The current concerns about global economic growth can’t stop consumption to increase further. According to a recent study by consulting firm McKinsey&Company, global urban consumption will increase with $23 trillion from 2015-30. But the driver of this growth will be significantly different from the past. It’s no longer the increasing number of consumers that ramps up consumer spending. The increase in spending per capita will be the main force behind a massive $1.5 trillion annual growth. However, spending power will be unevenly distributed among consumer groups. This will have a major impact on companies, and therefore investments in the consumer sector.
Cities and seniors become big spenders
McKinsey is specifically talking of urban consumption. Not only generate consumers in large cities 81% of global consumption, they’re also responsible for 91% growth in consumption during 2015-2030. Apart from that, there’s a huge difference in spending growth across age groups. As a result of an ageing population, the group seniors in developed countries is dramatically increasing. McKinsey estimates that the group 60-plus (seniors) will increase more than one-third, from 164 million to 222 million. But the shift in consumption is even larger. This group will generate 51% of urban consumption. The consulting firm shows the remarkable fact that the group 75-plus in Northeast-Asia will spend almost 40% more in the years to come, much faster than any other group. This can be largely attributed to an ageing population in Japan along with the countries spending freeze.
It doesn’t come as a surprise that this group will spend a lot on healthcare. Despite a $1.4 trillion growth until 2030, this is not the main reason why we should be interested in this development. Seniors today, that is, in developed countries, have a per capita consumption of $39,000. That’s much more than the $29,500 annual consumption for the age group 30-44 years. What’s more, it is estimated that seniors will contribute over 40% of future growth in personal care, housing, transportation, entertainment and food. And don’t forget that most new cars are bought by the group 50-plus. Not only this group buys two-thirds of new cars, the average price of a new car also increases with age.
Chinese consumers continue to spend
There’s another major force in global consumption growth: the Chinese working class. McKinsey projects that the Chinese working-age consumers, in the age of 15-59 years, will take 18% of urban consumption growth. In dollar terms: $4 trillion. Although the group will see its spending double, with an annual $10,700 by 2030, income figures are more modest. But don’t underestimate this significant lower annual spending! As McKinsey notes, this may reshape global consumption. The Chinese middle-class will increase dramatically. In addition, in the past researchers have observed that an increase beyond a $10,000 threshold will lead to much higher spending in luxury goods compared to basic goods. For instance, the purchase of a car is now an option, but also a dramatic increase in consumption of services can be witnessed (think of insurances).
Reshaping consumption profiles
Also North-American consumers will remain an important source of growth with a 10%-share in urban consumption growth. But let’s take a closer look on underlying developments. North-American shoppers are becoming more ethnically diverse. According to McKinsey, that means a significant change in product preference. But also a change in education level matters. New generations are better educated. However, for Americans a big issue is that key life stages, such as graduation, marriage or having kids are at higher ages than in the past. Therefore, the purchase of a first home is postponed. This matters a lot for consumption, since homeownership has a huge impact on the type of products and services that are consumed. Take for instance home insurances, cable subscriptions, do-it-yourself articles etc.
Investors preference should change too
The described developments have a huge impact on goods and services sold, and therefore on revenues and earnings of companies. Investors should take notice of these developments. For instance, the healthcare sector may benefit from an aging population that can spend more. But also other products and services aimed on this group can see significant higher demand. Higher spending per capital also means more demand for services. Investors should also be aware that different groups have different preferences. A company that is highly popular in the US, but neglects the preferences Chinese market has a significant disadvantage over competitors. What’s more, Chinese companies may see higher demand as well. For instance, insurance companies could offer products with better margins when income rises. This latter example sums up the broader consequence of increased consumer spending per capita: margins are important. Don’t look for volume, or quantity, but search for quality products and services.
The developments described are important because of the huge amounts of money involved. Don’t make the mistake to underestimate the powerful force of changing consumption patterns.