Trend to Watch: Shifting Consumption Patterns

Authors’ note: Each week in July and August, we’ll introduce a new trend you have to watch from our HBR article in the July-August special issue. We also invite you to comment on this trend and suggest what trends you think you have to watch.

Crisis or not, it was inevitable that U.S. consumer-spending growth would slow from the 3.4% real annual rate enjoyed since 1985. The 1980s and 1990s were peak consumption years for the now-retiring baby boomers, whose spending spree was financed by a mountain of debt.

Thanks to the recession, what would have been a gentle decline has become an abrupt fall. While consumption growth will return with economic growth, an aging population and depleted household savings mean that U.S. consumption is likely to expand less rapidly than it did pre-crisis.

For strategists, the question implied is this: If the U.S. is no longer the world’s consumption engine, will another country or region assume that role? Here are two possible scenarios:

1. Asia could become the new center of gravity. China and India together have more than a billion people whose incomes are just below a middle-class level. When growth returns to that part of the world and those households achieve more than $20,000 per year in disposable income (adjusted for purchasing power parity), expect a boom in discretionary consumption. If, as some forecasts indicate, China becomes the world’s third-largest consumer economy (behind the EU and the U.S.) by 2020, and India the fifth-largest (behind Japan), then three of the five largest consumer economies will be Asian.
2. Alternatively, the map of consumption could become multipolar. Suppose growth continues in China, India, and other emerging markets, but government policies and long-ingrained behaviors keep savings rates high and consumer spending low. The EU, the U.S., and Japan might then retain their positions as the top three consumer markets, but with lower rates of consumption growth. In this case, global consumer-spending growth could stay below pre-crisis levels for years or even decades.

Strategies will hinge on which scenario materializes, but for the moment companies should:

• Prepare for slower long-term growth in global consumption. Companies that have relied on fundamental market growth, especially for mature products, now need to fi ght for market share or compete in new categories.
• Shift investment to Asia. Consumption is clearly growing faster in China and India than in developed markets.
• Focus on older consumers. Within five years, more than half of all consumer spending in the U.S. will be by consumers over 50, and the proportion of older households is rising in Europe and Japan as well.
• Find ways to offer luxuries on a budget. Tighter household budgets don’t mean lower aspirations. Our research shows that stretched consumers in slow-growing economies will still want to feel that they are living the good life.

The verdict: This trend is categorized as accelerating.