Marketing Jul 2, 2012

Buy­ing Behav­iors of Emerg­ing Mid­dle Classes

How new con­sumers in devel­op­ing nations choose their brands

Based on the research of

Alon Eizenberg

Alberto Salvo

Listening: Interview with Alberto Salvo on the Middle Class

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A key fea­ture of the mod­ern world is the emerg­ing mid­dle class” — the demo­graph­ic group result­ing from the rise into rel­a­tive eco­nom­ic com­fort of once-poor pop­u­la­tions in devel­op­ing nations. The phe­nom­e­non — par­tic­u­lar­ly notable in Brazil, Chi­na, India, and Indone­sia — has obvi­ous inter­est for sell­ers of con­sumer prod­ucts, such as foods, drinks, med­i­cines, and house­hold appli­ances. But few researchers have sought to under­stand the buy­ing deci­sions made by new con­sumers” with their first expe­ri­ence of dis­pos­able income.

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Now, though, Alber­to Sal­vo, an assis­tant pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School of Man­age­ment, and Alon Eizen­berg, an assis­tant pro­fes­sor at Jerusalem’s Hebrew Uni­ver­si­ty, have begun to rem­e­dy that sit­u­a­tion. Their vehi­cle: a study of soda choic­es by Brazil­ians new to the mid­dle class. The result: a mod­el, esti­mat­ed from data, that reveals per­sis­tence in buy­ing behav­ior — per­sis­tence that should cause con­cern among ven­dors of pre­mi­um brands. If price-sen­si­tive new con­sumers start out by pur­chas­ing cheap­er, local brands — a.k.a. gener­ics — they will con­tin­ue to favor them rather than choos­ing pre­mi­um brands, such as Coca-Cola, favored by the tra­di­tion­al mid­dle class.

Social Eco­nom­ic Trans­for­ma­tion

To reach that con­clu­sion, the two researchers need­ed to advance gen­er­al under­stand­ing of the emerg­ing mid­dle class. Alon and I are study­ing mar­kets where there’s been a huge social eco­nom­ic trans­for­ma­tion over a very short peri­od of time owing to an income shock,” Sal­vo explains. We’re look­ing at how the demand for a par­tic­u­lar type of prod­uct changes as you change the socioe­co­nom­ic com­po­si­tion of the pop­u­la­tion and how pro­duc­ers respond.”

In doing so, Sal­vo and Eizen­berg devel­oped empir­i­cal tools to incor­po­rate social mobil­i­ty and the per­sis­tence of con­sump­tion habits into their study of the com­pet­i­tive inter­play between high-priced, heav­i­ly adver­tised estab­lished brands and val­ue brands” that com­pete on price. Many mar­kets have pre­mi­um brands that are expe­ri­enc­ing very tough com­pe­ti­tion from the gener­ic fringe,” Sal­vo says. This is a new phe­nom­e­non and it’s hard to get reli­able data on such mar­kets. We got it.”

Brazil rep­re­sent­ed an appro­pri­ate loca­tion for the study as a result of its expe­ri­ence of eco­nom­ic trans­for­ma­tion. It came in the mid-1990s, after high chron­ic infla­tion came down to sin­gle-dig­it lev­els,” Sal­vo notes. After this sharp shock you saw tens of mil­lions of new con­sumers enter­ing mar­kets for soda and oth­er pack­aged foods, cement and hous­ing, TVs and refrig­er­a­tors.” Soda proved an effec­tive prod­uct for study­ing con­sump­tion because of high demand.

The Brazil­ian mar­ket trails only the Unit­ed States and Mex­i­co by vol­ume,” Sal­vo and Eizen­berg write. Fol­low­ing a suc­cess­ful eco­nom­ic sta­bi­liza­tion plan in 1994, aggre­gate con­sump­tion of soda dou­bled by 1997, and con­tin­ued to grow at an annu­al rate of about 10% through 1999. As is well doc­u­ment­ed, this growth was fueled by pro­nounced upward mobil­i­ty among low­er income house­holds, who were no longer forced to pay an infla­tion tax.”

Mix­ing and Match­ing Data

To study the con­sump­tion trends, Sal­vo and Eizen­berg exam­ined con­sumers’ soda buy­ing between Decem­ber 1996 and March 2003. That process involved pio­neer­ing work in mix­ing and match­ing data from three orga­ni­za­tions. Nielsen sup­plied region­al data on the sales and prices of soft-drink brands. IBOPE, a pri­vate-sec­tor demo­graph­ic data com­pa­ny, pro­vid­ed infor­ma­tion on the socioe­co­nom­ic com­po­si­tion of urban Brazil­ian house­holds. And details on pur­chas­es of var­i­ous types of soda by dif­fer­ent socioe­co­nom­ic groups came from IBGE, a Brazil­ian gov­ern­ment orga­ni­za­tion rough­ly equiv­a­lent to a com­bi­na­tion of the Unit­ed States Cen­sus Bureau and the Bureau of Labor Statistics.

To inter­pret the buy­ing habits, the two researchers cre­at­ed an inno­v­a­tive clas­si­fi­ca­tion of socioe­co­nom­ic groups. Rather than using the tra­di­tion­al A through E group­ings that cat­e­go­rize the rich­est to the poor­est, they defined three class­es: poor, estab­lished afflu­ent, and new­ly afflu­ent. We assume that the As, Bs, Cs that we see in the data right before the income shock are exist­ing estab­lished afflu­ent house­holds; Ds and Es we label as poor,” Sal­vo says. But there is a mass of house­holds mov­ing from DE to ABC, which we define as new­ly affluent.”

When poor indi­vid­u­als, who have no dis­pos­able income, move up to the new­ly afflu­ent cat­e­go­ry, their buy­ing behav­ior may dif­fer from that of the estab­lished afflu­ent in two ways. They’re per­haps more price-sen­si­tive,” Sal­vo says. And since they are new con­sumers, they haven’t yet formed habits — espe­cial­ly the habit to shop for pre­mi­um brands.”

A Per­sis­tence Mech­a­nism”

To mod­el that behav­ior, Sal­vo and Eizen­berg matched the socioe­co­nom­ic data with infor­ma­tion on rel­a­tive sales of the high-priced, heav­i­ly adver­tised pre­mi­um brands such as Coca-Cola and the low-priced gener­ics typ­i­cal­ly pro­duced by small region­al com­pa­nies that rou­tine­ly appeal to less afflu­ent con­sumers. The mod­el reveals what Sal­vo and Eizen­berg call a per­sis­tence mech­a­nism” among new­ly afflu­ent buy­ers. It’s not brand loy­al­ty we’re after,” Sal­vo explains. It’s about stay­ing with the type of brand you’ve been con­sum­ing in recent months. And when the new­ly afflu­ent buy gener­ic rather than pre­mi­um brands, they might devel­op the habit of buy­ing frugally.”

This mech­a­nism cap­tures a world in which pre­mi­um brands have to act quick­ly in the wake of an emerg­ing mid­dle class,” — Alber­to Sal­vo and Alon Eizenberg

If that habit does devel­op, it can cause pre­mi­um brands to lose sig­nif­i­cant mar­ket share to the gener­ics. In Brazil, the share of gener­ic soda brands, num­ber­ing in the hun­dreds, increased from 20 per­cent to 40 per­cent dur­ing the first three years of the study. Exec­u­tives at the Coca-Cola Com­pa­ny, the lead­ing sell­er of pre­mi­um brands, respond­ed by mak­ing the painful deci­sion to reduce their prices by 20 percent.

That deci­sion made sense accord­ing to the new mod­el. This mech­a­nism cap­tures a world in which pre­mi­um brands have to act quick­ly in the wake of an emerg­ing mid­dle class,” Sal­vo and Eizen­berg write in their paper. If they wait too long, a sub­stan­tial mass of the new mid­dle class’ might be cap­ti­vat­ed by the gener­ic habit. It may then prove to be much more dif­fi­cult to con­vince these con­sumers to pay much high­er prices for a high­ly adver­tised pre­mi­um brand.”

Nation­al and Glob­al Impli­ca­tions

Iron­i­cal­ly, a deci­sion to reduce prices can ben­e­fit more afflu­ent groups in the pop­u­la­tion and the nation­al econ­o­my as a whole. To the extent that firms can­not dis­crim­i­nate between exist­ing and new con­sumers, by cut­ting prices Coca-Cola wrote a check to their estab­lished con­sumers,” Sal­vo points out. The inno­va­tion had impact on prices paid by the rich and hence mod­er­at­ed inflation.”

The study also has broad glob­al impli­ca­tions. While our appli­ca­tion focus­es on the very con­crete exam­ple of the Brazil­ian soft drink mar­ket, we view the issues that are tack­led in this work as like­ly char­ac­ter­iz­ing many con­sumer goods mar­kets in the devel­op­ing world,” Sal­vo and Eizen­berg assert in their paper. Con­sumers in emerg­ing mar­kets are viewed as an engine of growth for multi­na­tion­al firms and for the glob­al econ­o­my as a whole. Under­stand­ing the fea­tures of demand and the micro­eco­nom­ics of com­pe­ti­tion in such mar­kets — in par­tic­u­lar the tough match pre­mi­um brands face from local ʻval­ue play­ers’ — should be of great inter­est for pol­i­cy­mak­ers and firms alike.”

Relat­ed read­ing on Kel­logg Insight

Con­crete Col­lu­sion: Eco­nom­ic data reveals lit­tle com­pe­ti­tion in Brazil’s cement industry

Refram­ing the Pover­ty Prob­lem: Mar­ket­ing can help address social ills

Featured Faculty

Alberto Salvo

Member of the Department of Strategy faculty from 2005 to 2013

About the Writer

Peter Gwynne is a freelance writer based in Sandwich, Mass.

About the Research

Eizenberg, Alon, and Alberto Salvo. 2012. “Grab them Before they Go Generic: Habit Formation and the Emerging Middle Class.” Working paper, Kellogg School of Management.

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