The rapidly aging demographic in developing countries is an important market for consumer companies. For investors, it’s imperative to understand why complex socioeconomic changes will affect spending patterns in unfamiliar ways as emerging markets mature.
It’s easy to overlook the aging trend in emerging markets. Countries like India and China are home to the world’s youngest populations in terms of size. Yet as birth rates decline and healthcare improves, older people will constitute a growing percentage of the population. In the top 12 emerging markets, the over-65 demographic is growing at an annual rate of approximately 3.7% (Display)—nearly double the rate in developed countries.
As they are now living longer, older people are likely to play an increasingly greater role in consumer spending growth in the coming years. According to our estimates, annual consumer spending in emerging markets will rise from $12 trillion in 2014 to $63 trillion in 2030—a $50 trillion increase. You might think that the sectors best positioned to benefit from this trend would be financials, leisure and healthcare. After all, in developed countries, older people are often seen as consumers of post-retirement wealth-management services, cruises, and expensive drugs to fight age-related diseases.
But we don’t think so. In our view, the developed-market experience isn’t a good guide to the consumer spending of older people in emerging markets, where rapid economic development is transforming labor and income trends.
Job Insecurity Hits the Middle Class
As part of our research on consumer spending in emerging markets over the past four years, we visited consumers in their homes in 13 emerging-market countries. We discovered that young people in emerging countries are quickly becoming better educated and more qualified than their elders—including those at the peak of their earning abilities. As a result, people over the age of 45—who constitute the rising middle classes—are increasingly losing their jobs and getting pushed back down to the bottom of the pyramid.
This explains why emerging-country workers are reaching their peak income levels at very young ages—often between 35 and 39—a decade earlier than their developed counterparts (Display). And the older workers who are now losing their jobs typically have little or no savings, so instead of living out their lives comfortably, they are falling through the social classes.
We believe that this will have a profound impact on the spending power—and preferences—of older people from Chile to China.
New Struggles for Older Workers
For example, last month we talked with Enrique, from the Mexican town of Santiago de Querétaro. At 52, he earns 70% less as a freelance medical rep than he earned as a mid-level executive when he was 45. Back then, he bought fashionable clothes for his kids on weekly trips to the US; his family often went to the movies and restaurants and enjoyed expensive summer beach holidays. But in 2006, Enrique lost his job to a younger candidate. Suddenly, he was in financial free fall.
Enrique regrets that he didn’t save enough during the good times. Retirement is a big challenge. Today, his spending priorities are focused on obtaining cheap generic drugs and good value, high-quality products.
He’s not an isolated case. Many of his peers are facing the same problems. And we have found similar situations across diverse emerging-market countries. Unlike in the past, a university degree no longer assures middle-aged workers a bright future, because socioeconomic development is creating a generation of younger people with comparable degrees and better English skills, who are often willing to work for less money.
Since people in emerging markets are likely to face financial insecurity as they grow older, luxury and leisure goods won’t be priorities. That’s why we think successful consumer companies will be those that understand how to grab a growing share of the older demographic by offering quality products at good value and services such as retirement insurance or cheaper healthcare. For investors, aging trends serve as a reminder that traditional research into company fundamentals must be complemented by an understanding of the underlying forces that are shaping the evolution of emerging markets.