- Joel Muniz, Laura Chias - BCG Perspectives
Is it Mexico’s Moment? Preparing for the Inevitable Consumer Boom; an interesting outlook by: Joel M
For the past decade, Mexico has been making quiet—but steady—economic progress. Overcoming a history of financial turbulence, the country has generated modest growth, maintained fiscal stability, and quickly recovered from the 2008–2009 global financial crisis. Mexico’s gains, however, have yet to translate into the surge of consumer spending witnessed in several other big emerging markets. Indeed, despite an improving economy, roughly half of the Mexican households we recently surveyed said that they plan to tighten their belts in the near future.
The socioeconomic conditions are aligning for Mexico’s takeoff in consumer spending. Thanks to favorable demographics and growing affluence, millions of households are joining Mexico’s middle class. What’s more, our research shows that the overwhelming majority of these families are optimistic about the future and determined to build a better life. We project that, as long as Mexico’s public and private sectors take the actions needed to promote stable economic growth, consumption by Mexico’s middle class will surge by around 7 percent annually through the end of the decade and account for around 93 percent of incremental demand.
But in which product categories is consumption likely to surge? When are these takeoffs likely to occur? And what should companies be doing to position their product lines, retail channels, and marketing messages to capture the opportunities in a consumer market that we project will surpass $325 billion in 2018?
To gauge the sentiment of Mexican consumers and their spending plans, The Boston Consulting Group’s Center for Consumer and Customer Insight interviewed more than 3,000 households across the country at all income levels in 2014. We asked about their confidence in Mexico’s economic future, their sense of financial security, and their consumption habits and priorities for more than 200 products. We also analyzed the relationship between past household consumption of these products and changes in income.
The following are among our key findings:
Mexico’s middle class is surging. Largely due to demographic trends, Mexico will have around 1.6 million more middle-income households in 2018 than in 2013—even if economic growth remains modest. This will alter consumption patterns across all product categories.
Consumers are bullish. All told, 77 percent of Mexican households said that they are either very optimistic or somewhat optimistic about the future. Only 32 percent reported that they are not financially secure—a sharp drop from 44 percent in 2012.
But consumers are cautious about spending. While 17 percent of consumers said that they plan to increase spending in the year ahead, 48 percent said they plan to cut back. This suggests that consumers may want to see concrete evidence that recent economic reforms will translate into solid jobs and sustained growth before they change their consumption patterns.
The middle class is trading up to enhance quality of life. Respondents most frequently said they plan to spend more in product categories that can improve their living standards, such as education, food, and health care. In a break from past behavior, middle-income consumers said they plan to trade down in categories perceived as less essential, such as alcoholic beverages and out-of-home entertainment.
These findings indicate that while there are enormous growth opportunities in serving Mexico’s rapidly growing middle class, consumer-focused companies need a solid understanding of the market in order to realize those opportunities. They should recognize how changes in income have influenced consumption in Mexico in the past so they can anticipate which product categories are likely to experience a surge in spending. But companies also need keen insights into how consumption patterns, attitudes, and priorities are shifting in key segments of the Mexican market.
Our projections are based on assumptions of higher—but still modest—economic growth in Mexico. A raft of new economic reforms seeks to unleash investment in the energy sector, overhaul the financial system, make the labor market more flexible, and improve government efficiency. Such reforms are essential if Mexico is to create enough solid, middle-income jobs for the millions of people who will enter the nation’s workforce each year. Economists predict that Mexico’s economy will grow significantly faster if such actions are fully implemented—and further increase the size and spending power of the middle class.
Companies must act now to position themselves for Mexico’s consumer boom. For companies in many product categories, this is the time to expand their on-the-ground presence and to rethink their product portfolios, distribution systems, and brand positions. In numerous other sectors, companies should be laying the groundwork. The socioeconomic conditions and consumer intent are in place. The only question is when the economy will be able to deliver the Mexican moment.
Years of financial stability in the face of global volatility are starting to pay off for a growing number of Mexican households. The country has shed its reputation for fiscal mismanagement, which culminated in the 1994 peso crisis. Mexico’s economy rebounded quickly from the 2008–2009 global financial crisis, and consumer spending has increased by around 2.5 percent a year since then. Inflation has held steady at around 4 percent, the peso has remained relatively stable, and public debt has remained under control at around 38 percent of GDP.
The Mexican economy has been sluggish for the past two years—due in part to cautious government spending—and most economists project growth of around 3 percent for the next few years. Consumer confidence has been rising steadily for the past five years. The election of a reform-minded government and expectations of higher investment have helped boost business confidence above the levels of the so-called BRIC economies—Brazil, Russia, India, and China—as measured by the Organisation for Economic Co-operation and Development.
One factor that bodes well for higher consumption and economic growth over the long term is demographics. Mexico’s population grew from 112 million to 119 million from 2010 to 2014 and is projected to reach 137 million by 2030. (See Exhibit 1.) With an average age of around 27, Mexico’s population is younger than the populations in Brazil and China. Mexico’s working-age population is projected to grow by 19 million over the next two decades. In addition, more women are entering the workforce. The historical combination of a swelling workforce and falling fertility rates is what economists refer to as a “demographic dividend”—a powerful decades-long driver of growth in consumer spending.
The demographic effect will be greatly amplified by a high degree of social mobility. In growing numbers, Mexicans are rising from poverty and pouring into the middle class. From 2002 to 2012, the number of Mexican households earning between $1,200 and $9,000 a month increased by 3.1 percent annually, accounting for 31.2 percent of the population. The compound annual growth rate is projected to accelerate to 4.1 percent through 2018, by which time it is estimated that 34.7 percent of households will be classified as middle income. (See Exhibit 2.)
An analysis of publicly available social-mobility data supports predictions of a growing middle class. By our estimate, 64 percent of the population currently at the bottom quintile of the population in terms of income—around 3.9 million households—has the potential to move up into the lowest rung of the middle class.
The socioeconomic experience of emerging markets also offers confidence in such predictions. In Brazil, for example, the great leap out of poverty into the middle class occurred roughly a decade earlier than in Mexico. From 2000 to 2010, the number of Brazilians with monthly household incomes of $250 to $1,300, representing the lowest rung of the middle class, expanded by more than 10 million, going from 53 percent of the population to 59 percent.
Currently, middle-income households account for 39 percent of total demand in Mexico, compared with 46 percent accounted for by low-income families and 15 percent by high-income households. By 2018, consumption by middle-income households will rise by 17 percent from 2013 levels and account for 42 percent of total consumption, which will be around $325 billion. Social mobility will power some two-thirds of the growth as lower-income households join the middle class. High-income households will account for 11 percent of incremental demand, while the share of low-income families will decline by around 4 percent.
Economic growth could be higher if the Mexicans currently employed in the informal market (up to 52 percent), which is neither taxed nor fully captured in government GDP statistics, enter the formal workforce. The informal market expanded by an average of 2.2 percent a year in Mexico from 2010 through 2013, compared with 2.8 percent annual growth in the formal sector. Stable employment would boost spending because more Mexican households would feel financially secure enough to invest in higher-ticket items and permanently shift their consumption patterns.
Mexico could also unleash further growth by addressing a number of challenges that discourage greater foreign direct investment. The World Economic Forum’s Global Competitiveness Report 2013-2014 lists the deterioration of Mexico’s institutions driven by corruption and crime as the most problematic factor for doing business in the country, followed by inefficient government bureaucracy, limited access to financing, and restrictive labor regulations.
A number of major new reforms aimed at improving Mexico’s global competitiveness and its investment climate could help address some of these concerns. Among other measures, the country under President Enrique Peña Nieto has enacted or agreed to enact laws to liberalize foreign investment in its energy sector, improve labor flexibility, overhaul the banking system to facilitate commercial lending, open telecommunications to greater competition, and upgrade the education system. These measures have not yet been fully implemented, however. The government has also improved tax collection—an initiative that should bring in greater public revenue for investment in infrastructure and social programs.
Many economists expect that full implementation of these reforms could increase GDP growth in Mexico by up to 2 percentage points. Under a more optimistic scenario, another 300,000 households could join the middle class by 2018. The net effect would be a boost in compound annual growth in consumption by middle-income households of another 0.3 percent, or by around $1 billion.
The years of economic stability are translating into bullishness over the future among the majority of Mexican consumers we surveyed. In all, 77 percent of respondents said that they feel very optimistic or somewhat optimistic about the future. Only 6 percent reported being very pessimistic.
Consumers also are feeling better off financially than they have in previous years. In 2012, 44 percent of Mexican consumers surveyed said that they were either not financially secure or in financial trouble—a much higher portion than the combined 31 percent of Brazilians, Russians, Indians, and Chinese who reported the same sentiment that year in BCG surveys. In 2014, 32 percent of Mexicans said they were financially insecure, the same portion as in the BRIC economies that year.
The sense of well-being varies by income level. Our survey found that 91 percent of high-income consumers—those with average household monthly incomes of above $9,000—are optimistic, compared with 71 percent of low-income households (those households earning under $1,200 a month). Likewise, far more high-income Mexican consumers (89 percent) said that they feel financially secure than did middle-income consumers (78 percent) and low-income consumers (58 percent). Nevertheless, a clear majority of lower-income Mexican households are optimistic about the future and feel financially secure—findings that bode well for future consumer spending.
The high levels of optimism and financial security, however, have not yet translated into higher spending. Only 17 percent of Mexican respondents said that they planned to increase their discretionary spending in the subsequent 12 months—no significant change from two years earlier. Instead, 48 percent said that they intended todecrease their discretionary spending—a sharp rise from the 31 percent of respondents in Mexico who had said the same in 2012. This response compares with an average of 25 percent of respondents in the BRICs who said they intended to decrease discretionary spending.
One reason for this belt tightening could be that economic growth in Mexico was lower than expected in 2014, in part due to the financial volatility shaking many emerging markets. Another is that taxes have been raised on many households, giving consumers less money to spend. Because other reforms that have been approved by the Mexican legislature will be implemented over the medium to long term, they have yet to yield such tangible benefits as jobs and greater investment—especially for low-income households.
These findings suggest that middle-income and affluent households will be driving consumption growth over the near term. But not all product categories will benefit equally. To anticipate when this takeoff is likely to occur—and with which types of products—it is necessary to understand the consumption patterns and priorities of specific consumer segments.
One way to get a sense of when and where Mexico’s coming consumer boom is likely to hit is to analyze how consumers at different income levels have behaved historically, and then to make assumptions about how spending patterns will change when consumers reach higher income brackets. Social and economic change can alter these patterns, of course. To keep abreast of such shifts, BCG’s Center for Consumer and Customer Insight periodically asks consumers around the world whether they intend to trade up to higher-value goods and services in specific product categories or whether they plan to trade down.
To identify historical patterns, we analyzed consumption curves, which help marketers identify step changes, or critical shifts, in household purchasing behavior by comparing increases in income with household purchases of certain categories of products. We also projected the growth of low-, middle-, and high-income household segments through 2018 in cities across Mexico. We then developed consumption forecasts for all major product categories, as well as for specific goods and services.
Consumption patterns can vary sharply from one product to the next. Knowing the basic shape of a consumption curve is important to understanding whether sales in a particular category are likely to explode or remain fairly stable across industries in the decade ahead.
In some product categories, these curves show that Mexican households tend to dramatically increase spending after their monthly incomes hit a certain level—and then continue to spend more as they earn more. For example, spending on private health care, credit card service, motor vehicles, insurance, and restaurant meals tends to follow a pattern of exponential growth. Typical Mexican households increase their consumption in product categories such as food, personal-care items, and over-the-counter medicine at a steady pace as their incomes rise. Nearly 40 percent of Mexican consumer spending is on goods and services that follow a path of continuous growth. In roughly one-third of product categories, household spending essentially levels off when income reaches a certain point and then remains constant. Snacks, beer, baked goods, bottled juice, and sneakers are examples of product categories subject to this pattern. In still other product categories, consumption tends to continuously decline as households earn more income. Such households spend less on corn tortillas, for example. They also spend less on public health services when they are better able to afford private health care. (See Exhibit 3.)
What consumers actually do can often be quite different from what history suggests, however. We therefore conducted a second level of analysis by asking consumers about their spending plans in the year ahead for each product category. Quite often, the responses differed markedly from what consumption curves suggest.
The categories that are most likely to benefit from trading up are those that represent well-being. Our survey found that 64 percent of respondents plan to spend somewhat more and “pay as much as I can” for education. Food was the next-highest priority for trading up, cited by 58 percent of respondents, followed by health care (54 percent), personal care, and housing (40 percent each). (See Exhibit 4.)
Mexicans in different income segments have different reasons for trading up. Middle- and high-income consumers mainly cited technical reasons such as brand name and durability. Among functional reasons, all three groups most frequently cited buying healthier products as a motive for trading up. Emotional reasons varied: “Made in Mexico” was mentioned most often by low-income respondents; “I deserve it” by middle-income respondents; and “I read or hear good things about the brand” by those with high incomes. These responses suggest that companies should differentiate their product offerings based on the technical and emotional factors that drive choice among various consumer segments.
The primary motive cited for trading down was to balance the budget. This was the highest priority cited by low-income respondents (54 percent) and the second highest cited by middle-income (51 percent) and high-income respondents (48 percent). A similar portion of low- and middle-income consumers said that they enjoy saving money. “I don’t feel influenced by brands” was also a top motive for trading down among high-income respondents. This response underscores the necessity for consumer product companies to establish clear value propositions for their brands that appeal to specific consumer segments.
To capture the huge growth opportunities presented by Mexico’s swelling middle class, companies need to take into account both the historical patterns of consumer behavior and current consumer preferences and priorities. By combining the data from takeoff curves and demographic trends with intelligence gleaned from our study of intent to trade up, we can get a clearer sense of each product category’s growth potential in Mexico over the near to medium term. We found that products generally fall into four different clusters that are characterized by their growth potential and the perceived value they offer to consumers in light of current sentiment.
We call the four clusters golden future, aspirational growth, no-frills growth, and self-propelled growth. (See Exhibit 5.)
Golden future product categories are blessed with strong demographic tailwinds—a historical pattern of surging spending as Mexican household incomes rise—and a clear expression of intent to trade up by the consumers we surveyed. Companies offering the right value proposition should be able to capture a significant share of a buoyant market. Product categories in this cluster include private medical services and some food items, such as cheese and snacks, that stress health benefits.
Aspirational growth product categories will get relatively little boost from the demographic effect but will benefit from trading up. Education, for example, which is primarily in this cluster, represents a major growth opportunity because parents continue to aspire to better quality schooling for their children. Companies with products in this cluster should offer value-added goods and services in order to push consumers to spend the extra peso. When marketing foods and pharmaceuticals, they also should stress special benefits, such as better health, that could drive changes in consumers’ perceptions.
No-frills growth product categories will benefit from demographic trends but relatively less from consumers’ intentions to trade up. Consumption should continue to grow, but customers will make their decisions carefully. This segment includes a very diverse set of product categories, including travel, the Internet and cell phone services, and alcoholic beverages.
Self-propelled growth product categories will benefit little from either demographic changes or trading up. Products in this cluster generally meet basic needs that already have been met in middle-income Mexican households. The fight for market share will largely be based on the intrinsic value of brands and products, as well as the ability to showcase value for money. Many home-improvement products, such as cable TV and appliances, as well as personal clothing are among the categories that fall into this cluster.
To illustrate the implications for companies’ strategies of these demographic trends and shifting consumer preferences, we analyzed several product categories that are projected to experience some of the most explosive growth over the medium term: food and beverages, financial services, and education. Mexico’s growing middle class offers similarly abundant opportunities to companies in other sectors that have an intimate understanding of consumers’ evolving needs and preferences. In many cases, capturing the potential will require not only new tactics, but also new organizational capabilities and a new strategy.
Food and Beverages. The impact of the changing consumer landscape on distribution in Mexico is clearly visible in the food and beverage sector. Shopping in outdoor neighborhood markets, mom-and-pop stores, and other traditional channels is still a big part of everyday life. But as Mexican consumers grow more affluent, they place a higher value on convenience, variety, and branded goods. More consumers have cars now in which to haul purchases back home. As a result, they prefer to shop at modern channels, such as supermarkets. It is also increasingly important to reach consumers through smaller, modern retail formats in many more locations, where they can be visited more easily.
Consumers in different income groups also prefer different kinds of modern channels. We asked consumers at which kind of supermarket they last shopped. The responses of low-income consumers revealed that 52 percent shopped in a discount food warehouse and 43 percent at a supermarket. But among middle-income respondents, supermarkets (46 percent) were slightly favored over food warehouses (45 percent). High-income respondents overwhelmingly cited supermarkets (54 percent) over food warehouses (29 percent). They also cited much higher use of hypermarkets (9 percent) and club stores (7 percent).
These numbers suggest that both retailers and consumer-product companies should anticipate greater demand for supermarkets and other modern formats as more Mexicans enter the middle and affluent classes. For example, low-income Mexicans purchase 66 percent of their bread directly from bakeries, while 50 percent of middle-income and 47 percent of affluent households do so. This shift in buying preferences offers opportunities for baked-goods companies to better serve these customers in specific retail formats. A similar effect is visible in processed meats: middle-income households purchase 64 percent of their processed meats from supermarkets, compared with 49 percent of low-income households.
To cater to these changing needs, consumer goods companies should redefine their product portfolios and ensure that they have the most efficient delivery systems. For example, the distribution networks of most large food-product companies in Mexico currently are designed to deliver goods through their own direct sales forces to mom-and-pop stores. This approach could prove very costly if sales volumes of their products decrease. Retailers need to rethink their growth strategy across the range of formats and figure out how to better leverage their current footprints. The evolution of consumer preferences, portfolio strategies, and the retail landscape will also have important implications for the distribution models of many packaged-goods companies in Mexico.
Financial Services. The banking sector will benefit greatly from the rising needs and aspirations of Mexico’s growing middle class. For example, demand will increase for such basic banking products as payroll services—especially as more workers enter the formal sector. Higher incomes and aspirations will drive greater need for credit. Financial institutions will also need to develop products tailored to the needs of those living at the bottom of the pyramid, however. As a large number of bank customers with limited work and credit history ascend to higher socioeconomic levels, financial institutions that can effectively deliver attractive products at affordable rates will be solidly positioned to grow with their customer base.
Education. Our research shows a strong aspiration for more education in Mexico. Yet only 40 percent of those surveyed said that students in their households can stay in school—primarily because public schools’ capacity shrinks at higher levels and most students cannot afford private school tuition. What’s more, financing plans offered by schools tend to be very expensive. As a result, only 21 percent of middle-income households spend more than $340 per semester on tuition. This great and increasing unmet need presents big opportunities to providers of education and financial services. Organizations that can offer high-quality education at good value for Mexicans entering the middle class will find a growing market, especially for vocational programs that are aligned with the skills needed by industry. There are also opportunities for schools and banks to develop more affordable financial programs that enable students to stay in school through graduation.
There is little question that Mexico has the potential for a sustainable rise in social and economic development that will spur rapid growth in consumer spending. For Mexico’s moment to arrive, action will be required by government, industry, and society to create jobs that provide opportunities both for those entering the workforce for the first time and those working in the informal market.
Companies must prepare now for Mexico’s consumer takeoff. Even if the economy continues to grow only at modest levels, demographic forces alone will elevate millions of Mexican households into the middle class. For most companies, this trend will require a new, comprehensive strategy for channeling capital into products with the greatest growth potential—those that satisfy consumers’ growing desire to trade up.
The winning formula for Mexico will be heavily influenced by the growth potential of product categories—as defined by the impact of changing demographics and shifting consumer priorities. A company whose products fall into the no-frills growth cluster, for example, will need to adopt a very different mix of strategies than a company whose products are in the golden future cluster.
It should be remembered, however, that none of these product clusters is static. The Mexican market, like its society, remains highly dynamic. Also, companies can sway consumer habits and change perceptions of their products in order to enhance their growth potential.
The following are some key strategies for each cluster:
Golden Future. Because this product cluster will benefit from both demographic and trading-up effects, companies should place their biggest bets here. They should invest disproportionately in broad product portfolios that capture all spectrums of the market as well as in the route-to-market and marketing infrastructure needed to win the battle for share.
Aspirational Growth. Because sales growth for products in this cluster is unlikely to be powered by demographic forces, companies should focus on capturing the trading-up market in all consumer segments. Rather than on volume, they should concentrate on meeting the aspirational needs of consumers with a portfolio of products that includes both high-value offerings and offerings for more modest budgets. Consumers at the lower rungs of these segments not only represent an enormous market in Mexico but also the market of the future for companies that can win their loyalty.
No-Frills Growth. In order to drive growth, companies should make sure that their products in this cluster offer great value and are ubiquitously available. Portfolio strategies should be managed to ensure that they maintain the correct set of attributes in premium products while also offering strong value-for-money alternatives in order to drive growth. The biggest obstacle to reaching the budget market is that many of these consumers don’t have access to a company’s goods. Route-to-market strategies should seek to attain optimal market-saturation levels within appropriate retail channels. Because the target market is vast and geographically spread out, so must be the distribution network. Companies should pay special attention to consumers who are just beginning to attain the household income levels that place them within the target market for specific goods. Companies should also make sure that their portfolios include entry-level offerings.
Self-Propelled Growth. Even though goods and services in this cluster are not likely to benefit from either demographic or trading-up trends—and therefore offer limited growth potential—the market for them will continue to grow in Mexico. But companies will need to create momentum by improving the value proposition of their products to customers while at the same time lowering cost. Companies will need to build war chests in order to keep investing in growth.
Again, companies whose products currently are in clusters with low inherent-growth potential do not have to simply accept this fate. Companies can take steps to influence consumers’ habits and perceptions of value, and thereby turn a self-propelled growth cluster or a no-frills growth cluster into one with much higher growth prospects. For example, companies can promote the emotional and technical benefits that drive consumers to trade up, such as the health benefits or the convenience of certain foods or the durability and performance of home appliances.
Winning in Mexico will require a long-term vision, a clear strategy, and sustained investment. In many cases, it will also require new organizational capabilities. Companies will need access to rich research into consumer trends and the key considerations—technical, functional, and emotional—that drive consumers’ purchases in different segments. They will also need access to talented people who can analyze and act upon this intelligence.
Companies must reassess product portfolios from top to bottom and focus product development on what Mexican consumers really need rather than on internally driven innovation. Companies need to reorient manufacturing facilities in order to produce goods with the highest growth potential and to update distribution and go-to-market strategies. In some cases, companies should consider offering new consumer-financing options in order to make their goods and services more accessible.
A new strategy and new capabilities cannot be developed overnight. Some companies in Mexico already have efforts under way, while many others have only begun. Exactly when the Mexican consumer boom will ignite is still unclear. But economic and social trends suggest that such a takeoff is inevitable. The companies that are best prepared will capture the biggest rewards of the Mexican moment.
By: Joel Muniz, Laura Chias - BCG Perspectives Contact the Authors: Joel Muniz Partner & Managing Director Mexico City firstname.lastname@example.org Laura Chias Project Leader Mexico City email@example.com
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