The growing role of emerging markets in shaping global demand

“The rise of emerging markets has been perhaps the defining feature of the global economy this century. In 2000, emerging markets as a whole accounted for just 37% of global GDP (in Purchasing Power Parity terms); in 2013 this figure is expected to reach 50%. Even as developed economies recover from the recession, and emerging markets enter a period of slower growth, global economic growth will continue to be strongly influenced by emerging markets.”

This is just one of the key insights from a recent Euromonitor International report that predicts emerging market economies will grow almost three times faster than developed ones, accounting for an average of 65% of global economic growth through 2020. But while the emerging market spotlight has long been focused on the BRIC nations of Brazil, Russia, India, and China, the report, entitled Reaching the emerging middle classes beyond BRIC, notes that attention is turning to smaller markets. The shift is being driven by the rates of faster economic and demographic growth in many of those markets – factors that are together fueling growth in consumer spending, including highly valued spending areas such as education. In today’s ICEF Monitor post we examine these trends, point the way to the next group of emerging markets, and offer high-level strategies for education providers.

Emerging markets and the BRIC nations

First, some background. Although there is no standard definition of “emerging markets,” they can be broadly understood as “those countries which have started to grow but have yet to reach a mature stage of development and/or where there is significant potential for economic or political instability.” Lists that identify emerging market countries have been developed by several firms and research initiatives worldwide, including MSCI, FTSE, Standard & Poor’s, and the Emerging Market Global Players (EMGP) project at Columbia University, among others. But while definitions and classifications may vary, there is a general consensus about the role and prominence of the BRIC nations among emerging markets. Indeed, they have long been on the radar of education marketers and providers worldwide – and with good reason. Consider what the Euromonitor report has to say about the BRIC countries:

• Between 2004 and 2013, their economies doubled in size and now collectively account for 21% of global GDP and 53% of emerging market GDP;
• It is estimated that they accounted for one in every six US dollars spent globally in 2013;
• They are home to 268 million households with an income over US $10,000 a figure that is more than the US and Eurozone combined;
• By 2020, they are expected to add a combined US $3.3 trillion (in 2012 prices) to their consumer spending: “a figure that is equivalent to another France and Germany combined;”
• It is anticipated that the BRIC nations and Mexico will be among the world’s largest ten economies by 2020.

BRIC markets, however, do not feature among the world’s ten-fastest emerging market economies and they saw a slowdown in growth in 2013. There are also problems, as noted in the report:

“China is at the beginning of a shift to consumption-driven growth, Brazilian growth is fragile and the country has been beset by social unrest, India is suffering from the weak rupee, and Russia is over-reliant on energy production.”

These challenges aside, the BRIC nations are far from being “has-beens,” given the sheer size and scale of their economies. Nevertheless, many are beginning to look “beyond BRIC” and toward other emerging markets that seem poised for increased annual growth.

Population growth and consumer spending in emerging markets

Importantly, the Euromonitor report notes that in addition to influencing global economic growth, emerging markets are also driving population growth.

Last year, emerging markets were home to 85% of the world’s population, and 90% of those under age 30. Their total population is expected to grow at three times the rate of developed economies between now and 2020.

BRIC markets are, perhaps not surprisingly, home to almost half the world’s emerging market population. In 2013, however, 3.1 billion people lived in non-BRIC emerging markets, a figure that is “three times the current size of the total population of all developed countries.” During that same year, five non-BRIC emerging markets (Indonesia, Pakistan, Nigeria, Bangladesh, and Mexico) had populations of more than 100 million – a significant market when considered as a whole. Of note, seven non-BRIC nations are expected to surpass the 100-million mark by 2020. As observed in the report, the combination of demographic and economic growth is fueling rapid increases in consumer expenditure:

“…emerging market growth, at 43.4%, is forecast to be three times that of developed markets between 2013 and 2020. In fact, consumer spending growth in emerging markets has outpaced that of developed countries every year since 2000 and is expected to continue to do so.”

Looking at growth, non-BRIC markets are characterised as “the frontrunners” when it comes to the increase in spending. However, for those wanting to make inroads in these markets, the report recommends focusing on one consumer group in particular:

“For many consumer goods and services businesses, the key component of consumer expenditure to consider when planning strategy is not total growth potential, but rather, the growth potential of non-essential purchases per capita and per household. This focus means paying close attention to what is happening to the middle classes in emerging markets.”

The middle class: the engine of consumer spending in emerging markets

Similar to the themes raised by Euromonitor in its report, the global consulting firm McKinsey & Company has forecasted that 128 million African households will earn US $5,000 a year or more by 2020, enabling them to spend half their income on non-food items.

Furthermore, Africa’s middle class families – those earning US $20,000 or more – outnumber India’s.

Estimates from The Boston Consulting Group and McKinsey & Company further predict that the middle class income group in the Association of Southeast Asian Nations (ASEAN) region will exceed 100 million people by 2020. A political and economic organisation of ten Southeast Asian countries – Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam – the ten ASEAN states have a combined population of more than 600 million people. Looking at the world’s 20 largest non-BRIC emerging markets, the Euromonitor report notes that the proportion of middle class houses (defined as those with a disposable income over US $10,000) ranges from a high of 99.5% in the United Arab Emirates to a low of 4.8% in Kenya. In terms of income, the middle class in those same 20 countries earn from around US $3,000-6,000 per household in Nigeria to US $74,000–150,000 in the United Arab Emirates. Despite the relatively low levels of middle class income in some emerging markets, they remain an important consumer group. Engaging with these consumers at an early stage can be a smart strategy for building brand awareness, and creating and shaping the market for offerings from the outset, all of which may lead to long-term rewards. Of interest to education providers, the Euromonitor report notes that spending priorities in emerging markets include education:

“In particular, middle class households in emerging markets are twice as likely to report that spending on education for household members is one of their top five financial priorities (30% vs. 16%). Emerging middle classes in Indonesia, Mexico, and Colombia are especially likely to prioritise education (38%-44%).”

Findings such as these echo ICEF Monitor’s analysis of the situation in Nigeria, an emerging market where the combination of a rapidly growing population and burgeoning middle class has given rise to a huge demand for quality education. And according to The Parthenon Group, “Education now ranks as one of the most important requirements of the African middle class.”

Strategies for success

Given the forecast for growth in emerging markets, what can education providers do to meet the corresponding demand for education? While acknowledging that these “frontier markets” bring challenges for businesses, the Euromonitor report offers a number of strategies to reach the emerging middle classes beyond BRIC. Here are some that are relevant for the education sector:

• “Knowledge: Gaining a deep understanding of the market is crucial - this includes the education system, competitors, the operation environment, consumers and suppliers. Companies that are considering entering a new market for the first time or are planning to enlarge their footprint could do worse than learning from others.
• Build well-designed and locally-tailored products: Offer appropriate products, not cheap products. It is not safe to assume that consumers in emerging markets will like the taste, the look or the functionality of your existing product portfolio.
• Market your product as well as the associated lifestyle: Branding and advertising are key and often have to go hand-in-hand with education because knowledge of an entire category may be negligible.
• Find the right local partner: Market entry strategy is crucial and companies should think carefully about working with local partners.”

Needless to say, there is no “one-size fits all” approach to working in emerging markets, and each has its own distinct characteristics, challenges, and opportunities. It seems clear, however, that emerging markets - BRICs certainly but “beyond BRICs” too - will factor increasingly in international student recruitment in the years ahead.