.
To date, economic indicators are mixed and it is not clear whether a recovery in consumption will come in the short term. On the one hand, formal job creation has expanded (around 5%), but on the other hand, consumer credit continues to slow down (around 7% growth versus 15% in 2013). Furthermore, some companies have reported losing market share throughout 2014 to the informal channel, as consumers have shifted to cash to the detriment of credit and debit cards, probably driven by the tax reform enacted in 2014.
Russia: Dark clouds gathering
Against the backdrop of significant political tension and related economic pressures, the survey readings for Russia are, not surprisingly weak. The perception of future personal finances and inflation expectations are particularly weak, ranked eighth and ninth, respectively. The net balance for expectations of future personal finances has more than halved from 17% to 8%.
It should be noted that the survey was conducted before the most severe period of currency crisis and the most recent leg down in the oil price. The ruble’s devaluation must clearly be weighing heavily on the adverse perceptions of future inflation. Where inflation and the currency are concerned, we would also note that consumers suggest that they experienced on average over 7% inflation in food and beverages in 2013. Food consumes the largest share of monthly income among Russians and is thus a major negative factor.
Russia remains the sum of very unequal parts, specifically rich versus poor, with sanctions weighing more heavily on the lower end of the income scale. The “middle classes” have seen the biggest changes since last year’s survey. In keeping with the lower levels of optimism, income expectations for 2015 have fallen markedly compared to a year ago. On average, income is expected to grow at a nominal rate of 2.5%, which, with inflation running at 7%, represents a significant erosion in real terms, again before any ruble weakness feeds through.
The somber tone of the survey may seem at odds with consumer spending trends in Russia during 2014. Despite the latest round of sanctions recently imposed by Western countries, as well as ruble weakness, higher inflation and interest rates, household spending remained resilient in the third quarter.
Indeed, the sector mix of spending in the survey does not portray any material declines in spending. In fact, discretionary categories such as smartphones and to a lesser extent holidays have shown upward momentum. However, we believe these robust trends have been supported by frontloaded purchases of discretionary goods in fear of further ruble devaluation and its impact on inflation along with some appreciating accumulated savings in dollars. In our view, the negative nature of the macro indicators accompanied by higher uncertainty about continuing geopolitical tensions will ultimately see weak real incomes pressuring consumer behavior in the future.
Saudi Arabia: The petro-dollar
The Saudi Arabian consumer remains No. 5 in our consumer confidence scorecard, though we note this survey was conducted at the time of the fourth quarter drop in the oil price, with the full effects still likely to impact consumers residing in an economy whose fate is intrinsically tied to the commodity. This mid-table ranking is the result of a set of mixed responses from Saudi Arabian consumers, reflective of the wider socioeconomic imbalances present in a population with around 30% immigrants.
In this year’s survey, we see a continuation of the trend where the highest income earners are most optimistic about the state of their personal finances. This group has been a net 15%-20% more optimistic than the lowest income earners for three consecutive surveys going back to the 2012 survey data. Interestingly, we see a slight jump in the expectations of the lowest earners in society, with a net 24% of those earning less than SAR 5,000 expecting their personal finances to improve over a six month period. This can arguably be attributed to the Ministry of Labor’s initiative from early 2014 to raise the minimum wage. Market penetration in Saudi across the board is once again the highest in our survey, with above 90% penetration in items such as computers, cars and smartphones. In fact, all 1,583 respondents surveyed in Saudi confirmed that they own a mobile phone. High penetration rates such as these lead us to believe that the market opportunity now lies in the trading up of goods. This can be observed by the continued strong momentum in smartphone penetration, which has risen from 68% in our 2012 survey to 96% this year.
South Africa: Reduced optimism
In 2014, overall consumer sentiment in South Africa declined modestly, with higher income groups remaining more optimistic than lower income groups. In our survey, a net 11% of respondents expected their personal finances to improve over a six-month period, compared with 12% in the previous survey and 26% for the survey average. However, at the low end of the income spectrum (household incomes less than ZAR 3,000 per month), more respondents expect their finances to deteriorate rather than improve. This degree of negativity among low-income earners is worse than in any other country surveyed.
A net 21% of respondents do not believe it is a good time to make a major purchase; well down from last year’s 9% and much worse than the survey average. In addition, a continued deterioration of the savings rate is a concern, with 38% stating that they had no extra money for saving, which represents a significant increase from the already high 29% the year before.
With regard to spending, internet access and smartphones continue to grow, albeit at lower rates than the previous year, with internet access penetration increasing to 53% in 2014 from 46% in 2013 and 29% in 2012, and smartphones increasing to 60% from 56% in 2013 and 47% in 2012. South Africans’ low propensity to spend on education is still a concern, with only 14% of respondents in 2014 reporting spending in this area; down from 17% in 2013 and 23% in 2012.
However, consumer sentiment and expenditure in 2015-16 are likely to be influenced by the following positive developments. First, monetary policy looks likely to remain accommodative through most of 2015, with interest rates expected to increase only marginally after September 2015. Second, real wage growth is likely to accelerate as inflation drops sharply in H1 2015. Third, net wealth is likely to remain high, if the value of financial assets (pension funds, etc.) is sustained (the formal savings industry in South Africa is a unique feature of the emerging market countries). The negative developments that may curb some of these positive stimuli are: first, hikes in tax rates (personal and corporate); and second, continued anemic growth in the rate of credit extension to households.
Turkey: Subdued but stable
The Turkish consumer has had a difficult start to 2014. First, there was the political uncertainty ahead of municipality elections at the end of March 2014, accompanied by the harsh TRY depreciation against hard currencies. There was some post-election relief, but then came the upheaval with the IS Jihadist threat emerging in Syria and Northern Iraq in mid-May. However, sentiment is improving as the fall in commodity prices has already helped the macro balances in Turkey, supporting the TRY and lower interest rates. Cyclical demand has already reacted positively, with both automobile and appliance sales picking up since mid-Q3 2014. We expect a better first half in 2015.
Although the government introduced some restrictions to cut consumer electronics imports in Q1 2014, this has not curbed the strong Turkish consumer appetite for smartphones, with operators offering attractive long-term payment alternatives for affordable low cost smartphones. In our view, this was the main driver of the 19% increase in smartphone spending, the highest in any of the consumer categories in the survey.
The lower-income segment is less constructive on household incomes. This could be hindering the diffusion of under-owned cyclical items, such as cars, leisure and flat TVs among the more populous lower-income segments. But, on the other hand, it signals a good income support for branded premium products in the discretionary sector. There is a strong trend for modern accommodation standards among Turkish consumers, which explains the recent construction boost. As most of the recent purchases are on long-term instalments, we believe this segment will sustain its high share within the consumption matrix and may crowd out some other discretionary spending.