Credit Suisse Publishes Second Annual Emerging Consumer Survey

London, January 17, 2012 The Credit Suisse Research Institute today published its second annual Emerging Consumer Survey – a detailed study profiling consumer sentiment within the BRIC nations (Brazil, Russia, India and China), Turkey, Saudi Arabia, Egypt and Indonesia. Together, these consumers represent 3.5 billion people across the globe. The survey seeks to establish a unique profile of the spending patterns and preferences of consumers who are at the heart of a structural shift in global demand.

To undertake this project, Credit Suisse engaged the leading global markets research firm AC Nielsen to conduct primary research on its behalf. The data set consists of more than 2500 interviews in both China and India and more than 1,500 in each of the other six countries. The interviews were conducted across different cities and rural areas in each country, with the aim of establishing a representative sample of gender, age and income bracket among the respondents.

Stefano Natella, Head of Global Equity Research at Credit Suisse said: “At a time when investors are debating how sensitive emerging economies are to global macro trends and broader market turmoil, especially within Europe, this survey provides the investor a unique perspective on consumer behaviour at ground level. More broadly, the survey highlights the major income and demographic differences and cultural and social drivers within the emerging world, a key consideration for spending preferences and also for the brand positioning of companies.”

Giles Keating Head of Private Banking Research at Credit Suisse, said: “The analysis delivered in this report and the accompanying Emerging Consumer Databook provides insights not available from public sources of information which underlines the ambition of the Credit Suisse Research Institute to provide our clients unique and proprietary insights to support their investment process. It builds upon the Research Institute’s detailed knowledge of trends in emerging markets dove-tailing with the recent Credit Suisse Global Wealth Report that underlined the rapid wealth accumulation and consumption potential in the emerging world.”


Key Themes

Varying levels of optimism

Our survey suggests that confidence among emerging consumers is still reasonably strong. Of just over 14,000 adults included in the survey across eight markets, 35% thought their personal finances would improve over the next six months and 9% expected some deterioration. Optimism is highest in Brazil, India and China and lowest in Egypt, Turkey and Russia.

However, compared to last year, consumer confidence has slipped. This is particularly apparent for consumers that allocate a significant proportion of income towards food expenditure. High food inflation over the last two years has clearly taken its toll. The good news is that the inflation outlook is set to become significantly more supportive over the months ahead as the high food prices of H1 2011 lend a favourable base to H1 2012.

Cyclical headwinds interrupt the shift towards discretionary spending

The structural theme underpinning the outlook for the emerging consumer is a shift to the more discretionary bias that typifies spending in the developed world away from the basic essentials of life – a global rebalancing of consumption.

However, this long-term structural shift across the emerging economies towards greater discretionary spending has stalled, on average, over the past year as the slowdown in economic momentum and high food inflation has impacted confidence.

The survey highlights the reduction over the course of the last year in average consumer exposure to:

- sport shoes and fashion–borne the brunt of the decline in consumer sentiment and higher average food prices.
- private healthcare – four out of the eight recorded a decline in spending allocation to private healthcare.
- property ownership – declined on aggregate… flat in China and Russia but declined slightly in India and Brazil.


However, areas where the structural story has held up despite the cycle and consumer penetration rates have picked up include:

- mobile phones – predominantly driven by the rise in ownership across the lower income markets.
- smart phones – at the opposite extreme to the basic mobile, the higher income markets have been the key drivers
- computers and internet – enjoyed strong growth in penetration rates over the year.
- cosmetics – appears to have picked up marginally, low income groups in Brazil were important drivers here.
- education – in six out of seven markets said they had allocated money to private education courses this year, notably India.


The Appetite for Technology

The potential for an acceleration in technology penetration across the emerging world is a key focus of the survey, both in mobile telephony and computing. The survey data indicates the strength of demand for technology varies according to income group as well as market.

For example, the data shows that the penetration of smart phones is greater in the low income groups in Saudi Arabia than it is for the high income groups in Brazil and Russia. The ownership of computers is higher for the mid-income brackets in China than it is for the high income brackets in Saudi Arabia, Russia or India. Possible explanations for this include (i) the strength and sophistication of the distribution network; (ii) relative prices and (iii) the relative development of broadband infrastructure.

Looking forward, the survey suggests growth in mobile phone penetration looks set to be relatively strong in Indonesia (still 29% of our survey sample said they did not own a mobile), India (6% in total had no mobile rising to 12% at the lower income brackets) and Brazil (where 11% of the lower income groups had no mobile).

Momentum in smartphone penetration is likely to continue to be strong in Brazil and China. Saudi penetration rates also look likely to continue upwards. Supporting factors are (a) growth in real wages and relatively more optimistic outlook of these consumers, (b) size and affluence of the mid-to-high income groups in each of these markets, (c) existing momentum (smartphone penetration increased by 22%, 11% and 5% for Saudi, Brazil and China respectively over the last year).

For similar reasons, computer sales look likely to be strongest in Brazil and Saudi Arabia. Momentum has been strong in the past year but penetration rates are still only 67% and 63% for these two markets respectively compared with 83% in China.


The Role of Brands

The Credit Suisse Research Institute has shown in previous research the significance of the development of consumer brands for investing in consumer related stocks (See The Power of Brand Investing, February 2010). The survey continues along this theme and analyses in detail the consumer perception of both unbranded and branded goods across a wide range of consumer products and also the competing attractions and growth potential of local brands versus their global counterparts.

Three specific topics are drawn out in this year’s survey to highlight investment opportunities:

(i) The scope for industry consolidation and M&A activity.
- M&A is proving a major ongoing theme in emerging markets. Global consumer companies have taken advantage of the growth opportunities in emerging vs. developed markets and also the relaxation of regulatory constraints that permit it. It is the sectors which are more fragmented and where local brands proliferate that look most likely to benefit from greater M&A in the future –industries such as dairy and health products continue to show consolidation potential.

(ii) “Trading up” opportunities as consumers shift from unbranded to branded products as incomes improve.
- Having a well positioned brand for the improving living standards amongst low and middle income earners can be just as relevant for growth as the typical focus of investors on luxury brands. The acquisitive tendencies of global consumer staples companies bear this out. The survey identifies retailing, fashion and cosmetics brands that are well positioned and locally owned in India, Brazil and China.

(iii) The potential long-term winners.
- if the long term story is about the emerging consumer incomes becoming ever more robust, investors need to be aware of the brands that are well positioned among low and high income consumers. The survey illustrates brands that should succeed, as well as highlights brands that are vulnerable, to strong income improvements. The global players will continue to dominate the luxury space but a question mark hangs over the global and Western technology companies, where, Apple aside, there are illustrations of diminishing brand traction. Emerging market technology brands could well become the global standard.
Country highlights


Brazil: Living for today

The Brazilian consumer continues to stand out as the most optimistic across our survey. The Brazilian typically spends not saves. There is an appetite for real assets such as property if not financial assets.

Respondents, on the whole, are more positive in Brazil than in any other country. This measure of optimism has seen only a minor step down at the lower income end relative to last year’s survey.

Income expectations are underpinning this sense of optimism. On average, the Brazilian consumer is expecting one of the highest rates of household income growth among the countries surveyed, with the majority expecting increases in excess of 10%, or around 5% in real terms. Strong nominal income growth in the last year also shielded the consumer in Brazil from inflation better than in other countries.

Barely 7% of household income is registered as saved and over a half of respondents suggest they have no extra cash for savings. Given the strength of projected real income growth, this is striking. It is more typical of the countries where the consumer is being seriously squeezed than one where finances seem robust.

Property purchase intentions are higher here than for other countries and have increased over the year. 73% of respondents expect house prices to rise – higher than any of the BRIC countries. Coupled with a history of high inflation, real assets perhaps command more of a structural attraction.


China: A savings culture

The outlook for the Chinese consumer is robust though expectations have softened in the last 12 months. The expectations of the rich and poor remain a marked contrast, despite government policy initiatives aimed at addressing the imbalances.

At 38%, the weighted balance of respondents expecting to see their financial positions improve is still robust – though we would note softening somewhat from last year and below that of Brazil and India. The implied patterns of spending over the last year are of lower spending on a range of staples such as dairy and beverages as well as more discretionary items such as fashion apparel, cosmetics and perfumes.

The strength of technology spending is clearly apparent. The two other categories that stand out are healthcare and education. The only country with comparable momentum in healthcare spending is Saudi Arabia. Only Saudi and India had stronger readings on extra educational spending. Given the government prioritisation on spending in both these areas in China, the growth in these segments looks well supported and structural in potential.

The propensity to save remains unchanged. Any pressure on incomes has not been offset by a reduction in savings. At nearly 30% of monthly income, it is the highest in the survey.

When asked about the importance of environmental protection relative to economic growth, a net 28% of respondents thought that the environment should take priority over growth, well above any other countries surveyed. This profile suggests that wealth accumulation is also tempered by concerns about the common good and a degree of social conscience is emerging.


Egypt: Change but no change

Drawing any definitive conclusions from our survey for Egypt this year is clearly hazardous given a political backdrop that is so fluid. The reality is less has changed than one might have hoped.

The outlook of the consumer has improved with our weighted readings of optimism moving from –5% to +8%. However, this is still the lowest in the survey and the durability of this increased confidence looks very questionable given the deterioration in the household financial position over the last year.

There has been a pick up in buying in the lower ticket discretionary items – eg. fashion, cosmetics. This is perhaps reflective of the improved confidence among low income earners. This contrasts with retrenchment in property. Property ownership has fallen by 13% this year to 57% on average. Also striking, and perhaps concerning, there has been major reductions in areas of healthcare and education provision by individuals.

The structural bullish story that exists for the consumer in Egypt is that spending levels are so low. Recorded activity in almost every category is lower than other countries. The key is finding the stability and impetus to unlock it. At present, and politics aside, low nominal income expectations which, if delivered, will still be significant real declines are not the right platform.


India: Going back to school

Distinguishing features of the Indian consumer is a continued appetite for extra educational expenditure and a propensity to save. There is a structural opportunity in technology spending.

The Indian consumer remains the second most confident in his/her personal finances looking forward (after Brazil). On a weighted basis, this has strengthened over the year but the shift has been driven by the highest income earners.

Activity in the vast majority of categories have shown increases above that seen elsewhere. They are tending to be lower ticket in nature – cosmetics, clothing, beverages, mobile phones for example. In contrast to other countries, technology spending has been more muted (although still positive). 70% of Indians say they have no computers in the home. Only 19% of respondents register having access to the internet. If we begin to see a shift away from spending on essential items, this should be one of the areas to benefit.

Spending on extra education is recorded at a greater rate in this survey compared with last, both in absolute terms and relative to other countries. 32% of children participate in education outside of typical schooling vs 23% last year. Adult participation in extra courses has risen from 3% to 12%. This micro story underpins a long-term bullish macro story for India.

The savings culture we highlighted last year remains apparent. The survey registers the highest bank account penetration and the fewest number of people claiming they have no extra money for saving. The life insurance industry (via tax incentives) and real assets such as gold and property are the main non-cash homes for the rupee.


Indonesia: On a fast track

The Indonesian consumer offers a strong structural growth story. It’s GDP per capita may be the third lowest in the survey but its optimism is the third highest.

Optimism in the region comes third highest in our survey, with a weighted net 38% of respondents expecting their position to improve in the coming six months. This is up 4 percentage points from last year and has risen across every income category. While the richer display the greatest confidence – close to the highest in the whole survey – the poorer end of the scale show robust levels of confidence in the 20-30% range.

The risk that always exists for the Indonesian consumer is the sensitivity of food prices. As in any of the poorer economies, food consumes a large proportion of the household budget. Our survey suggests it is close to a third.

Recorded spending activity is positive in a wide range of sectors but in a more modest fashion than other countries where optimism is recorded at a similarly high level. However, if food prices become less of an impediment, there is considerable potential to unlock under-penetrated markets such as autos (cars and motor-bikes) and technology.


Russia: The weakest BRIC in the wall

Despite the structural support there has been for the Russian economy in recent years from commodity prices, there has not been a notable trickle down to the average consumer. Optimism remains the lowest of the BRICs. The inequality of income suggests that growth opportunities are played mainly at the high income end in Russia.

At a net weighted balance of only 20% viewing their financial position improving in the six months ahead, the reading in Russia is barely a third of the level seen in Brazil. The simple explanation stems from income growth– nominal and real. With inflation forecast to remain at similar levels, this lid on optimism will not be removed easily.

We have seen increased positive readings of activity in some areas of discretionary spending, particularly high ticket items, including technology and luxury goods. We would offer two explanations. First, a severe inequality of income prevails in Russia and at the high end support remains strong for large ticket purchases. Second, higher ticket goods such as watches and smartphones remain under-penetrated in Russia further supporting structural growth.

Russian consumption of alcoholic drinks is still one of the highest compared with the other markets. The penetration of beer (66% of respondents purchased beer in the last 3 months) is similar to China and Brazil but consumption of spirits is by far the highest.

The story of low banking penetration we highlighted in the last survey persists, with little improvement in bank account access. Worryingly, the savings rate has also declined to 9% from 14% in our last survey. Wealth accumulation is a story for the richest.


Saudi Arabia: The oil price hedge

The strength of income expectations underpin the high level of optimism of the Saudi consumer in the survey. The outlook for discretionary spending thus remains very strong after what has been a year of considerable momentum.

While optimism is at its strongest among the highest earners, the level is relatively high across a broad swathe of the population. The Government’s spending plans and policy announcements have been highly supportive. Optimism goes hand in hand with income growth. Saudi real household income growth over the next 12 months is uniformly positive, and on average the highest in our survey. The upper end of earners expect their incomes to grow by 9% in real terms.

The spending momentum in the last year and the outlook is discretionary focused. Smartphones, computers, property, cars and holidays have all seen more robust trends in activity than elsewhere. Looking forward, 25% of respondents see now as an excellent time to make a big-ticket purchase with intentions to buy cars and property rising across the income scale.

A structural opportunity remains in the financials services industry. The pool of savings is exceptionally large. High levels of income coincide with a high savings rate (15%). The Credit Suisse Global Wealth Report 2011 estimated that total wealth in Saudi Arabia increased from $0.4tr to $0.6tn in the last year. Financial wealth per capita increased 27.5%. Still the savings culture is far from sophisticated. Gold/jewellery command more of a focus than financial markets.


Turkey: Feeling the squeeze

Turkey is a new addition to the Credit Suisse Emerging Consumer Survey for 2012. Despite GDP per capita in keeping with the middle income bracket, Turkey’s spending patterns are more typical of the low income countries with food and housing costs posing a severe constraint.

Turkey registers a low level of confidence in the survey with only 7% of respondents registering net positive prospects for the six months ahead. Nominal income growth has been meagre – less than 3% even at the high end. Inflation will have more than wiped this out at every income level. With consumers suggesting that nominal incomes will grow at a similar rate next year, real incomes look set to erode further.

Two categories dominate the spending patterns of the Turkish consumer – food and housing/utilities. Collectively spending on these items represent nearly half of total income. Housing is though a more distinctive feature. Expenditure in this area (at an estimated 24%) is the highest of any country in the survey.

Taken together with the food component, the most basic needs are arguably crowding out many other areas of spending. The survey data show that the ownership and implicit penetration of discretionary products in Turkey is much lower, across the board, when set against the survey average despite GDP per capita in the mid-range compared with the other survey markets.

Consumers have limited engagement with the financial sector. Bank account penetration is among the lowest in the survey, with only 14% having access to one. While this presents a structural opportunity, we would equally note that worryingly 73% of respondents claim they have no additional income to save.


source: Credit Suisse