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Redefining Brazil’s Emerging Middle Class

How to Prepare for the Next Wave of Consumption Growth

July 4, 2013 By Olavo Cunha , Simon Cheng , and Rim Abida

After a remarkable decade of steady growth and economic stability, Brazil has emerged as one of the world’s most important new consumer markets. Millions of families that not long ago struggled for subsistence can now afford such basics as kitchen appliances and mobile phone service. Millions more now earn enough to pay for private school and a second car. And in the years ahead, the ranks of such consumers will swell enormously. By 2020, Brazilian households will represent an annual market of around $1.6 trillion (3.2 trillion Brazilian reais).

To help companies target this important market, The Boston Consulting Group’s Center for Customer Insight has developed a proprietary methodology for segmenting Brazilian households. We compared monthly income with consumption per household for more than 200 product categories.

We then identified the following five income segments on the basis of step changes, or critical shifts, in household consumption: subsister households (with incomes of less than $3,000 per year, or less than 500 reais per month) live in poverty and make purchases only to meet their most essential needs; restricted households ($3,000 to $15,000 per year) are no longer poor and typically increase purchases of basic goods as they can afford them; emergent households ($15,000 to $30,000 per year) have entered the middle class and tend to trade up to higher-value products within those same categories of essential goods; established households ($30,000 to $45,000 per year) increase spending in new product categories; and affluent households (more than $45,000 per year) dramatically increase their consumption of luxury goods.

This analysis yielded several striking insights:

  • While the decade from 2000 to 2010 in Brazil was marked by the ascent of millions of households out of poverty, the current decade will be characterized by a massive shift into the ranks of the middle class and affluent. Some 5.3 million households will rise from the restricted to the emergent middle-class segment. An additional 1.6 million and 1.9 million will enjoy established middle-class and affluent lifestyles, respectively. Families in the emergent, established, and affluent segments will make up 37 percent of Brazilian households by 2020, compared with 29 percent in 2010 and just 24 percent in 2000. These households will account for more than 85 percent of incremental spending from 2010 to 2020.
  • Companies will require a much larger geographic presence in Brazil than they did in the past. For example, in order to reach 75 percent of middle-class and affluent households by 2020, they will need to have a footprint in 405 cities, compared with 345 today. Cities with fewer than 500,000 people will account for around two-thirds of incremental consumption in Brazil by the end of this decade. We have identified five emerging consumer clusters in northern and northeastern Brazil and six in the southeast that will each represent at least $5 billion in annual spending power by 2020.
  • While such products as foods and appliances posted the strongest recent growth in Brazil, the sectors likely to experience the most rapid acceleration in consumer spending this decade are personal services, financial services, and private education. The apparel, groceries, telecommunications, transport, and leisure and entertainment sectors will also enjoy significant growth.
  • Rapid shifts in consumer behavior are predicted as Brazilian incomes grow. Once a household’s income exceeds $15,000 per year, for example, the family is likely to sharply increase spending on postpaid mobile phone plans. At that point, it is also likely to start buying fewer beverage concentrates in favor of pricier, ready-to-drink juices.

We believe that redefining Brazil’s middle class based on step changes in consumption can lead to more-effective strategies for penetrating one of the world’s most important growth markets. Companies can better anticipate when and where sales of their goods and services are likely to take off—and when they should adjust their product portfolios as households begin to trade up within categories.

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Redefining Brazil’s Emerging Middle Class