Mexico Is Ready for a Takeoff in Consumer Spending, Powered by Rapid Growth in Middle-Income Households

Mexico is poised for a long-awaited takeoff in consumer spending, powered by millions of households entering the middle class in this decade and high optimism about the future. Consumption by middle-income households is projected to increase by an average of around 7 percent annually through 2018—and could rise faster if a set of recent economic reforms succeeds in boosting growth. These are among the findings in a new report released today by The Boston Consulting Group (BCG).

The report, titled Is It Mexico’s Moment? Preparing for the Inevitable Consumer Boom, forecasts that the number of middle-income Mexican households, defined as those earning between $1,200 and $9,000 a month, will increase by around 1.6 million by 2018, even if economic growth remains modest. These middle-income households are projected to account for around 90 percent of incremental demand in Mexico. Some of the biggest increases in spending likely will come in product categories perceived as improving quality of life, such as education, food, and private health care.

“The socioeconomic conditions are aligning for Mexico’s takeoff in consumer spending,” said Joel Muñiz, a BCG partner and coauthor of the report. “If the economy can deliver, it will truly be Mexico’s moment.”

The report notes that average Mexican consumers are unlikely to go on a spending spree soon. Indeed, interviews with more than 3,000 households across the country of all income levels by BCG’s Center for Consumer and Customer Insight (CCCI) found that Mexican households remain surprisingly budget conscious. Although 77 percent of consumers surveyed said they are optimistic about the future, only 17 percent reported that they plan to increase overall spending in the year ahead. The report attributes this caution to recent tax increases and the fact that consumers are waiting to see concrete evidence that recently enacted reforms to Mexico’s energy, banking, and education sectors will translate into new jobs and sustained economic growth.

The rapid expansion of Mexico’s middle class, however, will be enough to push consumer spending to higher levels, even if economic growth remains modest. A powerful combination of demographic trends and a high degree of social mobility will work in Mexico’s favor. Due to its young and growing population, the number of working-age Mexicans is projected to increase by 19 million over the next two decades. What’s more, around two-thirds of Mexicans currently living in poverty—some 3.9 million households—have the potential to make the leap into the middle class over that period.

To understand which types of products are likely to see the biggest revenue gains, the authors analyzed historical consumption patterns in Mexico to see how rising incomes have influenced households’ purchasing behavior in a wide range of product categories. And to understand Mexican consumers’ current priorities, respondents were asked about their spending intentions for the year ahead with respect to the same product categories. By combining these analyses of past consumption patterns and future spending intentions, the study grouped product categories into four clusters that are characterized by their growth potential in Mexico over the near to medium term:

• Golden future product categories are projected to enjoy the strongest growth, because they will benefit both from strong historical patterns of surging spending as Mexican household incomes rise and a clear expression of intent by consumers to trade up to higher-value products. This cluster includes private medical services and some food items that stress health benefits.
  
• Aspirational growth product categories will benefit from the desire to trade up but not from demographic trends. Education and pharmaceuticals are examples of categories that fall in this cluster, and they should enjoy strong growth.

• No-frills growth product categories will benefit from demographic trends but relatively less from consumers’ intentions to trade up. This segment includes such diverse product categories as travel, Internet and cell phone services, and alcoholic beverages.

• Self-propelled growth product categories will not benefit much from either demographic changes or trading up. Products in this cluster generally meet basic needs that already have been met in middle-income Mexican households. Washing machines are an example of a product in this cluster.