Innovation in Emerging Market: Consumer Spending

"To flourish in this atmosphere, it helps to have the spirit of a frontier settler, not a corporate bureaucrat." states the article "Grow, grow, grow" in Economist's recent report on innovation in emerging markets here.

The East Rising

The Economist states: "The East is undoubtedly rising but its new day has barely begun." Excellent graphical representation of regional growth comparisons.

America's consumer goes from "Be Like" to "I Am"

"There is no such thing as "the American consumer"".

States an article in AdAge - "No more Joe consumer in America", here.  One key to this shift has been the American consumer's ability to voice a choice, ability to create and join communities of choice, and the choice being the brand that fulfills a need.  Did the Internet help enable this?

This democratization of the American demographic is discussed in a white paper (for you to purchase) here by Mr. Francese, demographic trends analyst at WPP's Ogilvy & Mather and founder of American Demographic magazine.  He states that:

"The iconic American family - married couple with children - will account for a mere 22% of households."

The changes represent the continued growth of digital communication mediums, while emphasizing the need to engage directly and pervasively with the consumer.

China Update

Good friend Mr. Tony Tsai passes along great updates from China:  

Consumer Focus

McKinseys & Co.: China will become world's third largest consumer
According to a research report released by McKinseys & Co. on Aug. 21, China will become the world's third largest consumer by 2020, with over $2.5tr in personal consumer spending, just behind the US and Japan. The report pointed out that the Chinese government is adopting a series of policies to stimulate consumption and transfer the economic development focus from heavy industry and export to service and consumption.

Ministry of Commerce advises to cut import duties to boost high-end spending
Aug. 6, Vice Minister of Commerce Jiang Zengwei says that China should cut import duties on luxury goods, such as cosmetics and watches to encourage wealthy consumers in mainland China to buy such products at home rather than abroad. Lowering the duties will boost the imports of luxury goods and that will spur domestic retail sales. He adds that China should promote sales on credit to bolster domestic demand.

Ministry of Health publishes four new regulations to solicit public opinion
The Ministry of Health recently issued four new regulations, including health archives management, booking register in hospitals, complaints from patients and an electronic case history, to solicit public opinions within three days. It indicates that the Ministry of Health is pushing forward medical reform steadily, which will bring great benefits to ordinary people.

Global Business & Transparency

Wen Jiabao: China's economic development still lacks inner vitalityDuring an inspection tour in Jiangsu province, Chinese Premier Wen Jiabao said, "There are still a lot of unstable and uncertain factors ahead and the economic situation is still very grave, although both the world economy and the national economy are making positive changes." He said the country's economic performance showed increasingly positive signs, but stressed recovery was still "unstable", not consolidated and "unbalanced". He warned against blind optimism. He said, "The country's economic development still lacks inner vitality to counter the crisis, as policy support remains an important propellant of economic growth." Weakening external demand was also creating overcapacity in some sectors, which would be a big obstacle to a rebound in industrial and economic growth. He reiterated that the country should stick to its proactive fiscal policy and moderately easy monetary policy for a sustained growth.

Wen Jiabao: China's economy is at crucial juncture in recovery and government will not change policy direction
Sept. 1, Chinese Premier Wen Jiabao meets with visiting World Bank President Robert Zoellick. He says that China's economy is at a crucial juncture in its recovery and the government will not change its policy direction.

China's accounting standards will meet international standards within two years
Sept. 10, the Ministry of Finance issues the roadmap for the substantial convergence between China's Accounting Standards for Business Enterprises and International Financial Reporting Standards. The roadmap has set a deadline of 2011. Starting from 2012, all of China's large and medium-sized enterprises will adopt the revised accounting standards system for Chinese business enterprises which is equivalent to the International Financial Reporting Standards. It has been reported that the European Committee decided that during the transitional period from 2009 to 2010, the EU will allow Chinese enterprises to adopt Chinese accounting standards when entering the European market, so they do not have to adjust their financial statements in accordance with International Financial Reporting Standards used in the EU.

Reorganization and restructuring of enterprises can not neglect democratic decision-making
The All China Federation of Trade Unions recently issued a circular about further strengthening democratic management during the reorganization, restructuring, closure and bankruptcy of state-owned enterprises, in order to protect the legitimate rights and interests of employees.

Four hundred and eighty-six of the world's top 500 companies have set up presence in Beijing
According to statistics, foreign direct investment (FDI) in Beijing in the first half of this year rose 5% year-on-year. Yu Xiaofeng, vice director of the Department of Foreign Trade under the Ministry of Commerce, attends an investment forum in Beijing and lists the reasons why Beijing has become the first choice for investment by multinationals and well-known foreign companies.The reasons include preferential investment policies, a good investment environment, high-tech human resources, low labor costs and simplified procedures for examination and approval of investment projects. By the end of the first half of 2009, 486 of the world's top 500 companies had a presence in Beijing. Beijing's actual use of FDI totalled $3.5b. Most of the companies are from Hong Kong, the British Virgin lslands, Germany, the US and Singapore.

China's FDI rose 7% in Aug., first growth in 11 months
Sept. 15, Yao Jian, spokesman for the Ministry of Commerce, says that China received nearly $7.5b in foreign direct investment (FDI) in Aug., up 7% from a year earlier, the first growth in 11 months, since last Oct. He says that currently, China's FDI policies have already formed a complete framework, and are fair and impartial. However, they need adjustments and optimization to better support the country's economic restructuring and to create a resource-saving and environment-friendly society. He notes that the adjustment and optimization will focus on investment procedures. Foreign investment filing systems will replace the current examination and approval system.

Consumer Insight - Alcohol Consumption and its Future Regulation

Dr. Ayesha Haroon sends along an article "Alcohol link to one in 25 deaths" here, discussing a study conducted at the University of Toronto.  Dr. Haroon highlighted that with the release of further details, the surgeon generals of the developed countries will have to reconsider their alcohol regulations while their governments will have to review policy towards alcohol sales and consumption.  Interesting fact about Europe in the article:

"Worldwide, average alcohol consumption is around 12 units a week - but in Europe that soars to 21.5. "

Alcohol in the form of consumer products have provided capitalism with exceptional wealth creation.  Perhaps too much of anything is bound to raise an eyebrow or two!

Chinese Consumer - Market Dynamics in Retail

Good friend and colleague who is a global leader in retail innovation, Mr. Tony Tsai, Chief Executive Officer – BHG Retail Innovation Institute & Executive VP Operations – The BJ Hualian Hypermarket Co. forwards an excellent article from Nielsen called "Changing Market Dynamics in China's Retail Industry".

The article states of the consumer product goods while touching on the fast moving consumer goods:

"The government’s retail statistics show a slowdown in retail sales over the last six months from 22 percent growth year on year in Quarter 3 to 19 percent in December and 15 percent in February. This slowdown is certainly reflected in FMCG as well. When looking through Nielsen data, specifically in the Modern Trade channel, there is a significant slowing from a 13 percent growth in Q4 2008 to two percent in Jan/Feb 09."

Mr. Tsai and I had discussed, interestingly sitting in Dubai a few years back while we were conducting an analysis of Gulf retail markets, how retail growth in emerging regions like Gulf begins with super market arena in tier 1 cities is followed by hyper and mini growth. What I was curious about was what happens with tier 2 and then tier 3, where the consumer desires for the experience of the tier 1 cities and the super markets? Inevitably it is consumer economics driven. As tier 1 cities grow larger and harder to navigate, hyper and mini marts start to provide the essentials of daily consumption while the weekend trips are reserved to the super "stores".

In case of China, Mr. Tsai had shared about 6 months ago that the workers who do not have work in the cities are returning to the tier 2 and tier 3 cities and towns. The Nielsen reports the results of this:

"Lower tier cities, where the spend on food and beverages represent roughly 40 percent of household expenditure, are achieving double digit growth, however the growth is potentially being fueled by the fact that more workers are staying in their hometowns as less job opportunities exist due to factory closures in South China. Another factor could also be that consumers are moving from villages to the towns to do their shopping as well as downgrading to lower priced products."

Also, Mr. Tsai back then highlighted that fluctuations in economics of a rapidly growing region like Gulf will impact consumer behavior, such as brand switching. I felt that bargain hunting may start to play a role in the consumers decisions

The nielsen report validates these predictions for the rapidly growing region like China impacted with economic woes:

"Consumers are changing their purchasing behavior ... with the significant increase in promotional activity, are being ‘trained’ to buy more on promotion. This highlights the importance of price right now with 85 percent of Modern Trade shoppers paying more attention to price promotions."

Consumer Spending Vs. Savings in the USA

In The McKinsey Quarterly, "The economic impact of increased US savings" here. Here are a few quantitative insights based on the fact that household incomes have not been growing and in some cased globally have been decreased, a recent example being renegotiation of contracts at automakers in Germany.

"...holding incomes constant, each percentage point increase in the savings rate translates into roughly $100 billion less in consumer spending¬. A 5 percent savings rate would mean $530 billion less in spending each year if US incomes fail to rise; if they rose by 2 percent a year, a 2.3 percent savings rate would mean $250 billion less spending, all else being equal."

The conclusion:

"But without significant income gains, deleveraging could undermine consumption and the global economy for years to come."