Introducing the Connected Spender – Magnitude
This report was developed and published by the Demand Institute, a non-profit think tank jointly operated by The Conference Board and Nielsen.
Today’s powerful data analytics make it possible to understand the characteristics of individual consumers on a very granular level. Yet marketers typically continue to rely heavily on a far more general concept, the middle-class consumer—seen as a vast market of households whose spending power enables them to buy the most in most categories. Our research looks at consumers in a different way: We identify a new category of consumers that we call “Connected Spenders.” These consumers have sufficient income for discretionary spending, are active and enthusiastic shoppers, and have access to stores both online and off.
Connected Spenders already 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, which, unlike middle classes, exist in mature and emerging economies and span income groups. The Connected Spender cohort, not the middle class, will be the sweet spot for marketers. Finding and meeting the needs of these consumers will be critical for consumer-facing companies that seek growth in an environment of restrained global demand and stagnant middle-class incomes in many countries. In this chapter, we look at how many Connected Spenders there are, where they are to be found, how and where their ranks are growing, and what countries are most important for marketers who want to reach this highly desirable group of consumers.
THE GLOBAL POPULATION OF CONNECTED SPENDERS IS SET TO DOUBLE
As shown in Exhibit 1, we estimate that the global population of Connected Spender households was about 1.4 billion in 2015. We project that this number will more than double to 3 billion in 2025, going from about 19% of global consumers to 37%.1 More importantly, total spending by Connected Spenders will grow from about U.S. $15 trillion in 2015 (about 35% of global consumer spending) to more than U.S. $32 trillion in 2025, when it will account for more than half of global consumer spending.
For a complete description of the analysis presented in this chapter and country-level detail, see the Research Methodology.
WHAT DRIVES THE GROWTH OF THE CONNECTED SPENDERS COHORT?
Driving the sharp increase in the number of Connected Spenders in countries around the world are three factors, whose relative importance is shown in Exhibit 2:
- Rising internet access
- Rising share of consumers with internet access who also have sufficient income for discretionary purchases
- Population growth itself (the least influential factor)
While the Connected Spender phenomenon is not only about online shopping (we measure consumer spending across all categories and shopping formats), internet access is a critical requirement. The internet is an important part of the modern consumer economy, and Connected Spenders use it for research and comparison shopping before they make purchases. These consumers are also more likely than others to use online stores and to purchase digital products and services.
Internet penetration. The most important characteristic of Connected Spenders is that they have access to the internet and everything that comes with it. The ability to participate in the digital economy hinges on that access, which is projected to grow from 44% of the global population in 2015 to 68% by 2025. This translates into an additional 2.3 billion consumers with internet access.
According to our model, growth in internet penetration will account for 57% of the growth in the number of Connected Spenders around the world.
The rising share of internet users who have spare cash to spend. To estimate how the share of consumers with income to make discretionary purchases will grow, we looked at several metrics, including urbanization rates, household income levels, and the prevalence of young adults in the population. Connected Spenders tend to be young, urban and relatively affluent.
Spending is also influenced by consumer confidence. When consumers gain confidence, they are more comfortable spending spare cash instead of saving it.
We estimate that the share of internet users spending spare cash will rise from 43% in 2015 to 54% by 2025. That growth will account for 30% of the overall growth in the number of Connected Spenders over that time period.
Population size. Countries with more people have more Connected Spenders, all else being equal. The world’s population is expected to grow 11% over the next decade, to 8 billion by 2025. This growth will account for 13% of the global growth in the number of Connected Spenders over the same time period. The contribution will likely be lower in mature markets, where population growth has been stagnant in recent years and is expected to continue growing relatively slowly relative to emerging and growth markets.
Spending growth. In addition to the number of Connected Spenders in a given market, we also track the amount of spending they do. Growth in the total amount of consumer spending from Connected Spenders can be decomposed into two components: the number of Connected Spenders and the per-capita consumer spending of Connected Spenders.
Total spending from Connected Spenders will more than double over the next decade, and globally, growth in the number of Connected Spenders accounts for all that spending growth (see Exhibit 3). But that hides important variation across different regions and levels of development. In mature markets, for example, growth in per-capita spending from existing Connected Spenders accounts for 30% of growth in total spending from the cohort. In other words, in those mature markets, some new consumers will become Connected Spenders, but a disproportionate amount of the opportunity comes from attracting the growing demand from existing members of the group.
THE POPULATION OF CONNECTED SPENDERS RISES IN TWO STAGES
The drivers of growth in the number of Connected Spenders vary widely and systematically across different countries. In particular, we find that growth in the population of Connected Spenders occurs in two stages, depending on countries’ levels of development.
- In very broad terms, the first stage is attainment of internet access, which is the primary driver of growth of Connected Spenders in emerging economies and what we call growth economies (relatively wealthy and fast-growing emerging economies such as China and India).
- In the second stage, where internet penetration is already high, growth in Connected Spenders depends more on rising incomes, consumer confidence, and the other factors that determine whether an internet user has spare cash to spend, as previously described.
In both stages, population growth is a small factor, either creating more potential Connected Spenders or, in some countries, limiting the pool.
Exhibit 4 summarizes the degree to which internet access, rising incomes and population contribute to growth of Connected Spenders by stage. It also shows that in stage 1, when internet access is rising rapidly, the largest driver of growth in consumer spending from Connected Spenders is from increases in the raw number of Connected Spenders. As more people are added to the ranks, so to speak, the group’s spending power rises.
In this stage, though, the average level of spend per Connected Spender does not necessarily tend to increase over time. Each additional Connected Spender added to the group will, on average, be less affluent than those who were already Connected Spenders before, dragging down the average level of spending for the group. In some cases, such as in the growth economies, the rising tide from a growing economy will more than counteract that effect, leading to small gains in per-capita spend overall. But in others, particularly the emerging economies, it will not.
In stage 2, growth in spending depends more on increased spending from the existing Connected Spenders. This occurs as household incomes rise and Connected Spenders become more engaged with the consumer economy.
In the next 10 years, growth of Connected Spenders in different parts of the world will depend on where countries stand in terms of stages one and two. Broadly, the biggest source of growth will be of the stage one type: expanding internet penetration in emerging and growth economies.
Stage 1: Internet access growth. Many people in emerging markets are already eager participants in the consumer economy, earning enough (in their own judgment, at least) to spend spare cash in discretionary ways. However, they lack access to the internet and the ability to research and/or shop online. As these eager consumers gain internet access, they can join the ranks of the Connected Spenders and fully participate in the modern, digital consumer economy.
As noted, we expect 2.3 billion new consumers to come online in the next 10 years. The vast majority of them will be in emerging markets, where internet penetration remains significantly below the level of mature economies. These countries will account for 2.2 billion of the 2.3 billion new internet users around the world. These estimates assume infrastructure investments on the part of business and governments, without which the numbers could be considerably lower. The ability to make those investments may depend on factors such as the overall level of economic growth in emerging markets, while continued urbanization will make the investments more efficient.
Stage 2: A rising share of households with capacity for discretionary spending. The second stage of growth—occurring in mature markets and a handful of growth and emerging economies—depends on enabling households that already have internet access to spend above and beyond their necessities. Several factors determine whether or not consumers are willing and able to spend their spare cash:
- They need to earn enough income to have spare cash in the first place. This means the performance of the overall economy and rising household incomes are important. In fast-growing economies and where an increasing share of GDP goes toward household income, more consumers will have spare cash.
- Another factor is access to financial services and cashless payments, which enable consumers to build up a store of cash and spend it conveniently.
- Because young urban consumers are more likely to become Connected Spenders, consumer-facing companies should also look for places where urbanization is continuing and average ages skew low.
Economies need both stages of development to create a large cohort of Connected Spenders. Even in mature markets, where internet penetration is close to 90%, Connected Spenders may not be a large portion of the overall population. In the United States, for example, 33% of consumers were Connected Spenders in 2015, and in Germany, only 44% were. In fact, in no country did Connected Spenders account for more than half of the population in 2015. Indeed, in mature economies, the number of Connected Spenders could decline in the short run, due to stagnating economic growth and household incomes, and shaky consumer confidence.
WHERE CONNECTED SPENDER POPULATIONS ARE GROWING FASTEST
Not surprisingly, mature economies have relatively well-developed Connected Spender populations (as a share of total population), due to high internet penetration and incomes. As a result, many of the places where Connected Spenders are prevalent today will likely experience slower growth over the next decade, while many countries where there are fewer Connected Spenders will experience faster growth. In other words, emerging and growth economies will begin to catch up with the mature markets, as depicted in Exhibit 5.
Even with faster growth, however, the share of Connected Spenders in emerging-market economies in 2025 will still be lower than in mature economies. This is because, in those markets, Connected Spenders are growing from a small base, and the level of income and internet penetration of mature economies will, on average, not yet be achieved by 2025. Some emerging markets may reach the second stage of growth by 2025, but that stage takes a long time to play out, and the mature markets already have a head start.
This will leave a gap both in the share of Connected Spenders and in how much they spend. In fact, we expect that the average Connected Spender in a mature market will still spend nearly 10 times as much as a Connected Spender in an emerging market in 2025 (see Exhibit 6). This underscores the trade-offs between investing in fast-growing markets and maintaining positions in mature markets. In percentage terms, the return on investment in growth and emerging markets may be higher, and that growth may be easier to capture in markets that are less developed and may have less competition. Still, the average level of spending in mature markets remains significantly higher.
Led by China and India, the Asian and Pacific regions of the world account for more than half of all consumers, so it is no surprise that most of the world’s Connected Spenders live in those regions. In 2015, more than 850 million Connected Spenders—over 62% of the global total—lived in either the East Asia and Pacific region or in Central and South Asia, as depicted in Exhibit 7. By 2025, that population could reach 1.9 billion—or 65% of the global total—as global economic output continues to shift toward Asia.
Nonetheless, Asian countries do not account for all the current leaders in Connected Spender population. The 10 largest markets for Connected Spenders in 2015 and 2025 are described in Exhibit 8. The United States, Germany and the United Kingdom rank among the 10 largest in the world in terms of the number of Connected Spenders, and Brazil is the fourth largest. Combined, the 10 largest markets by Connected Spender population account for nearly 70% of all Connected Spenders in the world but only 55% of the world’s population.
Over the next decade, the three largest markets will not change, but a handful of fast-growing emerging markets will climb the list. Indonesia will climb four spots, from eighth to fourth. Pakistan and Nigeria will both enter the top-10 list, pushing off Vietnam and the United Kingdom.
When we look at actual spending by Connected Spenders, we find it is more dispersed and does not follow the pattern of Connected Spender populations. Connected Spenders in mature markets, where there are higher levels of per-capita consumer spending overall, outspend their counterparts around the world. These dynamics are shown in Exhibit 9. North America and Europe accounted for only 22% of the Connected Spenders in the world but 64% of global spending from Connected Spenders.
Over the next decade, Connected Spenders will continue to play a disproportionate role in consumer spending in mature markets. They will account for more than half of all consumer spending in mature markets, compared with only 28% in emerging markets.
Eight of the 10 largest individual markets for consumer spending by Connected Spenders in 2015 were mature markets, with China and Brazil being the only exceptions (see Exhibit 10). In 2025, the United States and China will still be the largest markets for spending by Connected Spenders in the world, but India will vault from 13th to sixth. In each of six countries—the United States, China, Germany, Japan, India and the United Kingdom—annual spending by Connected Spenders is likely to exceed U.S. $1 trillion per year in 2025; only three countries hit U.S. $1 trillion in 2015.
COUNTRY SPOTLIGHTS: THE FIVE LARGEST CONNECTED SPENDER POPULATIONS IN 2025
By 2025, four of the five largest Connected Spender populations will be in growth and emerging markets, as Japan falls from the top five. The United States, which remains the top consumer market in the world despite the advances of China and growth economies, will keep its spot at No. 3, while Indonesia vaults past both Japan and Brazil to take fourth place.
China. China had the largest population of Connected Spenders globally in 2015 and will still have the most by 2025. In 2015, there were 417 million Connected Spenders in China, or 30% of the population. By 2025, there will likely be 710 million, making up half of the population, and they could be spending as much as U.S. $4 trillion per year, accounting for 59% of the total consumer spending in China.
Nearly three-fourths of the growth in the number of Connected Spenders in China will come from rising internet penetration. An estimated 375 million more Chinese consumers will gain access to the internet by 2025, lifting penetration from 53% to 78%. The remaining growth in Connected Spenders will come from the rising ability of consumers to generate spare cash to spend, due to urbanization and rising incomes.
The aging of the Chinese population will prove a drag on growth of Connected Spenders. The share of adults between the ages of 18 and 34—the age group most likely to produce Connected Spenders—will decline from 70% in 2015 to 62% in 2025. The aging effect is very pronounced in China relative to the United States, for example, because of the one-child policy. In the United States, the Baby Boom generation spawned the even larger Millennial generation, which has slowed the overall aging of the population. In China the Millennial generation is far smaller because of the one-child policy, leading to relatively few young adults today and over the next decade.
India. India is No. 2 after China in total number of Connected Spenders, with 188 million in 2015. That is only 14% of the country’s population, reflecting continuing high levels of poverty across India’s 1.2 billion people. However, with its faster projected GDP growth, India will have nearly caught up with China by 2025. It could have 652 million Connected Spenders, representing 45% of its population, and their annual consumer spending in 2025 could hit U.S. $1.3 trillion, the sixth highest in the world. Over the next decade, we expect Connected Spenders to account for 36% of India’s consumer spending.
As in China, most of the growth in the Connected Spender population of India will be attributable to growth in internet access. A staggering 536 million Indian consumers could gain access to the internet over the next decade, as penetration rises from 21% to a projected 56%. This growth would account for 77% of the total growth in Connected Spenders. Unlike China, where the population growth will be less than 3% over the next decade, India is expected to maintain moderate population growth totaling just over 11%, which will also contribute to the growth in Connected Spenders.
United States. The United States had 106 million Connected Spenders in 2015, or one-third of its population. By 2025, the U.S. will remain the third-largest Connected Spender market in the world, with 182 million. The U.S. is in the second stage of Connected Spender growth, so improvements to household income and the overall economy will play a large role.
While the total population of Connected Spenders in the United States is modest by Chinese or Indian standards, U.S. Connected Spenders still lead in consumer spending by a large margin. We estimate that in 2015, U.S. Connected Spenders spent over U.S. $5 trillion, which is more than three times what China’s 417 million Connected Spenders consumed. In 2025, annual purchases by U.S. Connected Spenders could exceed U.S. $10 trillion.
Since internet penetration in the U.S. is now about 90%, internet access will play only a small role in the growth of Connected Spenders. Internet penetration is expected to hit 98% by 2025. Most of the growth in Connected Spenders will come from steady gains in GDP and household income and a relatively constant population of consumers in the prime age group for Connected Spenders.
Indonesia. Indonesia is on a path to become No. 4 in the rankings and become the fourth country with more than 100 million Connected Spenders by 2025. We estimate Indonesia will jump from eighth place by adding nearly 90 million Connected Spenders over the next decade. By 2025, 40% of Indonesian consumers—about 114 million people—will live in Connected Spender households. Their total spending will remain relatively modest at about U.S. $425 billion in 2025, much less than the other large markets and ranking only 16th in the world. Per-capita consumer spending among Connected Spenders in 2025, at U.S. $3,700, will fall between India (U.S. $1,900) and China (U.S. $5,600).
The dynamics leading to Connected Spender growth in Indonesia largely mirror those in China. Three-quarters of the growth will come from expanding internet penetration, which is set to triple from 21% in 2015 to 61% in 2025. Household income growth will be slightly lower than in China, but the population will not age as quickly, so the net effects on the number of Connected Spenders are comparable between the two countries.
Brazil. By 2025, Brazil will remain in the top five in terms of Connected Spender population but will drop from fourth to fifth place. Because of slow economic growth, we anticipate the addition of only 28 million Connected Spenders over the next decade. That will yield 74 million Connected Spenders in 2025, who will likely spend U.S. $604 billion per year, making Brazil No. 10 in spending by Connected Spenders, down from No. 7 in 2015. The Brazilian economy has been in recession in recent years, and, while the worst may be over, income growth prospects over the next decade remain below average compared with similar markets.
The largest driver of growth in the number of Connected Spenders will be gains in internet penetration, rising from 61% in 2015 to 79% in 2025, but other factors will limit growth. GDP and household income growth is expected to remain stagnant over the next decade, and the population is aging, although not as quickly as in China. In addition, Brazil is already highly urbanized, so there is little headway for gains there. All of this adds up to well-below-average growth in the number of Connected Spenders relative to other growth countries.
The increasing numbers of Connected Spenders across countries and income groups, coupled with their inclination to engage in discretionary spending, make these consumers an attractive segment for marketers seeking growth. To learn more about the demographics and buying habits of Connected Spenders, read Who Connected Spenders Are and What They Value. To compare the advantages of focusing on this group rather than an income group, read Why Not Focus on Income? To explore some marketing implications of the Connected Spender approach, read Implications for Consumer-Facing Businesses. For details on our methods, see the Research Methodology.