Capturing the World’s Emerging Middle Class
Capturing the world’s emerging middle class
David Court and Laxman Narasimhan
Multinational companies need new “scale at speed” approaches to penetrate the developing world’s increasingly prosperous consumer markets.
The rapidly growing ranks of middle-class consumers span a dozen emerging nations, not just the fast-growing BRIC countries,1 and include almost two billion people, spending a total of $6.9 trillion annually. Our research suggests that this figure will rise to $20 trillion during the next decade—about twice the current consumption in the
United States.
David Court is a director in McKinsey’s
Dallas office, and
Laxman Narasimhan is a director in the Delhi office. These new spenders offer an opportunity for early winners to gain lasting advantages, just as companies in
Europe and the United States did at similar points in their development.
In 17 product categories in the
United States, for example, we found that the market leader in 1925 remained the number-one or numbertwo player for the rest of the century. These companies include Kraft
Foods (Nabisco), which led in biscuits; Del Monte Foods, in canned fruit; and Wrigley, in chewing gum.
Despite having strong global brands, multinational companies face challenging competition in emerging markets, as these economies already boast aggressive local players that have captured a significant portion of spending.
Chinese beverage maker Hangzhou
Wahaha, for example, has built
2
a $5.2 billion business against global competitors such as Coca-Cola and PepsiCo by targeting rural areas, filling product gaps that meet local needs, keeping costs low, and appealing to patriotism.
Further complicating matters is the fact that the multinationals’ business models are based on practices established in the markets of the developed world, where the game is won slowly by finding cost savings and making product improvements that capture single percentage points of market share over time. Among emerging markets, perhaps only China can provide enough short-term growth to justify that strategy. Meeting the needs of most consumers in emerging markets requires a different course, which often elicits anguished cries in the corridors of the multinationals: “You want me to change
my business model and go across the world for $50 million in revenue?” It’s an understandable lament for executives who not only fear ending up with little to show for their efforts but also are wary of the battles already under way among emerging-market champions.
While there are multiple approaches to capturing emerging-market consumers, the two critical factors are speed and scale. Our experience suggests that one way multinationals can quickly gain the scale they need is to identify clusters of similar consumers across multiple markets. That approach allows these companies to build revenue and profit streams that are collectively material and justify significant, ongoing capital investments to fuel growth. Another tack is to work at a more local level, gaining scale in specific regions and
Q3 2010
Emerging middle
Exhibit 1 of 2
Glance: The emerging middle class in developing countries comprises nearly two billion people, who spend a total of $6.9 trillion annually.
In developing countries, the emerging
Exhibit title: The emerging middle class
class—nearly two billion strong—spends a total of $6.9 trillion annually.
Income
segments
Distribution of consumption and population
% of total population,
100% = 5.5 billion
% of total consumption,
100% = $9.7 trillion
Global
Upper middle
Middle
Annual household income1 2.0
0.1
1.8
>$113,000
15.0
$56,500–$113,000
32.0
13.0
Lower middle
Deprived
$22,500–$56,499
23.0
23.6
$13,500–$22,499
28.0
61.5
David Court and Laxman Narasimhan
Multinational companies need new “scale at speed” approaches to penetrate the developing world’s increasingly prosperous consumer markets.
The rapidly growing ranks of middle-class consumers span a dozen emerging nations, not just the fast-growing BRIC countries,1 and include almost two billion people, spending a total of $6.9 trillion annually. Our research suggests that this figure will rise to $20 trillion during the next decade—about twice the current consumption in the
United States.
David Court is a director in McKinsey’s
Dallas office, and
Laxman Narasimhan is a director in the Delhi office. These new spenders offer an opportunity for early winners to gain lasting advantages, just as companies in
Europe and the United States did at similar points in their development.
In 17 product categories in the
United States, for example, we found that the market leader in 1925 remained the number-one or numbertwo player for the rest of the century. These companies include Kraft
Foods (Nabisco), which led in biscuits; Del Monte Foods, in canned fruit; and Wrigley, in chewing gum.
Despite having strong global brands, multinational companies face challenging competition in emerging markets, as these economies already boast aggressive local players that have captured a significant portion of spending.
Chinese beverage maker Hangzhou
Wahaha, for example, has built
2
a $5.2 billion business against global competitors such as Coca-Cola and PepsiCo by targeting rural areas, filling product gaps that meet local needs, keeping costs low, and appealing to patriotism.
Further complicating matters is the fact that the multinationals’ business models are based on practices established in the markets of the developed world, where the game is won slowly by finding cost savings and making product improvements that capture single percentage points of market share over time. Among emerging markets, perhaps only China can provide enough short-term growth to justify that strategy. Meeting the needs of most consumers in emerging markets requires a different course, which often elicits anguished cries in the corridors of the multinationals: “You want me to change
my business model and go across the world for $50 million in revenue?” It’s an understandable lament for executives who not only fear ending up with little to show for their efforts but also are wary of the battles already under way among emerging-market champions.
While there are multiple approaches to capturing emerging-market consumers, the two critical factors are speed and scale. Our experience suggests that one way multinationals can quickly gain the scale they need is to identify clusters of similar consumers across multiple markets. That approach allows these companies to build revenue and profit streams that are collectively material and justify significant, ongoing capital investments to fuel growth. Another tack is to work at a more local level, gaining scale in specific regions and
Q3 2010
Emerging middle
Exhibit 1 of 2
Glance: The emerging middle class in developing countries comprises nearly two billion people, who spend a total of $6.9 trillion annually.
In developing countries, the emerging
Exhibit title: The emerging middle class
class—nearly two billion strong—spends a total of $6.9 trillion annually.
Income
segments
Distribution of consumption and population
% of total population,
100% = 5.5 billion
% of total consumption,
100% = $9.7 trillion
Global
Upper middle
Middle
Annual household income1 2.0
0.1
1.8
>$113,000
15.0
$56,500–$113,000
32.0
13.0
Lower middle
Deprived
$22,500–$56,499
23.0
23.6
$13,500–$22,499
28.0
61.5