Shifting wealth of nations – what is overlooked

Middle class spending is crucial for economic growth. So now, with Western middle classes in debt and distress, many economists look to the new emerging-market middle class as the foundation for a new era of global  prosperity. However, companies need new approaches to penetrate the developing world’s increasingly prosperous consumer markets.

The last couple of years 70 million people in developing countries joined the middle class, with incomes between $6,000 and$30,000. It is estimated that within 20 years they will surpass their Western pears when it comes to global spending power. The focus is mainly on Asia and it is estimated that in about a decade they will pick up the slack left by overspent America. Emergency market spending is in fact already bolstering the balance sheets of many Western firms.

World focusing on China and India

Needless to say the world is focusing on China and India due to its huge populations as well as rapidly rising economies and middle classes. Correct if you look at the amount of people. But by looking at the issue that way we overlook a very potent and prosperous group of people. Saudi Arabia's retail sector is actually predicted to grow by $50bn by 2014 as more international brands look to move into the kingdom that has overtaken better known retail destinations like Hong Kong, Russia and Japan when it comes to attracting brands. Only London and Dubai are attracting more retailers and shoppers.

Don't forget Saudi Arabia and the Gulf states

When it comes to per capita spending I'm certain that the middle classes in Saudi Arabia and the other Gulf countries not only earn more but also spend far more than their Asian counterparts. It's not for nothing many middle class Indians chose to work in the Gulf, despite the fact that they are paid less than the locals. Salaries are higher and you pay no income tax in the Gulf.

Shopping for entertainment

Shopping is a top leisure activity and when the weekend starts the malls are filled with people who literally shop until they drop. A woman who works in a Chanel shop in the area told me an average customer spends an absolute fortune every time they come to the shop. And the same goes for more expensive items like cars, jewellery and electronics. Considering the importance the Chinese put on saving money, I would be very surprised if middle class people in China, with the exception of some mega rich, spend that much.

Richard Branson and Martha Stewart eyes Middle East expansion

The world, certainly multinationals, are already managing the economic spending shift to Asia very well. But quite a few Western companies are forgetting about Saudi Arabia and the Gulf, which in my opinion could prove costly especially for companies selling expensive consumer goods.

So it comes as no surprise thatVirgin Mobile boss Sir Richard Branson and Qatar Telecom (Qtel) are expanding their partnership and eyeing a number of new markets in the Middle East. And US lifestyle guru Martha Stewart is extending her magazine publishing empire into the Middle East with the launch of several of her namesake titles in countries across the region

A large amount of Asian and Middle Eastern households have incomes today that position them just below the global middle class threshold and so increasingly large numbers of them are expected to become middle class in the next ten years.

Emerging middle classes have different tastes

Emerging-market leaders know that the Western system created the worldwide boom of the last quarter century that ended when Lehman Brothers collapsed. Now the boom has moved to emerging markets, and their leaders will increasingly choose to alter Western models to suit their countries. Consequently the fact that all eyes are on Asia and the Gulf is forgotten could turn out to be a fatal mistake. The new emerging middle classes are supporters of globalization but highly nationalistic. And there is a vast difference between nationalism in China and, say, Kuwait.

Kingdom to invest $100b in transport and logistics
And not only is KSA and the Gulf a key market for consumer brands. All other products and services will find that what they have to offer is in high demand. Saudi Arabia is, for instance, targeting $100 billion of investment in port, airport, rail, road and logistics centre projects over the next decade in a push to make the kingdom one of the world’s leading transport and logistics hubs by 2020.

Back to emerging middle classes in general, we can conclude that the Chinese bought more cars than Americans last couple of years, and that India has as many Internet users as the U.S. Also it is estimated that by 2030, more than nine out of every 10 mobile phones will be owned by people in the developing world. Coca-Cola actually forecasts a doubling of worldwide revenues to $200 billion over the next decade, thanks to another 1 billion people expected to join the middle class by 2020. So Western companies who haven't yet focused on developing countries' middle classes should jump on the band waggon swiftly and not overlook the Gulf.

(photo: flickr – Lars Plougmann)

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42 Responses to “Shifting wealth of nations – what is overlooked”

  1. Manuel Says:

    Hi Catarina,
    As always very interesting, I have read a couple of articles regarding this topic, Here is a segment of one of them where they make a similar analogy with Brazil's growing middle class:

    "We still don't know how sustainable the rise of the new middle classes will be," says Brazilian political scientist Amaury de Souza. And to the extent that the new middle class is precarious, its ability to effect political change will be, too. Indeed, some development economists argue that the poor will be a greater force for social change. There is no middle-class parallel to the broad push for land reform among rural leaders in China. They are the agitators, unwedded to the status quo. The developing world's new consumers may have unleashed tremendous new energy at the checkout counter. But their ability to become a force for better government, greater freedoms, less corruption, and more economic liberty is much less certain.

    makes me wonder if the overspending of this new middle class around the world can sustain the pressure of supporting the economies of the world..

  2. Gunasekar Says:

    Wonder how you infer that "The new emerging middle classes are supporters of globalization but highly nationalistic. " ?

  3. Barry Says:

    Trouble is, in the Gulf they're not making any money they're just pumping it out of the ground.

  4. GuyW Says:

    Another thought-provoking post, Catarina. There's no question that the Gulf countries have enormous wealth, and they spend it on luxury items – hence the presence of virtually every luxury brand here. I suspect the reason for the focus on the BRIC countries is simply that the product of their enormous populations and their income makes them so attractive (even if the incomes are a great deal lower than the Gulf ones, the population size differential is enormous). In fact, due to the size of these populations, I believe you'll find there are more Millionaires in India today than the entire population of any Gulf country, and China's not all that far behind when it comes to the number of very wealthy people.

    For mass products – like mobile phones – the BRIC markets are also hugely important simply because of their numbers. And don't forget that other "sleeping giant" – Africa. I read a statistic the other day showing the per capita income in Africa is significantly higher than China and this, too, is becoming a very attractive consumer market.

  5. catarinaalexon Says:

    Hope the new middle class can. If not the world is really in trouble.

  6. catarinaalexon Says:

    That may not apply to you personally.

  7. catarinaalexon Says:

    Glad we agree Guy.

  8. catarinaalexon Says:

    Am sure there isn't anybody in the Gulf that doesn't wish it was that simple, Barry.

  9. Helena Baillio Says:

    Great post and insight Catarina! While western countries are globalizing their attention is more focused on their own economic sustainability due to the internal financial distress they are enduring. Essentially, stabalization is the prioritized agenda. I found this article which I think you and your readers might find of interest on "The value of China's emerging middle class" from the McKenzie Quarterly (http://www.mckinseyquarterly.com/The_value_of_Chi… but I posted an excerpt below which supports your discussion.

    As China's economy has soared at consistently astonishing rates, many global companies have focused on serving the country's most affluent urban customers. When these well-off urbanites were the only consumers with significant disposable income,1 this strategy of skimming the cream from the top made sense. But new research by the McKinsey Global Institute (MGI) highlights the emergence of a far larger, more complex segment—the urban middle class, whose spending power2 will soon redefine the Chinese market (see sidebar, "About the research"). While some companies are already focusing on the evolution of this new class, many others have yet to broaden their vision and thus risk missing a significant opportunity.

  10. catarinaalexon Says:

    Excellent comment Helena!

  11. maia Says:

    True post. Although it's shocking how much the rich chinese spend. But the average chinese 'middle class' person (actually in the middle, not middle class) runs a tiny shop, works 14 hours a day and rents a tiny flat. There are so many so poor people – including vast numbers of rough sleepers, i had an early train at one of Shanghai's central stations and virtually had to climb over women with babies sleeping on the pavement cobbles, i felt awful and it was quite a shock, while the city near the Terracotta warriors, Xi'An, a well known tourist destination for Chinese too (travel by train etc is so expensive the average middle class chinese person can't afford to leave the country for holidays, which anyway are just the 'spring festival' (visit home) for most people) had garages people were living in, no windows or anything, but built as blocks of flats (i can't explain very well, those lift-up metal garage doors and one windowless concrete room, onto balconies/walkways) and even completely ruined old houses, roofless and everything, that people were living in; and that's touristville, money town.

  12. S. Zafar Iqbal Says:

    Hi Catarina,
    As usual an insightful article that reflects your first hand knowledge of the region , especially Saudi Arabia.
    It is true that due to oil export a tremendous amount of wealth has shifted to oil countries of the Gulf, like Saudi Arabia. You have a point that many commercial businesses in the West have not fully realized the purchsing power of the emerging middle class in the oil rich countries.

    As always your articles are a pleasure to read.

    Continued ….
    S. Zafar Iqbal

  13. S. Zafar Iqbal Says:

    …..Continued .

    However, I believe we need to recognize the facts that :
    (1) A disproportionately large amount of oil wealth goes right back to the Western countries, such as the US, UK, and France , in the form of payments for the weapons that these countries neither need nor have the know how or the stomach to use.
    (2) A large segment of the population in these countries has not benefited from the oil wealth and remains poverty stricken — though hard to believe, it is a fact of life in many remote parts of these countries.

    The point is that the "military industrial complex" , and the weapons industries of the developed world are very much aware of these cash gushers and are doing every thing possible to divert the flow of cash to their own coffers.

    As I said , your articles are always a pleasure to read.

    S. Zafar Iqbal

  14. catarinaalexon Says:

    Seems we agree Maia that the middle class in the Gulf has far more spending power per capita.

  15. catarinaalexon Says:

    Zafar, the points you make are interesting but have nothing to do with the spending power per capita of the middle class in the Gulf.

  16. catarinaalexon Says:

    Let's just agree to disagree Christopher.

  17. Paul Novak Says:

    You certainly do know how to get the rusty gears I call a brain moving Catarina. To be honest, Although I visit often, I comment only occassionaly because I'd need an entire to post to get the thoughts out clearly;) That's a result of how much consideration your posts require, and a good thing IMO.

    At any rate, although there does seem to be a shifting of the classes and their locations, I have to wonder…

    A. How sustainable will these newly emerged middle class members be?

    B. Although there seems to be growth in some sectors, what is the ratio of growth to the decline occurring in other locations? Will it be a wash, an overall decline, or a net gain?

    As always, well thought posting.

  18. catarinaalexon Says:

    Thank you Paul. Throughout history empires come and go, and the United States is no exception. New super powers will take over, it's just a question of how long it will take.

  19. keyuri joshi Says:

    Well written and thought provoking post. Being orignially from India, I am pleased to see the middle class grow there. True that many choose to work in Dubai due to the wages and tax situation. That said, I've heard too many stories of abuses of these people with horrible working conditions to abusive situations. I only wish that large corporations would consider human rights instead of the fiscal bottom line. It seems that if more attention was put in that arena, we'd really be doing a service to our global community.

  20. Susan Oakes Says:

    You are right Catarina. It does seem the focus is on Asia especially concerning potential opportunities for business growth. Here our media rarely mentions the potential of the gulf and perhaps one reason is we are so near to Asia.

    I also think that western companies that will succeed will be in partnership as per your Richard Branson example. Each region and even countries have their own way of operating.

  21. catarinaalexon Says:

    Seems we agree Susan. Some companies enter into partnership in the Gulf but some do it on their own. However, it is easier to have a joint venture than going it alone which explains why so many companies prefer that option.

  22. catarinaalexon Says:

    What you are referring to Keyuri are workers mainly on building sites. When it comes to wages in companies your salary depends on where you come from i.e. if you are Arabic or Western you get a higher salary. Despite that Asians chose to come to Dubai since they still earn more money.

  23. Laura Sherman Says:

    Fascinating article. I had no idea that things were shifting in this direction. I wonder how this will affect companies in the upcoming years and what effect it will have on us. How will the upper-middle class Americans be affected by this shift? Interesting!

  24. catarinaalexon Says:

    Thank you Laura. More and more companies in the developed world will be keen on penetrating the new markets. And the shift from the West to the emerging markets will intensify. Needless to say that will have an affect on not only Americans but Europeans as well. We will all eventually be part of the old world.

    By the way, some financial experts believe China will overtake the US as the world's largest economy already in 10 years. Others believe it will take 20-30 years.

  25. Catherine Lockey Says:

    Wow, to learn shopping is considered entertainment for the middle class of Saudi Arabia and the Gulf countries is fascinating. I would love to see some ecommerce data on this demographic. Anyone have some interesting stats to share?

  26. Ron Villejo, PhD Says:

    Very good article, Catarina. I've heard about the power of economics shifting from the West to the East. But, to your point, not enough leaders and companies in the world fully appreciate the emerging opportunities in the GCC. I think local populations throughout the GCC are young and growing, and they represent a phenomenal need for all kinds of consumer products and services. Despite the push for alternative energy, oil and gas remain 'king' and the broader Gulf region is its 'kingdom.' Qatar and Saudi Arabia are strong, and will continue to invest in their development. Finally, a friend mentioned that many things in the region, economically, also have to pass through Abu Dhabi. The Gulf is where the action is!

  27. catarinaalexon Says:

    Thank you Ron. Glad you agree with the importance of the Gulf as a market.

  28. catarinaalexon Says:

    You should see the amount of cars heading for malls when the weekend starts. Doubt there are any exact stats for it, but maybe someone has the figures? If so please post them. Anyway, it's not for nothing that only Dubai and London attract more retailers than Saudi Arabia.

  29. patricroberts Says:

    Catarina,
    Interesting prediction within global uncertainty. I appreciated Manuel's comment by Brazilian political scientist Amaury de Souza "We still don't know how sustainable the rise of the new middle classes will be." And to the extent that the new middle class is precarious, its ability to effect political change will be, too. Indeed, some development economists argue that the poor will be a greater force for social change. There is no middle-class parallel to the broad push for land reform among rural leaders in China. They are the agitators, unwedded to the status quo. The developing world's new consumers may have unleashed tremendous new energy at the checkout counter. But their ability to become a force for better government, greater freedoms, less corruption, and more economic liberty is much less certain.

    My intuitive view is that like a few years ago the Internet was hardly recognized as a valued platform in economic global development so to will the poor become an increasing pro~advocate for balancing consumeristic growth in GNP for sustainability. It's interesting China bought more cars than USA and it's also insane to tear up bike paths to build highways. And it will be very interesting politically to see the outcome in China between rural leaders and central governments over built commercial real estate. Sustainability is the name of the new game. Do you assess "growth without restraint" as sustainable? If everyone in the world today were to consume as Americans (their weight in resources per day) we will need four more planets the size of earth.

    How does that viewpoint converge in your current thinking and position? In the end does agrarian justice trump agrarian law based in power? And this new emerging middle class may become a learning 3rd rail political block party that turns on Coca Cola as pro~consumers designing healthier wiser choices in the future in solidarity caring for global values of sustainability.

    Thanks once again for stimulating critical thinking. Appreciate as always your insights.
    Patric

    makes me wonder if the overspending of this new middle class around the world can sustain the pressure of supporting the economies of the world..

  30. keepupweb Says:

    Very insightful article Catarina. It’s interesting to read about the growing middle class elsewhere while here in the United States, we continue to see the middle class shrinking. Where we no longer manufacture very many consumable products, it seems daunting to see how we can jump on the band wagon. It will definitely be a challenge for our country to find new products and services to meet the growing demands of new consumers in both the Gulf and Asia.

  31. catarinaalexon Says:

    Agree with you.

  32. Rob Berman Says:

    I have traveled to over 20 countries on business. You are correct about targeting countries and regions and not just looking at the same places as everyone else. First mover advantage is important.

    Rob

  33. catarinaalexon Says:

    Thank you Darko. Agee that mainly Brazil should not be included. But the most important area that's overlooked is Saudi Arabia and the Gulf states.

  34. catarinaalexon Says:

    Gertrud Stein was rich enough to drive around with Alice B. Toklas and just write:-)

  35. Slim Fairview Says:

    The rise or fall of the middle class is a leading indicator of a nations economic well-being.

    China: Rising middle class, rising economy.
    India: Rising middle class, rising economy.
    USSR: No middle class, no more USSR.
    US: Declining middle class, follow the path of the trajectory.

    Now, what comes next?

    Not so much what to sell to the emerging markets; the emerging markets will determine that, but rather where to make it?

    In the service industry, the rising middle class will no doubt exploit cheap labour–whether from home or immigrants seeking a better life than the harsh ones they flee.

    With goods (products), the question is slightly different, but analogous to the enterprise of a woman who opened up a stationary business.

    With the state mandate to allocate 15% of its budget to doing business with businesses owned by women and minorities, she set up the following system.

    She acquired stationery catalogues from stationery companies, put her label on the front and sent the catalogues to the purchasing departments of government agencies.

    Purchasing departments sent orders to her via fax. She sent orders to the suppliers with instructions to ship to the buyers–purchasing departments. The company invoiced her. She invoiced the purchasing departments. She kept the difference as a profit.

    Emerging markets?

    Companies sell to the emerging middle class.
    They manufacture goods in other emerging nations.
    Ship the goods from distressed nations to the rising middle class buyers in emerging markets.
    Pocket the difference as profits.

    Sadly, I lack initiative.

    As Gertrude Stein once said, "I always wanted to be rich. I just never wanted to do what I had to do to become rich."

    Regards,

    Slim
    My recent post India: The FaceBook Evolution

  36. keepupweb Says:

    Thanks for sharing such valuable insight with us Catarina. It's helpful to understand where the potential markets are. I appreciate knowing that.
    My recent post How to Ping Your Website Blog and When Not To

  37. Cathye Says:

    Your article completely ignores the vastly different political, governmental, and religious institutions that govern behavior in the Middle East and have and will continue to hold them back from advancing beyond the Middle Ages. China and India, culturally, are far more advanced and far less shackled.

    C

  38. catarinaalexon Says:

    My pleasure Sherryl.

  39. catarinaalexon Says:

    Thank you conveying your opinion Cathye. However that's another issue and has nothing to do with the fact that the population of Saudi Arabia and the Gulf states have more money per capita to spend than consumers in other emerging markets.

  40. Slim Says:

    Catarina,

    Over the past 50 years in pursuit of my "social" studies, I've found that people who are very well off describe themselves as middle class, women who are very attractive are unaware that their "looks" pave the way. Or, as a newscaster once said, "Good people don't know how bad people are."

    Indeed, Ms. Stein was quite well off.

    The conundrum for the emerging markets is glossed over. As the middle class emerges, what happens?

    1. people go from eating rice to eating corn.
    2. from eating corn to eating chickens.
    3. from eating chickens to eating chickens with rice and corn-on-the-cob. (With butter.)

    Aside from the weight gain, and the expenditure, the resources–once sufficient, barely, for the others, are eaten up (literally) by the emerging middle class.

    After they have emerged, the middle class begins competing for resources with the upper middle class. This drives up both demand, and price. To keep costs down, the unemerged are pressed into labour at menial wages. (You wrote about the population shift to cities!)

    Here in America, Mexicans arrive as guest workers to pick apples earning for a day's work what they earned in Mexico for a week's work. We however, have the space and the agricultural resources that are unavailable in emerging nations.

    "There are no unintended consequences, only unwanted consequences." The quotations of Slim Fairview.

    Regards,

    Slim
    My recent post Merkel and Charybdis

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