Asia is the world’s consumption growth engine; if you miss Asia, you could miss half of the global picture, a $10 trillion consumption growth opportunity over the next decade. New research from the McKinsey Global Institute (MGI) identifies the large growth potential in Asia and the new growth angles for companies serving Asian consumers.
New, increasingly diverse cohorts of consumers with the potential to drive growth include Insta-grannies in Seoul, Generation Z gamers in Surabaya, career moms in Manila, and lifestyle-indulging digital natives in Chengdu. Shifts and diversification in Asia’s consumer landscape offer new opportunities for consumer packaged goods (CPG) players. Now is the time for these players to redraw Asia’s consumer growth map.
Asia’s consuming class is growing and getting wealthier, fueling CPG growth
Asia’s consuming class is growing rapidly.
By 2030, three billion people, or 70 percent of Asia’s total population, may be part of the consuming class—a billion more than today and 2.5 billion more than at the beginning of the millennium. For some economies, this will mean a substantial expansion of their consuming class. In Indonesia, close to 200 million people may belong to the consuming class by 2030, up from 120 million today. In India, the 2030 figure may be close to 825 million, up from around 340 million today. CPG companies will therefore have the opportunity to serve an increasing mass of incoming consumers.
As pronounced as this shift is, movement within the consuming class in the next decade is likely to contribute more to consumption growth than movement into it. Members of the consuming class are expected to attain higher income levels than ever before, shifting the center of gravity of the income pyramid sharply upward and changing consumption patterns. In the past 20 years, 80 percent of Asia’s consumption growth came from the lower-income tiers of the consuming class as new entrants joined. In the next decade, 80 percent of that growth could come from higher-income consumers (Exhibit 1).
As incomes rise, we are likely to see greater discretionary consumption and increased premiumization. While it is true that a greater proportion of consumption generally shifts to services-based industries as incomes rise, the CPG sector is still expected to grow in absolute terms. One driver of this growth is premiumization, as consumers pay higher prices for goods in the same category. Premium cosmetics and skin care, for example, have greater penetration in higher-income economies. More than 40 percent of the market is premium in the high-income economies of Australia and North Asia, compared with less than 10 percent in India and Pakistan. In many categories, CPG companies may find new opportunities to cater to increasing demand from consumers for premium alternatives.
Income remains a strong influence on consumption, but the spread of digital technologies and innovation in business models means that income is no longer a sufficient predictor of consumption. Instead, the relationship between income and consumption is becoming increasingly nuanced. Our MGI research points to the emergence of new consumption patterns in the continent over the next decade, which may unlock new opportunities for CPG companies seeking growth.
New growth angles are emerging in CPG
Most sectors are likely to be disrupted in the next decade, and the CPG sector is no exception. We see eight growth angles offering new opportunities to serve consumers in the region (Exhibit 2).
1. Shrinking households may change the mix of consumption categories
Across Asia, households are getting smaller. The average size of households has declined in most Asian countries over the past 20 years—for example, by around 10 percent in Indonesia and almost 30 percent in China. Almost one-third of households in Advanced Asian economies and more than 15 percent in China are already single-person ones.
As a result, a robust “singles economy” is emerging. For example, the rise in the number of individuals living alone has led to soaring ownership of pets across Asia. Companies may find new success in categories of goods that smaller households more frequently purchase, such as prepackaged food and pet food.
Shrinking household size is also likely to change consumers’ preferred packaging options. For instance, offerings of new, smaller formats have already emerged in Japan, where the average net weight of several fast-moving consumer goods decreased, including an 8 percent decline for butter and as much as a 25 percent decline for instant coffee.
Some categories may also decline in some markets. As fertility rates decrease and fewer children are in households, many categories may experience headwinds in parts of Asia. Some CPG companies have dropped categories ahead of this trend. For instance, Godrej Consumer and Hindustan Unilever are divesting from the Indian market for baby diapers.
2. The senior segment will grow and move online, changing consumption patterns
The population of Asian seniors, defined as individuals 60 and over, is expected to grow by around 40 percent over the next decade, from 575 million to more than 800 million.
Furthermore, seniors’ consumption may grow twice as fast as that of the rest of the population in many Asian countries. The increase in senior consumption power may drive increased uptake in targeted categories such as enriched foods and antiwrinkle creams. Many Advanced Asian firms have led in this area, with beauty and cosmetics companies such as Pola Orbis and Kosé targeting the senior segment with anti-aging products.
In a notable and relatively new phenomenon, the older generation is increasingly adapting to online consumption. By 2030, almost 100 percent of seniors in Australia, Japan, and South Korea are expected to be online, while by conservative projections, the share in China is expected to exceed two-thirds. This is the Insta-granny generation. The pandemic may have accelerated seniors’ digital adoption. While isolated at home, they were forced to digitize their lifestyles, spending significantly more time on social media, video platform websites, new apps, and e-commerce sites. CPG players seeking to engage the senior segment, particularly in Advanced Asian economies and China, may therefore need to reconsider the mix of their online and offline outreach channels. In China, for example, senior influencers live-stream products and have followings topping millions.
3. Women’s economic empowerment creates new consumption opportunities
Women’s economic empowerment could boost Asia’s consumption growth. Based on the GDP growth potential from narrowing gender gaps estimated in previous MGI research, women’s empowerment could add 30 percent, or $3 trillion, to Asia’s consumption growth in the period to 2030.
Women’s greater economic empowerment may unlock new opportunities. First, as women join the workforce, new needs may emerge, including new technology to facilitate working from home, professional apparel, new financial solutions to manage their income, and solutions that save time in household management. An example of paying for a service that saves time is the rise of food and grocery delivery services. In Japan, Oisix, which offers a meal kit for preparing dinner rapidly, has experienced robust year-on-year growth since 2018.
Second, as women gain greater spending power, we expect households to redirect some expenditure to certain categories for which their incomes may have been previously insufficient, such as personal care.
Finally, women may also change the way they shop, using different channels. Working women may put a premium on convenience, boosting their use of online channels, after-hours convenience stores, and bulk buying, especially of nonperishable goods. According to Tmall in China, one of Alibaba’s e-commerce platforms, 80 percent of the top new brands that emerged in 2020 were focused on the needs of women.
4. The digital-native generation needs to be engaged in a new way
Digital natives (people born between 1980 and 2012, including members of Generation Z and millennials) are expected to account for 40 to 50 percent of Asia’s consumption by 2030. While there are variations across countries, these cohorts share some common attitudes toward brand preference and discovery. What can CPG companies learn to be able to reach and connect with these cohorts?
First, Asian digital natives are, unsurprisingly, voracious online content consumers. According to a recent McKinsey survey, as much as 30 percent say they spend more than six hours a day on their mobile phones.
Though the pattern varies within the region, Asia’s digital generation tends to use non-Asian social-media platforms, messaging apps, and digital payments providers, but these consumers follow local social-media influencers and use Asian e-commerce platforms (Exhibit 3). CPG companies intending to reach them would do well to consider adjusting their approach to local markets.
A second lesson for CPG companies is that many of these consumers are harder to convince and influence. For example, members of Gen Z in Indonesia are 10 percent more likely than other generations to not trust promises from skincare brands. Conventional above-the-line approaches may be insufficient; social sources of awareness, such as social-media influencers, livestreaming, and video content, show higher promise.
Finally, digital natives exhibit lower brand loyalty and are eager for new experiences. They are twice as likely as Gen Xers to buy new brands. They prefer brands that show their personality and uniqueness but are also known well enough to be recognized.
5. New channels are reshaping how value flows through the value chain
The conventional value chain flowing from CPG companies to wholesalers and distributors and finally to modern trade and traditional trade is being reshaped. Increasingly, digitized business-to-business platforms (eB2B) are replacing established flows, and the shift toward e-commerce continues. In the process, these shifts are carving out new value chains. Value is shifting among players. To understand how a new channel mix may lead to shifts in profit pools across the CPG value chain in the next decade, we simulated two distinct categories in two different geographies: beer in Emerging Asia, and beauty and personal care in Advanced Asia (Exhibit 4).
Our results indicate that the emergence of new channels may lead to a redistribution of value across the value chain. For CPG brands, this reconfiguration can create opportunities and threats: their share of value pools can grow by as much as 5 percent or decrease by a similar amount. If CPG players can capture the benefits from higher efficiency of new channels, largely from a lower-cost-to-serve model that could result in higher margins for eB2B in the beer market and direct-to-consumer (D2C) in the beauty market, their share of value pools could increase. However, this gain is not a certainty. In a scenario in which eB2B intermediaries experience greater margin pressure due to increased bargaining power, or in one where an e-commerce channel experiences declining margins arising from higher cost to serve and greater bargaining power, CPG players could lose a small share of their total value pools.
For intermediaries, the impact on their value pools may be even larger. Conventional wholesalers and distributors could lose more than half their current value pools, while eB2B players may capture an increasing share of value pools.
Finally, for retailers, a shift in the mix is likely to occur as e-commerce continues gaining ground, especially in categories with lower cost to serve, such as beauty and personal care. Traditional trade may continue to lose share but may somewhat slow its decline by becoming more resilient and modernized through adoption of eB2B. Modern trade is likely to continue gaining some share in Emerging Asia but may lose share in Advanced Asia in categories where e-commerce continues to accelerate.
CPG companies have choices in how to respond to these disruptions in the channel mix. They can opt to partner with emerging eB2B players, as P&G and Nestlé have done with Growsari, a local Filipino eB2B platform.
Or as some players have done, they can develop their own platforms. For example, Hindustan Unilever launched an eB2B app, Shikhar, which today reaches over 500,000 retailers.
In categories where D2C may be economically viable, such as beauty and personal care, CPG brands may launch their own D2C efforts, as China beauty brand Perfect Diary has done. In 2020, revenue of its parent company, Yatsen Holdings, totaled 5.2 billion renminbi, up 73 percent from a year earlier, and Perfect Diary became the top color cosmetics company in China. D2C was responsible for 25 percent of revenue. The company’s D2C effort has been propelled by heavy investment in social marketing. The brand has as many as 6,000 key opinion leaders and key opinion consumers under management, as well as more than 10,000 brand-owned WeChat groups that enable the company to communicate directly with consumers.
6. Eco-responsibility may drive new demand
Consumers in Asia are increasingly eco-conscious. In recent surveys, the vast majority of Asian consumers have reported caring more about the environment and taking action on it. For example, more than 80 percent of respondents in China, India, and Emerging Asian economies said they had made changes to the products and services they buy because they were concerned about climate change; a similar figure indicated willingness to pay a premium for sustainable packaging alternatives.
We are seeing some signs of intentions translating to actual buying behavior, with China’s e-commerce player JD saying the volume of green purchases on its platform rose by as much as 70 percent in 2017.
However, there are still limits to Asia’s green consumption. Income continues to be a significant barrier. Although many consumers report being willing to pay a small premium, only few are able to accommodate the effective price premiums, which often reach as high as 30 percent for many CPG categories.
CPG companies have an opportunity to tap into rising preference for more sustainable products and the prospect that, as incomes continue to increase, they should become more appealing to more consumers. Some players are already active in this regard. For instance, leading milk producer Vietnam Vinamilk is investing in an eco-friendly dairy farm that does not use pesticides and chemical fertilizers and that uses biodegradable materials in its packaging. These efforts have helped the company become one of the top fastmoving consumer goods brands in Asia.
7. Personalization—the segment of one—is likely to continue crossing physical and digital boundaries
Asia has the right attributes to propel the spread of personalization, including explosive growth in data creation, capture, and replication, which IDC expects to triple between 2020 and 2025 in the region. Asian consumers appear relatively willing to share their data. In a 2021 Euromonitor survey, more than 45 percent of respondents in China, India, and Thailand said they share their data for personalized offers and deals, compared with less than 30 percent in France, Germany, and the United Kingdom. Personalization of marketing communications and services is becoming an increasingly important competitive differentiator.
As increasing volumes of consumer data are generated, CPG companies need to develop their digital and analytics skills in order to ensure they have access to the right data and then use the data to drive personalization of marketing, their products, and even product development. In Japan, Unilever offers a personalized shampoo product called Laborica, which is available in 20,000 variations based on consumers’ answers to about 30 questions. Under its brand name IOPE, Amorepacific launched a personalized 3-D hydrogel mask that fits each individual’s facial dimensions and skin conditions; the masks are made using a 3-D printer in the IOPE Lab in Myeongdong, South Korea.
8. Asian regional brands are gaining share
Asian CPG brands account for a large share of the region’s consumer spending but have struggled to cross borders. While cross-border regional flows are strong in sectors such as automotive and electronics, the same has not been true for the CPG sector. Local brands such as Indofood in Indonesia and Amul in India are able to cater to local tastes and, as a result, have controlled the highest market share of their respective markets in 2019.
Conversely, non-Asian players such as AB InBev in alcoholic drinks, L’Oréal in beauty and personal care, and Coca-Cola in soft drinks, leverage their global supply chain, branding, and expertise to establish a household presence in most markets.
In this context, regional Asian players’ share of market share has historically been low. However, we are seeing signs of a reversal. Between 2015 and 2019, regional players grew faster than the overall market in most categories over the past five years—and twice as fast in categories such as beauty and personal care (Exhibit 5). Who are some of these emerging regional players? Beer companies such as ThaiBev of Thailand and San Miguel of the Philippines have crossed borders by exporting their products to Australia, China, and Indonesia, potentially suggesting a path ahead for other regional champions. Beauty players such as Kosé and Shiseido in Japan and Amorepacific in South Korea have done the same. Today, Kosé earns one-third of its revenue outside of Japan, the majority of that in other Asian markets, where sales grew at a rate of 20 percent a year from 2016 to 2020. The company drew up specific strategies for each of its Asian markets. For instance, it entered the Indian market with a range dedicated to younger working women, partnered with Lazada to expand its reach in Southeast Asia, and partners with Jumei and Tmall in China.
Now is the time for CPG companies to remap consumption growth in Asia
The Asian consumer landscape is being reshaped. Rising incomes, diversifying new sources of growth, and a new consumption paradigm require companies to prepare for the next decade of competition. In its new research, MGI identifies three key actions companies may need to consider to compete successfully in the next decade of serving Asian consumers.
Redraw your growth map
Each company has a map of growth, but unless the company makes a concerted effort to understand and track dynamically changing markets, its map can all too easily become outdated. Companies may need to rethink how demand for their products and services is likely to evolve, and they should look carefully at which new growth angles are relevant to their businesses. Some CPG players may succeed by adjusting their product portfolio to the big demographic transformations playing out in Asia—for example, by creating offerings for seniors or smaller households. Others may choose to bet on the big convergence or localizing brands to consumer tastes.
Some players may have the appetite to pursue multiple avenues at once. Take L’Oréal, for example. The company established the Shu Uemura brand for the Japanese market and released affordable versions of products such as shampoo sachets and mini lipsticks in India. To make the most of the big convergence and a new channel mix, L’Oréal brand Maybelline has developed a loyalty program through a WeChat mini program, integrating points earned through both offline purchase and its Tmall D2C store.
Open up and manage partnerships
In increasingly diverse and dynamic markets, companies will have difficulty if they try to be all things to all consumers. For many, a promising way forward may be in partnerships and ecosystems. Companies need to decide whether to lead their own ecosystem or participate in an existing one, depending on which role they could fulfill most effectively.
Regardless of their choice, players may need to develop their partnerships’ capabilities to make the most of disparate markets. Belgium-based multinational drinks company AB InBev, for example, created national and regional innovation teams in China, partnering with Tmall’s innovation center in 2019 and gathering feedback from online and offline consumers to make a craft beer tailored specifically for China. The company also partnered with Brewing Technology Academy and Hubei Light Industry Technology Institute to innovate and train students to be future brewers. A key part of any CPG sector partnership strategy will be how it manages the shift in channels. Some players may decide to be proactive in partnering with emerging eB2B disruptors—the choice P&G and Nestlé made. Or they could launch new D2C offerings, leveraging local digital platforms, as many global players have done in China.
Reallocate resources with agility
With a refreshed growth map, companies may then consider how they can respond to market needs faster and with more agility. To have the right local market understanding, they must empower local decision making. Hindustan Unilever, for instance, created a highly localized leadership structure. To further cement agility and delegation, the company subdivided India into 15 consumer clusters as part of its strategy, “Winning in Many Indias”; 16 business teams act as “mini boards” for each country category.
Resource reallocation may be crucial, as the speed of transformation in markets accelerates. Both organic and inorganic plays may be in order. For example, Colgate expanded its presence in Asia through acquisition, buying Myanmar toothpaste brand Laser in 2014 and a stake in Bombay Shaving Company in 2018. Nestlé set up its first factory for plant-based products in Asia in 2020, and it has since launched a line of meatless products to address concerns about the impact of meat on the environment. The company has also marketed a plant-based, ready-to-drink latte in Malaysia before offering the product in markets outside Asia.
As consumer cohorts diversify, CPG companies will need to consider how they deploy resources to reach and influence them. Traditional avenues to reach consumers, such as above-the-line advertising, may be less effective with some consumer cohorts. In the case of digital natives, for example, spending on social media and live streaming may yield better outcomes. CPG players are likely to require a continuous test-and-learn approach to their marketing spending as they refine how they target consumers.
In Asia, powerful forces—technological, demographic, and social—are reshaping the consumer landscape. Incomes are rising strongly, and the consuming class is expanding, but the story is about far more than the upward trajectory of incomes. Increasingly, Asia’s consumer story is one of segmentation and increasing diversification in consumers and in their preferences and the channels through which they buy. To thrive under these conditions, CPG players need to redraw their consumer map for Asia and to be agile as they seek out new paths to growth.