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Credit Suisse Publishes Sixth Annual Emerging Markets Consumer Survey
The Credit Suisse Research Institute today published its sixth annual Emerging Consumer Survey – a detailed study profiling consumer sentiment and its drivers across the emerging world. With investor sentiment showing signs of improvement in emerging markets and currencies stabilizing, the study provides a timely focus on the opportunities that exist within one of the most powerful investment themes in the emerging world – a fast growing consumer culture driven by a rapidly growing young middle class with access to technology.
To undertake this project, Credit Suisse has again partnered with global market research firm Nielsen to conduct nearly 16,000 face-to-face interviews across nine emerging economies – Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey. The research is unique in benchmarking consumer behavior across these countries, posing nearly 100 questions to provide a granular analysis of the profile, mood and behavior of different emerging consumers and the potential of specific products and end-markets.
Stefano Natella, Head of Global Market's Research at Credit Suisse, said: "Our study continues to provide a timely insight into the drivers of consumer sentiment across the emerging world. Our analysis suggests that over the last two years, approaching 100 million new households across our survey countries have found their way into the middle class. Aided by innovations in technology, e-commerce and an optimism broadly driven by the younger consumer, the analysis delivered in this report continues to suggest that even in a challenging economic cycle, structural investment opportunities will continue to benefit investors."
Giles Keating, Deputy Global Chief Investment Officer at Credit Suisse, said: "Weak currencies, political risk and commodity exposures all contributed to the wide range of consumer sentiment expressed in this year's report. The negativity of in Russia, South Africa and Brazil contrasted sharply with the relative optimism apparent in India, China and Saudi Arabia. A granular understanding of the factors in play are key for investors looking to judge the range of risks and opportunities across these markets. The depth of analysis delivered in this report underlines the ambition of the Credit Suisse Research Institute to provide such guidance to clients and assist their investment and corporate strategies."
A presentation video outlining the key findings of the survey can be found here. For a copy of the survey, please click here.
1. The growing "young" middle class
The study analyses the changing income profile of consumers across the emerging economies by mapping the income distribution of our respondents. We find close to 100 million more households across our survey countries have moved into middle income territory, thereby driving new consumption patterns and tastes. The role of the young consumer is key here with income growth in younger age brackets the strongest across our countries and in some countries such as China, from a higher income base to begin with.
More generally, we find that consumer confidence indicators amongst the lower age brackets are uniformly more positive. Understanding the spending priorities of this demographic is key. Our analysis shows that the categories of spending that this group is focused on have a decided "life-style" characteristic and a growing desire for a healthy life-style.
2. Growth in e-commerce
The e-Commerce growth story remains strong and insulated from broader cyclical concerns. In fact, we believe that the online retail markets across some of the surveyed countries can more than triple annual revenues to reach USD 2.5 trn by 2025.
One of the reasons why the outlook for e-Commerce remains strong in our view is that softening economic conditions might actually improve the relative competitive position of online operators, versus the more traditional "bricks and mortar" companies. Additionally, the further expansion of the middle class, along with rising smartphone ownership and Internet access further support this trend.
This year's survey shows that while Chinese consumers remain more frequent online shoppers, users in other countries are starting to catch up. For example, the share of Internet users who shop on line rose to 30%, up from 27% in 2014 and 22% across all countries in 2013. India stands out as the biggest e-commerce opportunity. At the same time, we also note that online banking and travel are gaining in popularity. 28% of respondents use online banking services (up from 23% in 2013), whereas 15% use the Internet for travel services (up from 11% in 2013).
3. The EM travel guide
The long-term outlook for travel remains positive, although we do note some pockets of weakness this year. Across the countries surveyed since 2010, the propensity to take holidays declined for the first time to 57% from 61%, although we would note that this is still 21% higher than when we first undertook the survey in 2010.
Areas that appear unaffected by cyclical conditions include domestic travel with 88% of our respondents holidaying in their home country, and those companies that have exposure to the online travel market. The appetite to travel amongst Chinese consumers is growing strongly. Domestically, the strongest growth will be seen in emerging market hotels (notably economy/budget operators), airlines, airports, duty free retailing and through the technology consumers are using to book travel.
4. Healthcare and emerging markets
There remains a structural growth story for healthcare in emerging markets, as increased government spending amid aging populations should lead to the further expansion of healthcare infrastructure. Indeed, our survey highlights increasing access to healthcare among our respondents, but via growing state provision. There also some signs emerging of greater scope for private pay in older age groups.
However, key questions remain around the profitability and opportunities for global companies vis-à-vis increased competition against local companies despite this apparent structural opportunity. Considering the emerging consumer's enhanced perception of efficacy and safety and the government support of local brands and generics, we think local suppliers, particularly in the likes of China and Russia, look best placed to capture a growing share of this market opportunity.
5. Brands and the emerging consumer in 2016
We find domestic smartphone brands are playing a key role in kick-starting the e-commerce revolution in the emerging world and through local and innovative platforms rather than those developed in developed markets. This is not to say that the appetite for Western brands more generally is on the wane. 2015 shows how firm the secular shift in aspirational tastes has become.
For those who can afford premium brand purchases, purchasing preferences and aspirations for Western brands remain strong. At a lower income level, the trading-up by the upwardly-mobile Indian consumer, for example, reflects the same sense of aspiration. Only where economic pressures are at their most intense (e.g. South Africa) is this trend being reversed.
Brazil: Another tough year ahead
The impact of the severe economic slowdown we are witnessing in Brazil – projected to be the worst this century – is clear in the survey. In the past, Brazilians always ranked among the more optimistic consumers, even at the beginning of 2015. This time, Brazilians have fallen well below the average in nearly every benchmark of consumer confidence. As a result, Brazil has fallen to 8th in our scorecard, and last when consumers were asked if now is a good time to make a major purchase.
The hostile economic environment is clear in spending patterns. "Holidays", where overall penetration remains relatively low at around 35%, witnessed a substantial decrease in 2015 versus 2014 (-8%), reflective of a squeeze on "discretionary" spending driven by lower real disposable income. In products with higher penetration, there was also a significant decrease in the spending on cosmetics, beer and even internet access, which had been relatively inelastic in prior surveys. A notable change has been an increase in spending on further education, which could be explained by consumers looking to improve their skills as a way to better their position in a more competitive and tougher marketplace.
In summary, we continue to believe that the long-term potential of the consumer market is solid, but in the near term, we expect the sluggish consumer environment to remain.
China: The young emerging middle class
Despite the prevailing concerns over the health of the country's economy, Chinese consumers demonstrate higher confidence levels in income growth and personal wealth, and expect less inflation pressure. Consumption penetration in most categories recorded growth in 2015 compared to last year. In particular, penetration of cosmetics was up 12 percentage points (p.p.), internet access up 11 p.p., spirits up 7 p.p., and both smartphone and dairy up 6 p.p.
Growth in consumption was mainly driven by income growth and lifestyle changes among the young middle class. The generation born between 1985 and 1995 has now grown up to become "20-30-year-olds" and we see this relatively affluent young group replenishing China's future middle class, and contributing 35% to China's total consumption in the next five years (compared with current levels of 15%). This middle-class bracket shows the most positive income expectations for the next 6-12 months.
The Chinese e-Commerce market is the largest in the world and China has been one of the clear success stories as far as e-commerce is concerned. Online shopping continues its strong development and we see multiple reasons why China's online consumer spending looks set to continue. Internet access penetration among our respondents surpassed 80%, and smartphone penetration reached 90%. We estimate that online sales will grow 20%-26% YoY in 2016-2018, accounting for 16% of China's total retail sales in 2017 (up from 10% in 2014).
In conclusion, we retain our positive long-term outlook for consumption in China, though the near-term environment poses challenges to different spending segments.
India: Top of the scorecard
While there has been a degree of moderation in expectations after the initial post-Election euphoria, Indian consumers stand out amongst their emerging market peers with higher confidence about their current and future finances and relatively lower inflation expectations. The average Indian respondent's income has increased by double-digits compared with a decline for the EM average, although income expectations going forward have moderated.
India has amongst the lowest penetration rates for most categories, and the survey points to fast growth in consumption in categories with very low penetration, such as female hygiene products (14% improvement in one year) and smartphones (12%), while others such as beer and perfumes are showing fast-improving longer-term trends. While penetration levels in India will continue to improve, another overarching trend will be premiumization, as affluent Indians look to acquire better products.
The explosive growth in smartphones in India is seen in 32% of respondents having bought one in the last 12 months, versus only 20% the previous year. Willingness to make discretionary spends on fashion, jewelry, apparel, leather goods and watches showed muted trends over last year, but the base was high after significant improvement in 2014.
The sharp divergence between rural (positive) and urban (negative) India has been a feature of recent surveys. The results confirm a reversal, showing slower growth rates or higher declines in spending categories in rural areas. However, we believe that a normal monsoon season, after two consecutive years of poor rainfall, will help revive rural fortunes.
Indonesia: losing some of its shine
Our survey's consumer confidence indicators in Indonesia have dropped this year, with inflation expectations being a significant negative. While expectations of consumers' personal finances and income momentum have declined, they still remain favorable features for Indonesia compared with other survey countries. Notably, more Indonesians are still looking forward to making a major purchase.
Income momentum has been a positive since the survey was first conducted, and this remains the case. There are, however, some emerging areas of concern including rising unemployment (6.2% in August 2015, up from 5.8% in February 2015). Based on the survey, nominal income appears under pressure, particularly outside Java as these areas continue to be dependent on commodities. We also note the greater shift downwards in income expectations amongst the low-income earners compared with higher earners.
Consistent with the previous years, Indonesians allocated the bulk of their income to food, followed by savings, housing and public utilities. Savings remain a robust feature, with the savings ratio rising compared with a year ago. Consumers continue to spend more on smartphone and internet access, similar to the previous year's findings. In our view this is a result of the much wider availability of smartphones at a more affordable level. Consumers spent less on cosmetics and carbonated drinks, as well as two-wheelers, compared to last year. However, the penetration of these items continues to be high, due in our opinion to a move towards a more modern lifestyle. Multinational brands continue to dominate most consumer products, similar to our findings in previous years' surveys.
Mexico: A growing consumer culture
The situation for Mexico has been improving in macro terms, and our survey has also seen rising trends. Notably, the percentage of consumers who think now is a good or an excellent time to make a major purchase increased from 32% of respondents last year to 49% this year, potentially supporting a strong performance by discretionary categories.
The macro backdrop is not out of keeping with this message, having improved significantly during 2015, driven by a combination of: (a) highest real wage gains in a decade; (b) benefits from earnings sent from abroad which increased 25% YoY in local currency terms, and (c) a revival from depressed consumption levels in 2014. On the staples side, 50%-52% of respondents mentioned that they plan on spending more on bottled water and dairy products versus only 36% planning to spend more on soft drinks, after the first implementation of the tax on sugary soft drinks in 2014. Also, 58% of respondents either somewhat or strongly agree that they are eating more ‘healthy' options rather than ‘non-healthy' products. Consumer preferences are gradually starting to change.
In e-commerce, we would highlight that of those respondents with a mobile phone, 73% own a smartphone, up from 38% just two years ago. Limited fixed broadband penetration had historically been a barrier for e-commerce development in Mexico. However, as consumers migrate to smartphones, this barrier could come down, positioning Mexico as one of the most promising LatAm markets for e-commerce (we expect c.23% compound growth in e-commerce over the next 3-5 years). Overall, respondents without access to the Internet (either mobile or fixed), have come down from 60% two years ago to 30%.
The consumer story in Mexico remains promising over the long term, since (a) social mobility has not yet taken place, unlike in countries such as Brazil; (b) c.60% of the labor force remains informal, and (c) consumer credit penetration remains abnormally low, at c.4% of GDP, versus 10%-19% for other countries in the region. In the longer term, perhaps the largest risk to Mexican consumers remains the need for further fiscal adjustments in light of lower oil prices, with c.18% of total government revenues coming from oil versus c.35% in the previous five years.
Russia: Macro pressures intensify
The deteriorating economic environment has put significant pressure on the Russian consumer, and the survey findings suggest an exceptionally weak outlook from 2015 into 2016. The perception of future personal finance stays at the bottom (ninth), with expectations of personal finance in the next six months having fallen from 8% to -6%. Russia ranks fifth on inflationary expectations, given that several waves of ruble devaluation in 2015 have created a very high base for inflation, especially for H2 2016, from which it may decline.
The income inequality in Russia remains high. Even though all households have expressed depressed levels of optimism on income prospects, the lowest income earners have seen the biggest deterioration since last year's survey. This group has the highest share of food in total purchases, and given that food inflation exceeded CPI in the latter months, they were affected the most. We note that the Russian consumer experienced the highest food and beverage inflation of any EM country. Overall, income expectations for the next 12 months have deteriorated significantly in comparison to 2014. On average, incomes are now expected to fall by c.0.4%. It should be noted that Credit Suisse also expects 9.0% inflation in 2016.
We expect down trading to continue throughout 2016 in contrast to other EM countries, although the second half of the year should benefit from the already weak base. We might observe some accelerated purchases of consumer electronics and other durable items, in the event that the ruble devalues sharply again. The potential turnaround point, in our view, depends on oil prices, budget constraints and the government's willingness to increase pensions and public sector employee salaries as elections approach. For now, weak real and nominal incomes paint a bleak picture.
Saudi Arabia: Consumer sentiment resilient to lower oil prices
Perhaps surprisingly, the Saudi Arabian consumer moved up to share the number two spot on our consumer confidence scorecard, from the fifth spot last year. Despite the free fall in oil prices in 2015, consumer appetite for spending remains strong, with most Saudis envisaging an increase in their spending on general discretionary products. The consumer has been insulated from the pressures which the oil price weakness may have had on other aspects of the economy, given a strong buffer of foreign exchange reserves, low levels of debt and a currency that remains robust.
Saudi Arabia again ranked best among the nine countries when asked "In your opinion is now a good time to make a major purchase?". 53% of the respondents voted that it was at least a good time for a major purchase, and 23% of those thought it was an excellent time. Again this year we see a continuation of the trend where the highest income earners are the most optimistic about the state of their personal finances. We believe Saudis remain positive about the outlook of their personal finances due to their expectation that the government will continue to support private consumption by disbursing bonus salaries, although we believe it is unlikely this year.
Market penetration in Saudi Arabia remains high across products, with above 90% levels for items such as computers, cars and smartphones. This indicates that the opportunity in some areas lies in product substitution rather than increased penetration. There is, however, an important caveat that we should keep in mind. The survey may not fully reflect the impact of the 2016 budget announced at the turn of the year when the government announced for the first time an increase in gasoline prices as part of an overall review of subsidies levels (fuel, electricity, water, etc). The budget hinted at the introduction of fees and taxation which has been common in several Gulf Cooperation Council countries so far. Both previously mentioned initiatives are set to put relative pressure on the Saudi consumer's purchasing power in the future.
South Africa: Multiple challenges
South Africa once again ranks at the low end of a range of the survey's indicators with continued disparities between income groups. The 2015 survey shows a marked decline in overall consumer confidence, and not only has the gap between high and low-income groups increased but much reduced optimism in the middle income groups was also evident. A net 4% of respondents expected their personal finances to improve over the next six months, considerably lower than 11% last year.
Inflation expectations are elevated and a net 65% of respondents expected higher inflation, compared with the survey average of 46%. This contrasts with only a net 1.5% of consumers anticipating increased income over the next 12 months. The majority of consumers still did not believe that now was a good time to make a major purchase, although sentiment was less negative than last year. Perhaps surprisingly, those who stated that they had no extra money for saving declined from 38% to 30%, putting South Africa below the survey average of 32%. There remain large disparities between low and high-income earners, which further increased in 2015. Of note was a marked deterioration in the optimism of the low-income group (monthly incomes below ZAR 3,000), with a net 16% anticipating that the state of their personal finances would deteriorate, compared with 6% the year before.
South African consumers face multiple challenges in 2016, with higher inflation due to severe drought conditions and a weak currency, as well as likely interest rate increases demanding higher shares of already constrained disposable incomes. The prospect of job cuts in the mining industry looms large, and will likely place further pressure on low-income households. Mid- and higher-income households will likely face further interest rate hikes this year and, combined with currency weakness, constrain purchases of higher-end, often imported products.
Turkey: Moving up the scorecard
Turkey stands fifth, and thus in the middle of our scorecard, having risen from sixth last year and seventh in 2014. This progress is notable, given a track record of engrained pessimism among Turkish consumers. Turkey has been the only country in the survey where personal finances are expected to improve, from a very low base of previous-year results. Inflation worries are also lowest. There is an implicit concern about the immediate outlook, with a net negative balance of 20% recorded for those seeing now as a good time to make a major purchase. Geo-politics may of course be an issue here.
In terms of policy, we are expecting a more benign environment for 2016 versus 2015. Regulators introduced a few prudential measures in February 2014 limiting instalment sales in a number of cyclical, import-driven sectors (such as mobile handsets and cars), given the structural current account problem in the Turkish economy. With the sharp fall in energy prices, we expect policymakers now to be less worried about the deficit. Although it has historically been the highest income segment that has the most positive personal finance outlook, we note in Turkey's survey results this year that there is a year-over-year improvement in expectations of personal finances in the populous TRY 1001-2000 per month income bracket. This has not yet been reflected in the purchasing decisions for big-ticket items, since low-income earners only began to receive higher salaries in January/February 2016.
Turkish respondents are considering the highest spending increase in "semi-discretionary items", and consumer confidence indicators suggest that Turkish consumers are not yet convinced about making bulk purchases. There is already a good penetration of staples, and thus we think that any incremental disposable income is likely to be spent on "affordable-but-non-necessity" items (such as alcoholic drinks, cosmetics and technology.