The $10 Trillion Prize. David Michael
shows that consumer demand for different products changes at a different rate as income changes. Take two types of beverage, for examples: water and fine wine. As people’s income increases, they do not actually consume that much more water, and so the consumption curve is fairly flat. By contrast, as a consumer enters the middle class, there is a tendency to drink better wine every now and then, as a special treat. Then, as the consumer becomes truly affluent, he or she begins to consume fine wine on a regular basis. So the consumption curve for wine is upward sloping, rising as income rises.
Using this tool, our analysis shows that once people have sufficient disposable income to enter the emerging middle class—typically when their household income reaches around $7,500 per year—they start spending on things that they could once only dream of having: fresh fruit and vegetables, manufactured ready-to-wear clothing, better housing.
Our research shows that consumers hit a second important threshold once they start to earn around $12,500 per year. At this point, they begin to invest in a first automobile, dabble with entry-price luxury goods and health foods, and spend more on beauty products, apparel and shoes, entertainment, and alcoholic drinks.
Then, as they become more affluent, with an annual income of $19,000, consumers cross another threshold. They start to spend money on travel, recreation, fancier household goods, and foods that are not everyday commodities, such as yogurt, chocolate, coffee, and wine.
For items such as household goods, the consumption curve is a sharply upward-sloping line, indicating a steady rise in spending as incomes rise (figures 2-4 and 2-5). Other consumer categories that rise steeply, if less so than household-related goods, are transport and communication, as well as education. Expenditures on health, another major category, only start to rise as people reach upper middle or upper class, with only the tail end of the consumption curve bending upward.
By contrast, the consumption curve for food follows a gentler upward trajectory and actually flattens out, as people get richer. You can only spend so much on food and consume so many calories.
Consumption Patterns in China
In China, people rising to emerging middle-class status focus on three core needs: food, clothing, and the household. When they were poor, they bought their clothes from street vendors, bartered for basic food, and endured subsistence-level living conditions. With more money, they visit modern retail stores to buy apparel; they go to supermarkets to select a broad mix of fruit, vegetables, meat, and dairy products; and they invest in basic household goods. In urban areas, more than 95 percent of households have a washing machine, a refrigerator, and air-conditioning units.
FIGURE 2-4
BCG consumption curves for different products in China
As people enter the middle class, they switch their focus to consumer goods that enhance their quality of life far beyond subsistence. Food, clothing, and the home remain important, but they look for sophisticated products with advanced functionality and instantly recognizable international brand names. They also look for definably healthy products: juices, bottled water, vitamins, and other food supplements. This is a growing trend. For instance, we noted an increasing appetite for bottled water in China, with the purchase incidence rising from 67 percent in 2007 to 86 percent in 2011. Fearful that tap water may be polluted, the Chinese devote more of their income to safe products.
FIGURE 2-5
BCG consumption curves for different products in India
When Chinese people enter the upper class, their shopping behavior evolves as they trade up to premium products such as luxury items and prestige cars, as well as to life-enhancing activities such as dining out, going to the movies, playing sports, and going on overseas trips, especially long-haul flights to the United States and Europe. Today, these richer Chinese are buying a record quantity of fine wine from the vineyards of Bordeaux. In doing so, they are starting to appreciate, and not just consume, wine—a reflection of their growing sophistication.
As they become wealthier, Chinese consumers look ever more closely for branded products: some 70 percent say they trade up because of brand, a higher percentage than for consumers in most other countries (figure 2-6). In the United States, just 30 percent trade up to brands in this way, and in Europe, it is an even lower proportion, at just 19 percent. Chinese consumers emphasize brand mainly because they see it as an indicator of quality and functionality.
For some consumer categories—notably baby products (such as infant formula), luxury products, and designer labels—brand plays an especially important part in the purchase decision. For other categories, such as home decoration and entertainment, brand is less significant. There are also some categories for which foreign brands are coveted and others for which local brands are preferred. When it comes to clothing and consumer electronics, foreign brands are favored—notably Nike, Adidas, and Nokia. By contrast, for home appliances, local brands, which offer trustworthy products with good after-sales services, are preferred. For instance, twice as many consumers are aware of Haier refrigerators than of other brands, including famous international manufacturers of white goods.
Consumption Patterns in India
We segment the Indian middle class into emerging middle and middle, with particular focus on urban and rural distinctions. At the lower end, there is some overlap with the next-billion category, which includes some of the emerging middle class, while at the upper end, particularly with the educated professionals, there is some overlap with the rich or affluent classes.
Today, the middle class—including teachers, junior executives, factory managers, and village doctors—accounts for 28 percent of households and some 44 percent of consumption.1 As might be expected, the urban class has relatively higher spending, accounting for 8 percent of households and 11 percent of consumption. Educated professionals, a distinct group whose members include graduates working as managers and executives and whose income overlaps with the richer middle class, will see their share of household consumption increase from 16 percent in 2010 to 26 percent in 2020.
FIGURE 2-6
Consumers’ reasons for trading up, by country
We estimate that the discretionary spending of the urban middle class is about 32 percent of their overall income. For the rural middle class, it is slightly lower, at 28 percent. For educated professionals, it is substantially higher, at 48 percent.2
Most Indians, even those with income of $3,000 or lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. As they get richer, they start to purchase durable goods, with the typical hierarchy being a TV, then a gas cooking stove, then a music system, then a refrigerator and washing machine, and then an air conditioner. Also, most will buy a two-wheeler, such as a scooter or a motorbike, for getting around.
Beyond this, their priorities are things relating to the family, especially children. We have calculated that 37 percent of the middle-class household’s expenditure is devoted to children, mainly food and education. One young couple we met in Mumbai earned about 15,000 rupees ($300) a year and lived in a one-room chawl (a ghetto-like apartment). The couple spend nearly 1,000 rupees ($20) per month on school fees for their only daughter. “We want the very best we can afford for her,” they explained.
By buying a private-school education, they are buying a branded product—one with quality assurance. Indeed, our research shows that, as with Chinese consumers, 70 percent of Indian consumers consider the brand to be an important criterion when making a purchase, with 64 percent saying it is a reason for trading up.
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