Purchasing priorities change according to age, and what is considered a premium product over time. Picture: REUTERS
Purchasing priorities change according to age, and what is considered a premium product over time. Picture: REUTERS

Premiumisation as a trend is gathering momentum across a variety of industries as consumers’ priorities and spending patterns continue to evolve. During the early and mid-20th century, ownership of items such as stoves, refrigerators, radios and TVs were seen as a form of status-signaling. Due to technological advances, manufacturing ingenuity and globalisation, these items have become ubiquitous in modern times.

Essentially, the process of commoditisation has lowered the prices of such goods to the point where the level of quality is standard and so price becomes the key differentiator.

Premiumisation lies at the other end of the spectrum and while it may not be new, what has changed is the motivation behind consumers’ purchasing decisions. With its beginnings traced back to alcoholic drinks in the 1970s, premiumisation would historically be referred to as “trading-up” and seen as luxury. However, following a multitude of supply-side advancements, we can now refer to terms such as “masstige” (mass market prestige or mass personalisation), the opposite of commoditisation.

Premiumisation, though, is not just about personalisation but can also focus on a product’s rarity, its ingredients, the level of service associated with the product, its reliability and durability, and so on.

Importantly, consumers and their preferences play a vital role, too, in the shift towards premiumisation. From a desire for status, quality, brand affinity, environmental consciousness and superior style, to the subtleties of the demographic shifts from Baby Boomers to Gen-X to millennials to Gen-Z and their respective purchasing habits, consumers are driving premiumisation.

Those who can afford better, want better, and if they cannot afford better, they will prioritise for better.

In short, today’s consumers are increasingly purchasing for both rational and emotional reasons

From an investment perspective, understanding the underlying drivers of premiumisation from both the demand and the supply side is critical in identifying and exploiting potential investment opportunities.

According to the Organisation for Economic Co-operation and Development (OECD), the middle-class is expected to grow to 5.3-billion by 2030, accounting for 63.5% of the world population. Based on this estimate, the middle-class will be the fastest growing segment of the global population, accumulating an estimated 1.7-billion additional people, while the wealthy will increase by just 100-million.

It is therefore abundantly clear why businesses are making it a key priority to capture the middle-class segment of the global population.

Intuitively, the bulk of the middle-class growth is expected to come from the youngest (by population age) and fastest growing economies. Unsurprisingly, these economies are found across emerging markets. China — with its 1.4-billion population an an average age of 37, a fast-evolving services sector, and a middle-class of 420-million — is the most meaningful of the emerging markets. The country is closely followed by India and Indonesia, whose populations of 1.3-billion and 270-million, respectively, are, on average, 27.1 and 30.2 years old, respectively.

As these large and young populations age, their personal expenditure ultimately changes, causing major shifts in global consumer spending patterns.

Older populations tend to spend more on healthcare and related services and less on entertainment and apparel. This is not to say that younger generations (Gen-X and millennials) do not spend on such items; the reality is that their spending priorities are different. So while household and personal care items are important, younger generations tend to prioritise day care and education for their children.

Against this backdrop of evolving consumer spending patterns, it is evident that the opportunity to premiumise products sits across a spectrum of industries and sectors ranging from consumer staple companies to discretionary spending favouring companies such as Disney, Netflix, Nike and Starbucks. Globalisation has been a key driver of spending across these categories as consumers can easily access a wide range of products that just a few decades ago were only available in certain parts of the world.

According to the 2019 “Changing Consumer Prosperity” report by Nielsen, items within the personal electronics, apparel and cosmetics categories are able to command and achieve premiums.

Chinese millennials are a significant target market for large multinationals as brand affinity and ownership enhance these consumers’ social capital

With the exception of personal electronics, such as tablets and smartphones, other categories can also benefit from local insight where manufacturers focus on premium attributes that are more greatly appreciated in specific countries and regions.

At the other end of the spectrum, two categories that are least able to command premiums are carbonated drinks and tobacco. Typically, consumers view these categories as value purchases that are not sufficiently distinct to warrant a higher price.

Attributes that are worth paying up for, and which manufacturers should focus on, tend to be more experiential in nature:

  • High quality/safety standards.
  • Superior function and performance.
  • Organic and/or all natural ingredients.
  • Environmentally friendly/sustainable materials.
  • Unique feature (often intellectually protected).
  • Socially responsible.
  • Single source of origin.

In short, today’s consumers are increasingly purchasing for both rational and emotional reasons.

Although “green” attributes are gaining traction globally, they arguably find the greatest support in developed markets. Emerging market consumers, especially the new middle-class, tend to be more nuanced in what they “trade up” for. Chinese millennials are a significant target market for large multinationals as brand affinity and ownership enhance these consumers’ social capital.

Purchasing decisions are therefore about much more than just items, they are lifestyle choices that represent distinction and exclusivity. For context, more than 50% of the global growth in luxury spending between 2012 and 2018 was driven by China and this number is expected to increase to above 66%.

A final but important consideration is that the majority of emerging-market consumers are the first in their families to enter into the middle-class. As such, they represent untapped markets to manufacturers and their brands.

Premiumisation as an investment opportunity is borne and driven by the evolution of a multitude of factors. We live in a more populous, prosperous but flatter and closer world.  Consumption patterns are shifting from developed to emerging countries and from physical to digital locations. In addition, our preferences have changed. As observers, the greatest sources of growth are abundantly clear.

However, investors need to be selective about where they allocate capital. Businesses must be dynamic and flexible so as to shift with the times. Gone are the days of product differentiation by price alone. A much stronger and closer relationship with the consumer is required, ideally one that is ongoing, underpinned by product support and evolution.

• Singh is research analyst at Old Mutual Wealth’s Private Client Securities.

Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.