• Tassos Stassopoulos

Emerging market consumers are tearing up the inflation playbook


When it comes to adjusting their household spending for rising inflation, emerging markets consumers are tearing up the traditional playbook. COVID-19 has fundamentally changed consumers’ mindsets and long-term priorities meaning companies and investors need to re-think their assumptions about which products or services are likely to exhibit ‘protective moats’ during times of tighter consumer spending.


Many emerging markets consumers lack a savings cushion, so they need to adjust household spending quickly when inflation starts to rise. However, these consumers are also more used to dealing with inflation shocks resulting from a lost harvest, livestock disease or a sudden jump in fuel prices. Such events tend to have a direct impact on household spending and can’t be readily absorbed without lifestyle changes.


It is usually assumed that rising inflation results in people dialling back discretionary spending, buying from discounters and traditional markets, or substituting expensive premium brand products. This assumption led to expectations that some strong consumer staples, for example a quality brand laundry detergent, would be better placed to weather the storm. During our recent immersions trip to Brazil - which saw inflation peak at 12% in April 2022 - we found that these assumptions didn’t always hold.


COVID changed the consumer mindset

Our ethnographic research highlighted a clear shift in the emerging markets consumer mindset. Before COVID, many had assumed that, as long as they worked hard, they were on a one-way path of continuously rising income and better health while letting them enjoy leisure time in cinemas and restaurants or travelling. The pandemic shattered this outlook when consumers suddenly faced a new reality, without a safety net which many in the developed world could rely on. Consequently, these consumers needed to react quickly to find solutions that allowed them to determine their own destiny.


This ‘self-determination’ mindset also guides them on how to respond to rising inflation. 39-year-old Cristina and her family are a typical example of lower middle-class households in Brazil. Cristina lives in São Paulo with her husband, four children and a dog. She helps her husband run his own car valet business, which gives them what she sees as a comfortable lifestyle compared to the one she had before migrating to the city from the rural state of Mato Grosso. As living costs increased, they turned to price comparison websites, coupons and discounts to make the family’s money go further, looking to buy the same products at lower prices. As inflation continued to rise, they also substituted premium brands for private label products, and started shopping at cash & carry supermarkets or farmers’ markets, even grinding meat at home rather than buying processed foods.


Health becomes a major focus

“COVID accelerated the move towards this health-awareness phase, and moreover, this mindset continues to hold sway despite increasing pressures on household spending.”

As emerging markets consumers join the middle classes, they typically start indulging themselves and their families, spending money on unhealthy items like beer and chocolate, before becoming more health-aware as incomes increase further. Interestingly, we found that COVID accelerated the move towards this health-awareness phase, and moreover, this mindset continues to hold sway despite increasing pressures on household spending.


In 2021, Brazilians ate just over 32 kg of beef per capita. While this is still one of the world’s highest levels of per capita beef consumption, it is the lowest level in Brazil since 1993. The rising cost of beef was one driver, but Cristina told us that the focus on eating healthy was equally or even more important in her decision-making, despite enjoying beef. Rather than buying bargain beef to save money, the family switched to healthier and cheaper foods such as poultry and eggs. They also bought an air fryer as a low-fat alternative and spend a bit more on a brand of butter that is seen as healthier. Cristina is clear that these substitutions are about her family’s health and should not be compromised.


Interestingly this focus on health also extends to the family dog, Picky. Cristina is adamant that cutting corners on the quality of pet food will only lead to health problems and vet bills further down the line, so Picky continues to enjoy his premium dog food.


No inflation lockdowns


Emerging market consumers feel they have worked hard over the years to get to where they are and place a lot of value on keeping the luxuries that they have earned. Before COVID they were used to taking their families to the mall, cinema or restaurants and indulged in some leisure travel. In our view, the importance of these events, coupled with pent-up post-COVID demand, makes it likely consumers will cut back elsewhere to prioritising such experiences. Put differently, they don’t want inflation to put them back into lockdown. The demand and urge to keep their symbols of progress makes some discretionary categories more resilient than certain staples.


“The winners in the inflation substitution game are likely to be products and services that consumers see as essential to leading a healthy and fulfilled life and are therefore the last items they are willing to cut.”

Traditionally we had assumed that discretionary goods and services, not considered essential by consumers, would suffer most when money gets tight. Viewing the current economic cycle through an emerging market consumer lens gives us a different perspective. The winners in the inflation substitution game are likely to be products and services that consumers see as essential to leading a healthy and fulfilled life and are therefore the last items they are willing to cut. Looking through their eyes, a night with the family at the cinema is more of an essential, ’staple’ than a premium-brand laundry detergent.


The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.