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Latin Americans Find Their Niche

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How an expanding middle class sends the affluent searching for something new.

BY JOHN PRICE
InfoAmericas

Latin America is half way through its fifth successive year of expansion, a boom that has lifted dollar-measured regional GDP by 14.8 percent per year since it bottomed out in 2002.  By the end of 2007, the region will be twice as wealthy as it was only five years ago.  The surge in purchasing power has caught both economists and marketers off-guard, with most multinationals only now beginning to reinforce their marketing budgets for the region. 

As the international marketing community returns its focus on Latin America, it will find a region unrecognizable from the one it knew when Latin America last basked in the global spotlight in the early to mid-1990s. Latin American consumers are not only wealthier than a few years ago, but also socially transformed, having both modernized and adapted to the negative and positive economic shocks that have buffeted the region.  With the arrival of more brands, both local and foreign, and the modernization of distribution channels, customer choice has exploded, creating new competitive pressures to either push down to a mass audience or choose profitable niche. 

THE MIDDLE CLASS SURGE

In 1999, the wealthiest 10 percent of Latin Americans earned 41 percent of the region’s income.  Over the last eight years, that number has gradually dropped to 38 percent in 2007.  It is a subtle shift, but the corresponding $90 billion net gain by the lowest 90 percent of households represents the first economic victory for the middle class in Latin America since the 1970s. 

There is no magic formula that delivered this gain to the middle and working classes.  In Mexico, expanding credit availability raised homeownership levels and launched more SMEs, both powerful catalysts of upward mobility.  In Central America, the $10+ billion annual flow of remittances from family members working abroad did more to re-distribute income than any government policy or private sector initiative.  In Brazil, the No Fame and Bolsa Familia programs augmented household incomes amongst the poor and lower interest rates spurred investment in job-creating sectors like construction.

In Brazil, household income expanded 18 percent per year from 2003 to 2007 in dollar terms.  In the same period of time, households earning more than $35,000 per year grew a whopping 159 percent per annum as 3.2 million households lifted themselves into this affluent income strata.  Today, over 12.5 million Brazilian households earn above $15,000, considered the threshold of middle class.  That translates into the middle and upper classes representing 25 percent of all households, compared to 9 percent of all households in 2003. 

It is easy to understand why consumer product companies are rushing back to Brazil.   Brazil has outgrown the regional average due, above all, to the remarkable turnaround of its currency, but it is far from alone.   Even more striking gains in middle class household incomes have been realized in Argentina, Venezuela and Chile.  To put these figures into a global perspective, there are twice as many households today in both Brazil and Mexico earning above $15,000 per year than in China.

BANKING THE MASSES

Latin America has witnessed upswings in the past, so many skeptics have yet to be convinced that today’s boom won’t quickly turn into tomorrow’s bust.  One unlikely cheerleader of this era’s expansion is the global financial services sector, which, more than any industry, has bet billions on a sustainable expanding middle class in Latin America – more than $60 billion in the last ten years alone.   

Their optimism is built on the track record of most governments in the region demonstrating a new sense of prudence in fiscal and monetary policies.   Record trade surpluses have been used by all governments, right wing and left, to pay down international debt.   Whether Argentina’s Kirchner is scorning the IMF by “getting it off its back” or Mexico is converting short-term dollar debt into long-term peso debt, the end result is the same: lower foreign debt levels, lower interest rates and banking products accessible to a much larger audience. 

In spite of the banking sector’s optimism, Latin American consumer demand for debt has outstripped supply and non-traditional lenders have stepped in to fill the gap.  Today, working class Chileans are as likely to get their first credit card from Falabella supermarket as they are from the nation’s largest bank, Santander Santiago.  Consumer credit levels are growing at more than 20 percent per year across the region.  In more developed credit markets like Mexico, Brazil and Chile, credit growth is fastest amongst those receiving their first-ever credit card, i.e. the middle and working classes.

The democratization of credit in Latin America opens up a mass market for many consumer goods that previously could only be marketed to the affluent.  Without access to credit it is next to impossible to build broad demand for the sale of computers, air travel, cars and homes, big-ticket items that cannot be financed through cash savings in any market.  Sure enough, it is discretionary spending that is growing fastest in those markets that are enjoying the most dramatic credit boom.  As the market widens for mid-large expenditures, the profile of the “typical” buyer dramatically shifts, providing a new challenge to advertisers who try to design images and messages that resonate with their “core” audience.

Consumer credit also forces a shift in the quality vs. price trade-off for many consumers.  Youngsters buying their first set of furniture are motivated, thanks to credit, to move up-market and buy sturdier or more stylish product than a cash purchase would permit.  Middle class families moving into a new home may choose to buy a washing machine and dryer and thereby cut down on the domestic services they normally use.  Here, we see a trade off between time and money heretofore never contemplated by middle class consumers.

LATIN AMERICAN HOUSEHOLDS: STEREOTYPES DESTROYED

While the last five years are witness to an economic transformation of Latin America, a slower, more profound series of changes is reshaping Latin American society and households.  So many of the social stereotypes that simplified the lives of Latin American marketers are now turning on their heads or at the very least being challenged. 

Stereotype #1 – The sole breadwinner of household is a married father, living with his wife and children.  Today, this “classic” household is less than 22 percent of the total, having declined from about 1/3 of households in 1990.  Another 10 percent of homes are led by single breadwinning fathers and include extended relatives such as grandparents, aunts, uncles, cousins, etc.  The dismantling of food and transport subsidies combined with harsh economic times in the 1990s forced many stay-at-home mothers to seek employment outside of the home.  Aging demographics enabled moms with teens to resume their careers.

Stereotype #2 – The elderly live with their children.  The fastest-growing household segment in Latin America is comprised of “empty-nesters”, most still working, some retired, whose kids have left home.  Preferring the independence of their own confines, empty nesters often move from the city to the suburbs or even to second tier cities in search of less hectic environs than the notoriously stressful large cities of Latin America.  Their share of households has doubled over 15 years to reach 9.5 percent.  Without the economic burden of children, most empty nesters enjoy above average disposable incomes.

Stereotype #3 – The young stay at home until they are married.  Living at home until marriage was once a social obligation, particularly for young women.  Today, the social taboo of leaving the nest is somewhat reduced, and is secondary to economic reality.  For the poorer classes, young men and women often leave home to find work in other communities.  Central American and Mexican young men often cross national borders to find work elsewhere.  Rural and small town men and women in all countries move to larger cities to find work.  For affluent urban twenty-somethings, the biggest restraint on housing mobility is the high cost of rent and low entry level wages, because many have already overcome any social obligation to their moving out of the house. 

In a 2000 survey of 12-29 year olds in Mexico, 11.5 percent of youngsters lived away from their parents and were unmarried.  Amongst 20-year olds, the statistic is closer to 20 percent and growing.  It is an important segment for those who sell furniture, white goods, electronics and kitchenware, all of which loom large in the spending habits of first-time renters. 

Stereotype #4 - Get married, have kids.  In few geographies around the world has the fertility rate of women dropped faster than in Latin America.  In spite of deep Catholic roots and laws forbidding abortion, governments across Latin America spread the gospel of birth control in the 1970s and 1980s in an effort to curb population growth which most saw as the greatest inhibitor to development.  Today, fertility rates in several countries barely exceed replacement levels.

Young couples wait longer to get married and to have their children primarily for economic reasons, but in affluent circles also from a shifting set of priorities towards self-actualization.  Unplanned births have dropped precipitously thanks to education.  As a result, 8.1 percent of households have no kids.

Stereotype #5 – Latin Americans are good Catholics.  Any survey taken across Latin America will show that the vast majority of Latin Americans call themselves Catholics.  Probe deeper and research reveals the waning influence of Catholicism (and formal religion in general) on the lives of Latin Americans, particularly younger generations.  In Mexico today, less than 8 percent of Mexicans attend church each week, compared to 20 percent in the United States.  The declining influence of church is altering the values of Latin American society, some would say, making the region more tolerant of “alternative” lifestyles.  Several states and nations in the region are considering the legalization of abortion, homosexual acts and even gay marriage or union.  Free from church-dominated societal mores, Latin Americans are reshaping their households accordingly. 

One market with enormous unrealized potential is the gay and lesbian market, which reaches $500 billion per year in the USA but is a far more modest $5 billion in Mexico.  In an economy of $800 billion, 5 percent of Mexicans are estimated to be gay or lesbian.  Given the propensity of people without kids to have more disposable income, the homosexual market potential is estimated at $30 billion.  Savvy marketers are beginning to openly and aggressively pursue this market, knowing that early entry will help ensure long-term customer loyalty.

THE INDIVIDUAL OVER THE COLLECTIVE

All of the household fragmentation trends in one way or another point to greater emphasis on the individual than in the past.  The mobility, growth and inequality of Latin American cities long ago weakened any sort of community cohesion.  The collective mentality found in Latin American society began and ended with families.   Divorce, empty nesting, pre-marital nest departure and alternative lifestyles all challenge the survival of a household archetype.  The emerging theme for marketers is that of the individual and self-realization, not to be mistaken as American or European but uniquely Latin American.

THE AFFLUENT HEAD FOR THE HILLS

Will the democratization of credit and an expanding middle class shake up Latin America’s multi-tiered social strata and force a consolidation of classes?  This is an important unanswered question.  In many Latin American societies, class divide is more than a purely economic measure and often coincides with race (Brazil, Mexico, Colombia, Venezuela) and language differences (Paraguay, Peru, Guatemala, Bolivia).  Will the upper classes welcome the aspiring middle classes into their private schools, their restaurants, and their sports clubs or will they run for cover, building new tiers of elite spheres to maintain their isolation?  If history repeats, we will see further fragmentation amongst the upper classes.  The economic miracle of Chile provides a proxy of future behavior in other markets.  Chile’s rising economic tide has lifted all boats, but has done very little to bring the rich and common man closer together. 

In Mexico, where the middle class have been on the march for almost a decade, affluent consumers have abandoned their traditional brands in search of something novel.  Affluent car buyers want the never before imported model, outbound tourists want to experiment with undiscovered destinations, everyone is seeking something new.  The phenomenon is a threat to the established brands and a welcome opportunity to high-end brands looking for new markets.  Mexico could prove to be the mold of things to come in Brazil, Argentina, Peru, Colombia and elsewhere. 

CARVING UP THE AFFLUENT MARKET

Latin America’s affluent hold the vast majority of wealth assets, and are responsible for the lion’s share of discretionary spending in areas such as entertainment, travel, private education, domestic services and financial services.  The 7-10 percent of the population referred to as affluent is increasingly sub-divided into three tiers of wealth: ultra-affluent, core-affluent and mass affluent.

  • Ultra Affluent – more than $500,000 in liquid assets. They almost always own rent-producing real estate and keep most of their liquid wealth off-shore.  They prize discretion above notoriety, in no small part because of security issues in the region.  They tend to distrust mass media and prefer a chosen few sources of printed and on-line media. 
  • Core Affluent – household incomes of US$80,000 to $150,000 per year.  They often own multiple properties but use these properties themselves.  They tend to be ostentatious consumers of products and find it important to display their wealth.  They like to cultivate an eclectic collection of tastes and preferences that are appreciated by others precisely because of their recognized rarity and relative inaccessibility.
  • Mass Affluent – $40,000-$80,000 per year in income. These well-paid professionals often rent in high price districts and rarely own second homes.

Within the affluent segment, close scrutiny reveals a highly fragmented market.  Given the impressive spending power of these consumers, even small groupings can themselves represent an interesting target for niche marketers.  The proliferation of highly focused magazine titles in Mexico since 2000 is a testament to the viability of these niche segments.  Expansión magazine, itself a well positioned business magazine in Mexico, began building a portfolio of niche titles aimed at consumers back in 2000.  Today, it controls over a dozen such titles and the majority of its advertisers for said titles are luxury goods brands.

MEXICO'S CAR MARKET: A REVEALING CASE STUDY

The combination of an expanding viable middle class and a more segmented affluent class has opened the door for more product differentiation, a trend that is likely to deepen in coming years.  Notably, Mexico is one of the most accessible thanks to a long list of trade agreements.  With the largest middle class in the region, Mexico has led the region in attracting a variety of product and service choice for its consumers. 

In 1996, only nine car makers actively serviced the Mexican market.  By 2006, that list had grown to 27 international carmakers selling 279 different car models.  The most commonly sold models pre-NAFTA, compacts, have shown almost no growth over the last decade.  Offered choice for the first time, upper middle class and wealthy consumers abandoned compacts and gravitated towards SUVs and vans, now the second-largest model category.  The expansion of car loans to the formerly un-banked opened up a large market for sub-compacts, which start as low as $7,700 in the Mexican market. 

The Mexican car market is indicative of where other product categories are headed in much of Latin America.  Large-scale production of low-margin price driven models will be used to capture SES C and even D consumers that formerly could never afford the product.  Simultaneously, large varieties of higher margin brands and models will fight for their niche amongst an ever segmenting affluent market. 

John Price is president of InfoAmericas. This article originally appeared in the company's Tendencias magazine. Republished with permission.

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