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Who are tomorrow's consumers?

By Sanjeev Sanyal  (China Daily)

16:29, August 17, 2012

Luxury brand companies' stock prices plunged in July, after their financial results disappointed investors, owing largely to slower sales in emerging markets, especially in China. And reports indicate that high-end shopping malls in India and China are increasingly empty.

What is going on? Many analysts had expected emerging markets to generate exponential growth over the next decade. But now there is talk of how the global crisis is slowing down these economies and killing off discretionary spending.

But a slowdown in China's economic growth cannot really be blamed for slower sales of luxury goods or empty malls. The annual growth rate of China's $7.5 trillion economy fell from 8.1 percent in January-March to 7.6 percent in the second quarter, hardly a cause for panic. Moreover, two-thirds of the decline is attributable to slower investment rather than slower consumption. For all of China's long-term structural problems, it is not exactly slipping into recession.

The real problem is that many analysts had exaggerated the size of the luxury goods segment in emerging markets. China is by far the largest emerging market economy, with 1.6 million households that can be called "rich" (defined as having annual disposable income of more than $150,000). But this is still smaller than Japan's 4.6 million and a fraction of the 19.2 million rich households in the United States. The number of rich households amounts to barely 0.7 million in India and 1 million in Brazil.

The point is that developed countries still dominate the income bracket that can afford luxury goods. The explosive growth recorded by this segment in emerging markets in recent years reflected entry into previously untapped markets, with the subsequent slowdown resulting from saturation. The number of high-income households is still growing, but not enough to justify the 30-40 percent compound growth rates expected by some.

This does not mean that growth opportunities in emerging markets have disappeared, but expectations do need to be recalibrated. Despite the economic boom of the last decade, China still has 164 million households that can be called "poor" (with annual disposable income of less than $5,000) and another 172 million that are "aspirant" (between $5,000-$15,000). Similarly, India has 104 million poor households and 107 million aspirant households.

The real story for the next two decades will be these countries' shift to middle-class status. Although other emerging regions will undergo a similar shift, Asia will dominate this transformation.


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