Article: The new Middle Class drives lots of value in Frontier Markets. Why is this, and ‘so what’?

“I bought a fridge”

For Amana, a proud mother of four we spoke to in rural Punjab, this was a big moment.

Having a fridge means you can up your nutritional and financial game. You can provide better food for your family at a lower cost. You can plan into the future and make better use of your resources. And the money you don’t spend on food can go to discretionary nice-to-haves which bring emotion, colour and excitement to a daily landscape. The stuff which makes life special.

The stuff which brings you into the Middle Class.

In making this pivotal purchase, Amana had leapt the first hurdle in the Middle Class journey, passing from a cohort of subsistence to consumption. Subsistence is where daily needs are all-consuming and there’s no money to save.

Consumption sees regular income and more financial stability. It’s in this cohort that discretionary spending starts; better food, more and more regular proteins. Many of these items can be kept in the fridge and provide more variety and taste.

Discretionary spend also starts more interesting and exciting retail experiences. We call this ‘Experience Retail’ – when shopping becomes entertainment. We’ve seen that even at modest levels, growth of experience retail can have a profound impact on economic vibrancy.

The scale of the Middle Class tide is staggering …

The picture below shows the cohorts and how the transitions are sequenced. The scale of the numbers is staggering. The subsistence cohort is typically counted in volumes of tens of millions, and even when discretionary spend moves from single dollars to tens of dollars, the gross economic uplift can sustain real growth in GDP.

And although the volumes of people fall quite rapidly as wealth grows through ‘Consumption’ to ‘Indulgence’, the corresponding growth in discretionary income provides greater and greater power to the already substantial lift achieved so far.

… and it really does lift all boats

We see this initial transition – captured in the pivotal moments of a fridge, a mobile phone or a celebration dinner which brings families together – as the tide which lifts all boats in a Frontier Market economy.

As a Frontier Market investor, this is one of the most exciting trends we have seen.