Many economies in the world are driven by consumption, and there are many variables which contribute to rising consumption, including (but not limited to) salaries, inflation, job security and other factors. What I want to explore here is how consumption may be driven by a trend known as “premiumisation”, and the implications this has for investors.
What Is Premiumisation?
Premiumisation refers to a pattern of consumption where people “trade up” from basic goods to more premium goods, even though the underlying utility does not change. An example would be purchasing a non-branded handbag for a lady to place her money and cosmetics, which is an example of a basic need. The same handbag could cost many times more if it was branded and made of higher-quality materials, but the basic function remains the same. The choice to upgrade may be due to prestige or a desire to flaunt one’s wealth and social status.
Growing Middle Class
Countries with a growing middle class are prime candidates for this consumption trend. A few factors may contribute to this – a large young working population, rapid urbanisation, infrastructure and transportation development links from rural to urban areas, as well as overall better job prospects.
With a larger group of working adults in the population who are productive and earning more, demand for consumption will rise and correspondingly, entrepreneurs will also cater to this demand by providing a constant flow of supply of goods. Existing international companies may also venture into the country to set up shop, encouraged by the higher level of consumption demand.
Rise Of The Salaries
As the country prospers and the economy booms, people’s salaries would also rise in tandem as companies report better profits. With higher salaries and better bonuses, more families would be able to save up and enjoy a standard of living they previously may only have dreamed of.
More “Wants” Than “Needs”
As the wealth effect trickles down from managers to ran-and-file employees, everyone starts feeling richer and the propensity to spend increases. This is a psychological effect created by good economic times, rising wealth, stable jobs and better salaries, and causes people to open their wallets more readily and consume more.
In addition, more and more people may also trade up their “needs” to “wants” — get a more branded handbag or sofa set because they can afford to, or enjoy an artisanal coffee from a cafe rather than one from a normal coffee shop.
The Positive Feedback Loop
As can be seen above, when more and more people start to trade up to more expensive items, this creates a positive feedback loop — businesses which were started to cater to these trends do better, and start expanding their presence. This in turn creates jobs and propagates the wealth effect further, leading to greater spending.
Investors who latch onto this trend benefit greatly as premiumisation may result in a significant rise in profits and cash flow for businesses in the early part of the cycle. This is one trend which investors should be aware of and watch out for in any country they invest in.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.