Get prepared for the middle-class boom

It will happen around the world -- but not here -- as the middle class grows globally. Two big questions for investors trying to catch this trend: How big it is and how long it will last.

It's big as well as it's growing fast.

But that's regarding all the experts agree on about the global middle class.

I don't expect investors to achieve enlightenment where a generation of political and social scientists, development experts, investment strategists and economists have tied themselves into statistical knots.

But because I think the growth of the global middle class is the single many important investing trend for the next 20 many years, I think investors ought to make a begin at sorting through the myths.

I'd start by trying to distinguish myth from our imperfect grasp on reality in four areas.

Myth versus Reality No. 1: We don't have a good head count on the rising global middle class.

The global middle class numbers 1.8 billon, or perhaps 28% of the world's population, according to the Organisation for Economic Co-operation as well as Development. According to The Economist magazine, however, in February 2009, more than half of the world's population was already middle class. The World Bank projects that between 16% and 19% of the world's population is middle class by 2030.

Whenever you are talking about a world population of 7 billion, a difference of 10 or 20 percentage points, or a decade or perhaps two, amounts to a lot of people.

The projections don't necessarily get a whole lot closer when we go from a global perspective to an individual country.

The McKinsey Global Institute projects that India's middle class of 50 million, less than 5% of the country's population, will explode to 583 million by 2030. But economist Nancy Birdsall, the president of the Center for Global Development, calculates that India has no middle class at all. McKinsey Global puts China's middle class at 43% of its population today, on its way to 76% in 2025. Birdsall calculates that China's middle class was simply 3% of the population in 2005.

The extraordinary difference in these estimates comes from the difficulty in defining the middle class. By Birdsall's definition, the middle class consists of people who earn more than $10 a day but who aren't in the top 5% of the population by income. In 2005, India's extremes of income inequality put just regarding everyone creating over $10 a day in the top 5% of the population. The World Bank uses a range between the mean income levels in Brazil as well as Italy to define middle class.

Other estimates say the middle class begins at either $2 a day (twice the World Bank's $1 a day definition of extreme poverty), or at $6 a day.

Myth versus Fact No. 2: Forget regarding the look for a single definition of a international middle class. There isn't you international middle class -- there are at least 2. When I consider all these struggles to define "middle class," the thing that jumps out is how a lot of the difficulty comes from trying to mash together the income levels of the existing middle class of the developed world with the income levels of the developing world.

If we take a behavioral approach to our definition of "middle class," economists see middle-class activities such as discretionary purchasing for status, or the use of credit to turn future wealth into current consumption, emerging, to a degree, at income levels of $2 or perhaps $6 a day.

But whilst it can make an interesting intellectual challenge to try to somehow unify all these people at such disparate income levels under a single heading of middle class, from a business perspective -- as well as thus an investing perspective -- it makes no sense at all and may in fact be dangerous to a company's top line and the portfolio.

This division into 2 -- to more -- middle classes shows up, for example, in the method Coca-Cola (KO, news) markets its products in China. In urban areas, where incomes and aspirations are higher, Coke sells its products at prices that are just slightly lower than in Western markets. The fairly high price is part of a strategy to brand Coke as a product that consumers aspire to as incomes rise. In rural areas, Coke sets its costs reduce, sells in slightly small bottles and requires customers to drink their Cokes on-site as well as return the bottles to vendors. Coke remains an aspirational product for rural Chinese consumers with rising incomes, but the income bar is set reduce.

Coke's pricing strategy is being duplicated by other consumer companies, including Procter & Gamble (PG, news), that market their products in developing economies in smaller sizes as well as at lower costs, but the strategy suggests that there's a sizable opening for companies to develop brand new products as well as create brand new brands that fit different price points for the developing-economy middle class. If this massive developing-economy middle class doesn't have the income of its developed-economy peers -- at least definitely not yet -- it still has the aspirations to signal its new wealth and status.

Investors should not assume that the fruits of the growth of the developing-economy middle class will automatically flow to developed-economy consumer companies. We are seeing a process in the cellphone sector, for example, where Taiwan's HTC as well as Korea's Samsung have created brands that are displacing phones from Nokia (NOK, news) as well as successfully waging mind-share battles with Apple (AAPL, news).

You of the factors that companies including Nestlé (NSRGY, news) are investing and so much cash to set up research, development and marketing centers in developing economies is a belief, well-founded I think, that the rise of a developing-economy middle class requires over simply transporting middle-class products from the developed economies to the developing world with, perhaps, many tinkering at price points.

Following this perspective just a bit down the road raises the possibility that there are over two middle classes -- developed as well as developing-economy models. There's sufficient difference in income levels between the BRICS economies (Brazil, Russia, India, China as well as South Africa) and the next wave of developing economies that look willing for international takeoff (nations such as Vietnam and Indonesia) to create openings for an additional group of companies catering to the aspirations as well as cost points of these new middle-class consumers.


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