Old Shanghai travel guides list a food street off the Nanjing Road shopping hub, but if you go there today for a RMB 7 (USD 1.10) cup of hot soybean milk you'll be in for a surprise.
That's because the street has been demolished.
In its place, you'll find a new, 30,000 sq.ft, three-storey premium coffee roastery offering a RMB 48 (USD 7.60) Nicaraguan blend Americano, plus craft beers, store-baked breads, and augmented reality customer experiences.
And while you may balk at the change, Shanghai residents don't mind.
In fact, they're going in droves and any local will tell you about the morning queues.
And this transformation is typical of a consumer demand shift not only happening in China, but in all Emerging Markets (EM).
EM consumers are trading up
That's because EM consumers are trading up – accepting higher prices and buying premium, value-added, products across a whole range of categories, and not just coffee.
This trend, also called premiumization, has three EM-specific fundamentals:
- Income growth: 400 million households are shifting from middle-class to higher middle class income groups (1).
- Urbanization: the size and make-up of EM urban populations is changing, creating a young, urban, and tech-savvy consumer class.
- Demographic change: a growing working age population in countries like Indonesia, Turkey, the Philippines, and Malaysia, is supporting the growth of a consumer class.
But it's more than that.
EM consumers are choosing premium products for social status, healthier lifestyles, improved personal appearance, and an alternative to mass-market brands.
Trading up across sectors
Take auto sales for example, luxury car sales in China grew 18% y-o-y, vs. 1.4% growth across all categories in 2017, according to the China Passenger Car Association (2). It's a similar picture in India, where luxury car sales* grew with a CAGR of 23.8% between 2009 and 2017, according to Business Today (3).
Personal care is a another sector to benefit from trading up, with health and beauty sales in Korea growing by a CAGR of 22.5% between 2011 and 2016 (4), and cosmetics sales growing 4.8% in Brazil, 9.2% in India, 9.8% in Russia, and 10.6% in Indonesia, y-o-y, respectively during 2016, according to Euromonitor (5).
Premium liquor in China is another case in point. Chinese drinkers have a taste for premium baijiu, a rice-based liquor, and sales for one market-leading brand grew at a CAGR of 32.1% from 2010 to reach RMB 52.4 billion in 2017 (6). And that company is so confident in both its brand and customer demand it's expecting to grow sales in 2018, despite raising prices by 18% on average (7).
A long-term EM consumer story
These are just three of many areas where trading up is playing out, and we believe the trend has longer to run.
That's because, firstly, we're expecting the underpinning trends of income growth, urbanization, and demographic change to continue growing in EM, creating over 400 million new households in higher middle class income brackets by 2020.
Secondly, we believe companies will become more adept at selling into the EM trading up trend. Whether by penetrating fast-growing urban markets and/or developing nuanced product offerings, we see the consumer discretionary opportunity as just too big for them to ignore.
An active approach to capture the EM opportunity
But while it's one challenge to recognize these trends, it's another to capture them.
That's where we believe an active approach to stock selection and investment management can create value for investors.
The rapid change in EM means emerging sectors are often under-researched and benchmarks tracked by passive managers tend to look backwards to the performing sectors of the past, rather than to the new, innovative sectors driving the future.
Having a team of sector and country experts taking a bottom-up approach to new emerging industries, doing detailed on-the-ground research on market conditions, applying rigorous company assessments, and compiling the best ideas across EM can capture new emerging trends before they are picked up in the markets.
Outside of trading up, we are seeing many other secular growth trends play out in EM, including the ongoing shift from offline to online retail, steady innovation in the IT space, and growth of financial services, and we believe these are long-term trends that investors simply can't ignore.
And as these trends play out, they add up to compelling reasons to take a closer at EM, because they will propel the region for many years to come.