This report was developed and published by the Demand Institute, a non-profit think tank jointly operated by The Conference Board and Nielsen.
Companies that seek growth from meeting consumers’ needs appreciate that there are vast variations in consumption patterns from one country to another. Likewise, consumers in any given country differ in their means, preferences and behaviors. Given the logical result that some consumers will drive spending growth more than others, marketers are particularly interested in knowing the consumers who will contribute most to their growth objectives. Identifying, understanding and meeting their needs should be fundamental to the company’s growth strategy.
THE MIDDLE CLASS: AN INSUFFICIENT CONCEPT
For years, consumer-facing businesses have favored a simple approach to identifying the growth drivers in their markets: they prioritize on the basis of consumers’ income levels. Luxury-goods manufacturers concentrate on high-income consumers. Manufacturers of mass-market goods appeal to middle-income earners. The latter group, often referred to as the middle class, is often seen as the big opportunity for companies that provide consumer goods and services. However, we see several reasons why the notion of a middle class is inadequate as the foundation of a growth strategy.
Too broad to apply across markets. One disadvantage is that, although “middle class” sounds like a straightforward category, definitions actually are difficult to apply across markets. Pew, for example, defines the middle class as any household that earns between $10 and $20 per person per day. Not only is this an enormous range in purchasing power, but many others define it differently.
Moreover, income does not necessarily denote purchasing power. What $20 can buy in a day in Saint Louis, Missouri, is very different from what it can buy in an inland city of China, such as Chongqing. For these and other reasons, the concept of a middle class is difficult to use for comparisons across markets—particularly across markets with different levels of economic development. Businesses would benefit from a more cohesive approach.
Overlooking mind-sets. This approach also ignores consumer mind-sets. In the United States and other mature markets, being middle class is not just about the resources an individual has. It is about that person’s engagement with consumer culture. Income is neither necessary nor sufficient for that mind-set to exist. The financial lives and aspirations of consumers can be quite rich, even without abundant economic resources.1
As this consideration of mind-sets illustrates, consumer culture is different from income, though income is an enabler. A rich consumer culture grows not just from rising incomes but also from willingness to spend that income. In a developed consumer culture, consumers make decisions about how to allocate their spending across categories beyond those required for basic survival. They communicate with one another about new products. They write reviews and share opinions on social media. They experience life in a different way from those who are not part of the culture.
Identifying which consumers are already engaged in consumer culture, and which might be soon, will be key for businesses seeking growth. Simple income measures are inadequate for meeting that challenge.
Ignoring access to goods and services. A final problem we see with middle-class and other income-based approaches to seeking growth is that these approaches ignore access to consumer goods and services. Consumers may have enough income to qualify as middle class, but can they spend it? Many emerging and growth markets face significant challenges in distribution and logistics.
E-commerce potentially provides some outlet for pent-up demand, but it requires a developed digital infrastructure—internet access to the retailer, as well as the ability for the consumer to use a form of cashless payment. And e-commerce still requires logistics; sellers must deliver products to consumers efficiently. These capabilities are still lacking in many markets.
As a result of these challenges, there are, for the time being, hundreds of millions of “middle-class” consumers whom consumer-facing businesses will struggle to serve. Either the consumers do not have online access, or the local infrastructure does not support efficient distribution to them.
INTRODUCING CONNECTED SPENDERS
To address these shortcomings of a focus on the middle class, we have developed a new approach that identifies the consumers who are able and ready to be higher spenders. We call these consumers Connected Spenders, and they will account for 46% of the world’s consumption over the next decade, or U.S. $260 trillion.2
Definition. Two features define Connected Spenders. First, once they have covered basic necessities, these consumers have spare cash that they are willing to spend on other consumer products. Second, they are connected to the Internet, so they have access to information and retail channels that enable them to participate fully in a consumer economy.
Impact. In 2015, we estimate, about 1.37 billion people, or 19% of the global population, were living in Connected Spender households. These households accounted for 35% of total consumer spending, or U.S. $15 trillion. By 2025, there will be nearly 3 billion Connected Spenders around the world, accounting for U.S. $32 trillion in total spending annually.
Profile. Connected Spenders are a relatively sophisticated group of consumers. They are younger and more urban than consumers overall, and they have higher average incomes, though not all are rich. They are also extremely confident about their personal economic situation. They represent the most eager participants in consumer culture and are the ideal representatives of the modern, connected and global consumer economy.
DRIVERS OF GLOBAL CONSUMPTION GROWTH
Countries with a larger share of Connected Spenders tend to have economies with greater household consumption. Between 2010 and 2015, countries with above-average growth in the share of the population living in Connected Spender households experienced faster growth in per-capita consumption than would be expected from the corresponding growth in per-capita GDP. In other words, in countries where the number of Connected Spenders grew particularly quickly, consumption as a share of GDP tended to increase. Or even more simply, household consumption took on a larger role in the economy. In particular, holding constant GDP growth, each additional 10-percentage-point increase in the share of the population living in a Connected Spender household is associated with four additional percentage points of consumption growth over the five-year period.
As an example, consider two countries in Latin America, Belize and Trinidad and Tobago, between 2010 and 2015:
- GDP per capita increased in both countries at roughly the same rate—10.1% in Belize and 10.6% in Trinidad and Tobago.
- In Trinidad and Tobago, Connected Spenders grew more quickly than in Belize. Their share of the population in Trinidad and Tobago rose 12 percentage points, from 16% to nearly 28% of the population, compared with an increase of six percentage points in Belize, from 8% to 14%.
- Per-capita consumption in Trinidad and Tobago grew by 40%, compared with consumption growth of only 10% in Belize.
Myriad factors determine consumption growth, and not all comparisons of two countries are this clear, but on average, growth in Connected Spenders signals additional growth in consumption above what is predicted from GDP growth alone.
In that sense, the Connected Spenders serve as a leading indicator of where global consumption is headed. Over the next decade, we project that consumer spending around the world will reach nearly U.S. $600 trillion, and Connected Spenders will account for close to half of that total, despite representing only 19% of the world’s consumers in 2015. Therefore, consumer-facing businesses should monitor where the Connected Spender population is growing fastest and prioritize those markets.
HOW THIS REPORT CAN GUIDE YOU TO THE CONSUMERS OF THE FUTURE
In this report, we provide all the tools consumer-facing businesses need to develop a strategy based on Connected Spenders. The chapters describe where Connected Spenders are today and will be in the future, what their preferences are, and how to market to them.
The Rise of the Connected Spender. A new category of consumers that we call Connected Spenders do most of the consuming in mature economies, and their numbers are rising rapidly in emerging markets. By 2025, half of global consumer spending will be done by Connected Spenders, who exist in mature and emerging economies and span income groups. The Connected Spender cohort, not the middle class, will be the sweet spot for consumer-facing businesses. This chapter describes where Connected Spenders are to be found, how and where their ranks are growing, and what countries are most important for companies who want to reach this highly desirable group of consumers.
Who Connected Spenders Are and What They Value. Connected Spenders are the new global digital consumers and the ideal customer for a broad range of products. They are young, urban, and confident, and over the next decade, they will lead the world’s consumer spending, both online and offline. Along with details about their demographics, this chapter digs into their spending habits and lifestyles.
Why Not Focus on Income? The research that led us to the concept of the Connected Spender uses a new way of classifying consumers that outperforms conventional income-based approaches to finding where the growth in spending is likeliest. This chapter explores how the population of Connected Spenders differs from the population of middle-class consumers, even though many Connected Spenders also can be classified as middle class.
Implications for Consumer-Facing Businesses. In a world where economic growth is slow and household incomes have stagnated in many economies, it is more important than ever to identify the best consumers and find ways to capture their demand. The Connected Spender concept does just that. This chapter offers some ways that consumer-facing businesses can apply the approach.
For a complete description of the analysis and the relevant countries, see the Research Methodology.