The Middle Class Market Boom
Boza, María-Eugenia, Americas Quarterly
The growing middle class in the hemisphere is creating an entirely new base of consumers. But tapping them requires understanding and adapting to their needs.
There's been an amazing revolution in the global commercial landscape. The developing world has emerged as one of the most promising wholesale and retail markets. Many of these regions in the past were valued primarily as a source of cheap labor-often in maquilas and sweatshops. Today they are seen as a source of new consumers.
Latin America has been the most dramatic example of the transformation.
While per capita GDP is steadily rising in advanced emerging economies such as China and India, the potential impact on consumer markets is greater in our region. Sustained economic growth since the turn of the twenty-first century, accompanied by an increase in average earnings and a decrease in poverty levels in nearly every country, has put more discretionary income into more Latin American pockets. And as more of the region's residents entered the middle class, they contributed to a surge in demand for consumer goods, ranging from cars and refrigerators to personal care products and mobile phones.
The shifting market opportunities have also transformed business analysis and marketing strategies. Although multinational firms had been selling their products in Latin America for decades, their customers came mostly from the upper classes. Their Latin America offices had been forgotten step-siblings of the North American and European offices that handled the core business. But Latin America's emerging middle class has inspired innovative approaches to tap the potential of the new consumer market across the region.
But success is far from guaranteed. An accurate definition of the region's new "middle classes" eludes consensus. Despite rising per capita GDP, standards of living and incomes even in advanced developing markets are well below their counterparts in industrial economies [see figure 1], and consumption patterns of the new middle class differ significantly from those of the traditional upper class in the emerging world.
Another challenge for multinationals is the increased competition on the ground.
A new generation of companies that had their genesis in emerging economies is not only competing in those markets but also aggressively expanding beyond national borders. High-profile examples include Embraer (Brazil), Lenovo (China) and Tata Motors (India). Lenovo bought IBM's personal computer division in 2003; Tata purchased Jaguar Land Rover PLC from Ford Motor Company in 2008 and launched the world's most inexpensive car, the $2,500 Nano; and Embraer has positioned itself as the world's third largest aircraftmanufacturer and the leader in regional jets.
What is remarkable about these examples is that they defy conventional wisdom about the direction in which capital, technology and knowledge should flow in the global economy.
WHAT'S THE TARGET MARKET?
The "poor" (i.e., income below the $2 poverty line) and "very rich" (the famous "1 percent") have been extensively researched-the former for policy prescriptions, the latter for business strategies. Those efforts to understand both sides of the income spectrum have produced regular and systematic information on these groups, their patterns of behavior and their interests, as well as a sophisticated methodology for measuring poverty.
No such information exists, though, for the new middle class. At this point, there is not even a widely accepted definition of the middle class.
Economists prefer groupings based on income, and there are proposals to adopt a rule that classifies households as middle class based on their absolute daily in- come adjusted by purchasing power. Abhijit Banerjee and Esther Duflo define the middle class as those with daily per capita income between $2 and $10.1 This is an impractically broad definition for companies trying to develop strategies in the various middle-income countries in Latin America. …