Asia houses four of the top 10 largest consumer markets in the world – China, India, Japan, and Indonesia. These four markets alone account for 26 per cent of the world’s consumption expenditure. What is even more remarkable is the rate of expansion of these markets; excluding Japan from the equation, the consumer markets of China, India, and Indonesia grew at year-on-year rates of 5.9 per cent to 9.5 per cent. These rates are much higher than the 3-4 per cent growth in the consumer markets of the US and Europe. Clearly, the future of global consumption growth lies within Asia, and an underlying driver of this growth is the trend towards consumption upgrades.
The consumption upgrade story
Consumption upgrades happen when consumers are willing to pay higher prices to acquire products, services and experiences that are of a higher quality or offer enhanced performance. Even just the perception of better quality or performance can inspire a consumer to upgrade.
The consumption upgrade trend is most visible in China, where disposable income per capita has shot up by 42 per cent in the last four years. Rising disposable incomes are meaningfully improving the spending power of the average Chinese consumer and enabling them to trade up. A large majority (73 per cent) of middle class Chinese consumers between the ages of 20 and 45 and living in tier-1 and tier-2 cities, are setting aside money for sports attire, fitness facilities and organic food – categories which by themselves reveal an upgrade in lifestyle.
While the consumption upgrade trend is most visible in China, its reach is seen across Asia, and will potentially become more prominent in the coming years.
To understand whether the consumption upgrade trend is a short-term or structural story, we examine two key drivers of the trend and determine whether the momentum is sustainable.
Urbanisation in Asia is ongoing
Urbanisation is a powerful demographic trend in Asia that is fueling consumption upgrade. Spending habits drastically change when people move from non-urban areas to big city locations as they tend to buy more premium products and their discretionary expenses increase.
A clear relationship between consumption upgrades and urbanisation is evident in India, where it was found that consumers in big cities from across all income segments purchase more premium products as compared to other non-urban locations; this is the case for both basic products, such as laundry detergent powder, as well as discretionary items such as dining out.
Asia as a whole has seen a significant increase in populations moving to urban areas over the last few decades, although the rate of urbanisation varies substantially between the individual Asian economies, with the Philippines on the lower end of the urban growth spectrum, while China and Thailand are on the higher end. Yet, urban migration in Asia still has a long way to go as the urbanisation ratio in the region is only 48 per cent, compared to the mature rates of 73 per cent in Europe and 82 per cent in North America. There is a lot more room for the urbanisation trend to play out and further shape consumption upgrades in Asia.
Rising incomes in Asia will continue
As we have seen, consumer spending on premium products tends to increase along with income. Since 2009, incomes in developing Asia have surged by 75 per cent. This increase is notably higher than the income growth of 24 per cent in OECD member countries over the same period. The rise in incomes is also suggested in the increasing number of high net worth individuals in the region, which has more than doubled in the last 10 years, with Asia now home to more high net worth individuals than North America.
In line with the income growth, the last decade saw the world’s middle class population double, with the rise due overwhelmingly to Asia. Going forward, it is estimated that of the next billion people to enter the middle class, an incredible 87 per cent of them will come from Asia, thus making the rise of the middle class a powerful and sustainable trend that will continue to empower consumers in Asia.
With consumption upgrades becoming prevalent in Asia, the trend is translating to actionable implications for investors. Many Asian publicly-listed companies have been enjoying a steady rise in their earnings, with the trend of selling higher quality products at a premium emerging as one of the drivers of this margin expansion.
Stock selection remains key
Select companies in a range of sectors are well positioned to benefit from consumers trading up. Companies in the beauty and personal care sector in markets such as Korea, the Philippines and India could benefit from rising aspirations and increasing income. The home care sector in India and Indonesia is also being impacted by consumers switching from unbranded to branded names. Plus, the healthcare sector is seeing Asians seeking higher quality services due partly to increasing health awareness.
Additionally, travel companies and related sectors are set to benefit from the theme, as many Chinese consumers have accumulated wealth and greater spending power to satisfy their desire for leisure and entertainment.
Upgrading to foreign brands
Consumers are also trading up to products from leading foreign brands, such as American smartphones, American sportswear, or European luxury goods, to list some examples. Therefore, well positioned non-Asian companies should also benefit from Asia’s upgrade theme. Besides, some of these leading foreign brands are listed on Asian stock exchanges; for instance, a leading American luggage company that is benefitting from the Asian consumption upgrade theme, is listed on the Hong Kong stock exchange.
At the same time, the success of non-Asian companies also translates to gains for other companies within their supply chain. Apple’s iPhone production for instance, uses a whole range of Asian companies including EMS makers, display makers, camera system suppliers, mainboard PCB makers, and so on. In fact, an overwhelming majority of Apple’s top suppliers are headquartered in Asia.
While the Asian consumption market is growing fast, overall consumption levels are still very low as compared to mature markets, which means there is significant room for growth. The ongoing shifts in the behavioural patterns of Asian consumers, as we have seen from a number of consumer studies, help explain where some of this rapid growth is coming from. Consumers in Asia are increasingly willing to pay for premium products and are now seeking more lifestyle experiences as well. Combined with ongoing and sustainable drivers supporting consumption, the trend of consumers trading up will only continue to gain more importance from here and further shape the dynamics of Asia’s ever-growing consumption market.
Ben Sheehan is senior product specialist for Asian equities at HSBC Global Asset Management. The views expressed above are his own and should not be taken as investment advice.