3 ways to counter slowing population and consumption growth

By Sabine Vollmer

No longer can businesses rely on population growth to fuel global economic expansion. Instead, it is becoming more important for businesses to know which consumers will spend robustly, where they are, and what they prefer to buy.

Population growth contributed 54% of global consumption growth from 1970 to 2000, a report  by the McKinsey Global Institute suggests. Since then, per-capita consumption – how much each individual consumer spends – has become more important. Per-capita consumption growth contributed 58% of global consumption growth in the past 15 years and is projected to increase to 75% by 2030.

The shift is driven by demographic changes – populations are graying, and people living in cities are spending more – and consumer demands shifting from goods to services.

“Companies need to understand how shifting demographics impact their organisation’s footprint,” according to the McKinsey report. “If that footprint doesn’t match the most promising consumer markets, they may need to adjust their strategy.”

To know where to find the consumers of the future and anticipate what they may demand, the McKinsey report suggests that companies take a close look at these three global trends:

Consumer groups driving consumption growth. Demographic groups projected to be responsible for about half of global consumption growth in the next 15 years are Chinese of working age or older and those 60 or older in developed economies.

Over the next 15 years, the number of people age 60 or older in developed economies will increase 35% to 222 million. In the US and Canada, for example, this age group will account for 60% of overall population growth and 47% of urban consumption growth.

Predictably, the 60-plus group in developed economies is projected to spend significantly more on health care than any other age group. In developed countries, a 30-year-old consumes an average $3,000 per year on health care, compared with a 60-year-old who consumes on average $8,200 per year and a 90-year-old who consumes, on average, $35,000 per year.

The 215 million Chinese consumers age 60 or older are an equally large population to watch. China lacks, for example, appropriate housing and residential care facilities for the elderly with disabilities or chronic conditions.
The number of working-age Chinese consumers is projected to rise 20% to 628 million by 2030. Working-age Chinese citizens, especially in urban areas, will see their monthly earnings increase, and their per-capita consumption is expected to more than double to $10,700 annually over the next 15 years. Personal products, recreation, and dining out are among their favourite indulgences.

Cities that matter. Ninety-seven per cent of the world’s population growth in the next 15 years will occur in cities. People living in large cities will account for about half of the global population and 81% of the global consumption by 2030, and 91% of the consumption growth from 2015 to 2030. That growth is concentrated in a few hundred cities. Thirty-two of those cities will generate one-quarter of the urban consumption growth globally.

The top ten cities contributing to consumption growth during the next 15 years are projected to be London, Tokyo, New York, Beijing, Shanghai, Houston, Los Angeles, Tianjin (China), Dallas, and Chongqing (China). Mumbai is ranked 11th, and Mexico City is 12th.
Consumption shifting towards services. The number of people who can afford to buy more than just necessities is projected to increase by about 1.8 billion in the next decade. The majority of these new consumers, who will have more than $10 in disposable income per day, will live in large cities in emerging economies such as India.

Demand for goods and services beyond necessities currently accounts for 35% of household consumption in India. By 2025, it is projected to account for 70% of Indian household consumption.

As per-capita incomes rise in an economy, the share of income that goes to goods such as food, clothing, and furnishings decreases, and the share that goes to services such as education, restaurants, health, and recreation increases. For example, in the US, a country with high per-capita income, households on average spend 17% on goods and 41% on services; in India an average 49% of household expenditures is for goods, and 13% is for services.

In developed economies, growth in spending on services is expected to be largely driven by people 60 and older demanding more health care that is more costly because it is of higher quality. Health-care spending is projected to account for 34% of overall consumption growth amongst that population.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.