Emerging Demographics Are the New Emerging Markets
Guest Blog Richard Dobbs Jaana RemesJonathan Woetzel
Marketing savvy just isn’t enough to track consumers anymore. Companies will need a more detailed portrait of target customer groups than ever, including their age, income, ethnicity, and shopping preferences. But what could this mean for small businesses?
A radical demographic shift is transforming the nature of consumer markets. Until the turn of the century, population growth powered more than half of global consumption. As population growth slows, that will fall to only one-quarter in the next 15 years.
Per capita spending will be the engine of consumption growth. In this new world, companies need to know which consumers have the purchasing firepower, where they are, what they want to buy, and what drives their spending.
There are surprises. For example, people aged over 50 bought nearly two-thirds of the new cars sold in the United States in 2011. McKinsey Glog research finds that China is expected to spend 12.5% of all consumption growth on education for those under 30 — higher than any other country apart from Sweden. Young people in China are learning to love coffee. And North American millennials don’t trust company claims about their products, but are happy to let a room in their house to a stranger who they trust because of an Airbnb rating.
A recent report by the McKinsey Global Institute, Urban World: The Global Consumers to Watch, has identified three key groups of urban consumers with the numbers and purchasing power to shape the consumer landscape over the next 15 years. One thing common to all the groups is their location in cities. Over 91% of world consumption growth over this period will come from city-dwelling consumers.
The first of these is the 60-plus age group in the United States, Western Europe, and Northeast Asia. Their number will grow by more than one-third to stand at 222 million in 2030. In those 15 years, they will generate more than one-third of global consumption growth. In comparison, European millennials, for instance, will contribute less than 2%. The young may be the darlings of marketers, but for companies chasing growth, the truly glamorous market is the elderly.
To give an idea of their dominance, the 60-plus age group will account for 60% of total urban consumption growth in Western Europe and Northeast Asia, the latter comprised of Japan and South Korea. This group, not surprisingly, spends heavily on healthcare, but that’s not all. In the United States, these consumers will contribute more than 40% of consumption growth in housing, transport, and entertainment. A decade ago, those aged 55 and older accounted for less than one-third of all U.S. spending on home improvement. By 2011, this share was more than 45%. Companies in every sector — some of which have never been associated with the elderly — will need to prioritize this market as never before.
The second group is China’s working-age consumers age 15–59. Their numbers are set to rise by 20% or 100 million people in just the next 15 years and their per capita consumption is expected to double. By 2030, they will be spending 12 cents of every $1 spent in cities worldwide. These individuals are more optimistic about their financial future and willing to spend a greater share of their disposable income than their counterparts in previous generations.
The 2016 McKinsey Global Sentiment Survey of more than 22,000 consumers finds that nearly 30% of these Chinese consumers are willing to pay more for new and innovative household products—double the share of their counterparts in North America and Western Europe. These consumers are the successors to Western baby boomers who were, in their time, the richest in history in their prime years.
Third is North America’s working-age consumers. They already constitute a major market, and will continue to grow modestly in number and per capita spending. But they also pose new challenges to companies, because inequality is rising, and most incomes are under increasing pressure. Today, the median net worth of the top 20% of young adult households is eight times that of the other 80%; as recently as 2000, that multiple was four times. That means companies need to work harder to offer goods and services at very different price points. Compared with older cohorts, young adults are 10 to 20 percentage points more likely to consider and use sharing economy services from accommodation to car rental to furnishing. The behavioral differences for this age group require new customized strategies from companies seeking their dollars.
The consumer markets that matter have arguably never been more varied and complex. Rising inequality is one challenge. Another is that, as population growth slows, city demographics — and therefore their growth prospects — are diverging. Companies need to be in the right places. Cities are where 91% of global consumption will take place over the next 15 years – the trick will be knowing which cities, and even which neighborhoods within cities will house the highest-spending consumers.
Richard Dobbs is a senior partner in McKinsey & Company’s London office.
Jaana Remes is a partner at the McKinsey Global Institute.
Jonathan Woetzel is a director at the McKinsey Global Institute.