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The big spending shift in emerging markets

Geoff Colvin
By
Geoff Colvin
Geoff Colvin
Senior Editor-at-Large
Down Arrow Button Icon
Geoff Colvin
By
Geoff Colvin
Geoff Colvin
Senior Editor-at-Large
Down Arrow Button Icon
March 17, 2014, 4:46 PM ET
A shopper at a supermarket in Hefei

FORTUNE — As I was talking recently with a group of experts on emerging markets, we focused on consumer behavior — an important issue now as many of those markets build growing middle classes, and Chinese government policy aims to shift the world’s second-largest economy from being investment- and export-based to being consumer-based. A few trends, some surprising, emerged as vital for investors and business people to understand:

  • As incomes rise from low levels, consumers first spend money on more calories, naturally enough, and then, somewhere around $1,500 of annual per capita income, they spend in order to get more of those calories from protein. Soon after that they start spending on familiar consumer goods, such as personal care products and even on larger capital goods, notably air conditioners; the number of air conditioners per capita in China has rocketed in the past decade. But this early progression is often disrupted by a desire for a cell phone. The experts said that many emerging-market consumers will sacrifice nutrition for connection. Facebook’s (FB) Mark Zuckerberg argues that connectivity is a human right. Of course he would say that, but his position may well become widely shared.
  • Consumers want better transportation, but the progression isn’t as obvious as we may think. In India it isn’t unusual to see a family of four on a motor scooter, so we expect them to want a car. Which they do — until too many people get cars, and then people want scooters in order to get around the cars that are stuck in traffic.
  • A remarkably consistent trend as economies mature is a strong desire for a premium version of the local hooch. Ruou in Vietnam, Lambanog in the Philippines, the infamous Baijiu in China — when people (okay, men) get a little disposable income in their pockets, they apparently feel a powerful need to pay more for booze than they used to.

MORE: On eve of stress tests, Fed asks banks for more info

  • But governments can stop trends. The growth of the luxury goods market in China was stupendous until President Xi Jinping decreed that ostentation is now uncool, especially among government officials. After years of booming, the luxury goods market was virtually flat in China last year.
  • Many products that consumers used to buy can now be shared or consumed as services. In poor rural villages, groups of people will jointly get a cell phone, which is easily shared, unlike a landline phone. Urban consumers employ Zipcar-like services to use a car only when they need it. As a result, these people can consume major products much earlier in their rise to prosperity than previously.
  • We all know that emerging market consumers will reorder the world economy. But we Western consumers will get into trouble if we assume we know how it will happen. The real trends demand attention.
About the Author
Geoff Colvin
By Geoff ColvinSenior Editor-at-Large
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Geoff Colvin is a senior editor-at-large at Fortune, covering leadership, globalization, wealth creation, the infotech revolution, and related issues.

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