Premiumisation in Emerging Markets – a rapid growth story

PremiumisationAbstract

With larger middle classes and maturing industries, emerging market is coming increasingly from premium products and the provision of new, or augmented, services

One of the most fascinating aspects of the growth story we’re seeing in emerging markets (EM) is the evolution of consumer spending patterns.

With larger middle classes and maturing industries, EM growth is coming increasingly from premium products and the provision of new, or augmented, services in areas like education and healthcare. Here are just a few current examples:

Cosmetics – beauty at a premium

The growing spending power in Asia is fuelling a rise in luxury cosmetics. This is particularly evident in China, where the retail sales value of cosmetics trebled between 2009 and 2017 and premium cosmetic sales are expected to continue at a rapid clip.

Chinese consumers value the provenance of brands, in particular goods from nearby South Korea, with those products viewed as better quality, higher status and preferable to domestic-made cosmetics. Consumer goods business LG Household & Health Care has been harnessing this spending power, through its duty-free sales and rapidly expanding direct sales into mainland China. The majority of these come from its luxury cosmetics brand ‘The History of Whoo’ (where its skin care and treatment sets sell for hundreds of dollars). It’s notable that this demand held up, even as political tensions arose between the two countries. The de-escalation of Sino-Korean tensions should boost duty-free sales, as inbound tourism from China resumes.

National Bureau of Statistics of China

Food delivery – the next online frontier

Despite the common belief that EM consumption is focused on basic items, high-quality takeaway delivery has seen unprecedented growth in emerging markets. Latin America’s largest online food delivery platform, iFood, which includes South African internet investment group Naspers among its major stakeholders, has expanded to 390,000 orders per day in Brazil alone, seeing faster growth than Grubhub, a global leader which serves 2,200 US cities and London. This is particularly remarkable considering the relative income levels between the two countries, and that smartphone penetration in Brazil is far lower than in the US.

Meanwhile, in India, Swiggy (which also has Naspers as a shareholder) doubled its gross merchandise value in six months , with its focus on bringing quality foods to its consumers. It is also investing in technology and AI to improve its delivery systems.

Source: Naspers press release, November 2018, Grubhub Q3 results 2018

Premium services

The consumer evolution is not just limited to goods. We’re seeing it expanding into a number of services as well.

In education for example, there has been a huge growth in demand for private education providers, particularly in China, as parents seek out-of-hours tuition for their children.

Healthcare provision is also an area of increasing importance. Looking at Brazil again. The service offered by OdontoPrev is tapping into the changing nature of how the country’s oral-health conscious citizens receive their treatment. Brazilians tend to pay out of pocket for their treatment (rather than through an insurance plan). OdontoPrev is changing this by offering an insurance package cheaper than the average out-of-pocket yearly payment. With an oversupply of dentists in Brazil, the company has been able to spread its treatments among large numbers of dentists who are under-utilised, rather than rely on a smaller few who then charge higher fees.

Accessing the consumer growth story

Consumer growth in emerging markets is one of the world’s most compelling investment themes. This economic megatrend is driven by growing working-age populations, rapid urbanisation and a boom in the middle class.

Accessing the growth potential is now more nuanced than ever, and the huge take-up in technology has permanently shifted the consumer landscape. In our view, this is only the beginning and there is a wealth of untapped potential. Identifying the winners from such monumental change requires patience, skill and a long-term mindset.


1Source: Statista, National Bureau of Statistics of China, February 2018
2Source: Naspers press release November 2018, Grubhub third-quarter results 2018
3Source: Naspers press release


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.
Past performance is not a guide to future returns.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable