The big difference between developed and emerging world rich

Written by Andrew Henderson

Dateline: Kuala Lumpur, Malaysia

$859.

That was the difference in price I noted between a Salvatore Ferragamo bag here in Kuala Lumpur versus the same bag in the chain’s United States boutiques.

The local price of 7,700 Malaysian ringgit – roughly US$2,200 – versus $1,350 in The Land of the Free means that Malaysian consumers are paying a healthy surcharge for buying products in Malaysia.

The same is true in many other emerging markets, forming part of the reasoning behind the famous migration of Chinese consumers to Italy to buy luxury products. (The other reason in China, of course, being fear of counterfeits.)

While the United States is a horrible place to live if you want to minimize taxes or keep your offshore bank accounts a secret, it is not a bad place to shop for cheap deals.

While being an entrepreneur or retailer in the United States is increasingly complicated thanks to pending European-style sales tax regulations, it’s good to be a shopper there.

That’s how socialism works: bad for business, good for the little guy. That is, if you’re one of the “little guys” who actually has money to spend this holiday season.

Despite the significantly lower US price points on luxury goods from stores like Prada, Louis Vuitton, and Ferragamo, these luxury chains are experiencing the majority of their growth in emerging markets.

Heck, they’re even experiencing better growth in recessionary markets like Russia, where the ruble is down some 60% this year.

Stores like Prada have been doing well the last few years, opening stores at a brisk pace. What was once a rather exclusive brand is now plastered at every mall you can imagine.

Here in Kuala Lumpur, there are literally three Prada stores within a five or six minute walk of each other. Ditto for tony areas of Hong Kong, Singapore, and some Middle Eastern cities.

In fact, many luxury brands now have more stores in Asia than in the entire United States and Canada many times over. For one brand, it’s a factor of five to one.

As we frequently discuss here, wealthy Chinese, Russians, and Arabs are snatching up luxury goods no matter what the price. They’re happy to pay a healthy premium over western countries because the premium just doesn’t matter that much to them.

And that spells out the very important difference between the “new rich” of the west, and the new rich of the emerging world.

It is, as one Swiss banker calls it, “Income statement” buyers versus “Balance sheet” buyers.

These days, countries like the United States are run on debt. The federal government in the Land of the Free just passed the $18 trillion debt mark, with the hush-hush total unfunded liabilities hovering around $100 trillion.

The place might as well have a big “for sale” sign hanging on it.

It’s not surprising that western economies are so far in debt because their citizens are so far in debt, too.

The average US household has $7,100 in credit card debt. That’s nearly 15% of the median household income of $51,939. When you consider that household income levels are up a minuscule 3% collectively in the last eight years while debt levels have risen, those figures are even worse.

And while the average household has some $7,100 in debt, the average household that carries debt – ie: the people weighting the average higher – have more than $15,000 in unpaid credit card balances. The new middle-age consumers of Generation X have a higher average, suggesting the trend will only get worse as more financially conscious older Americans get removed from the average.

Heck, even the average Millenial has more than $8,800 in debt, which is again concerning considering how many recent college graduates are still living at home on their parents’ couch while the job market for the young remains weak.

The issue in western countries like the United States, Canada, the UK, and Spain – where debt burdens remain high and the job market isn’t as robust as politicians wish to claim – is that further spending drives further debt.

The United States, as the Paris Hilton of countries, has no idea what “being rich” means, but they sure know they are entitled to it. They have lived an entire life having politicians tell them they are “the best” and “the wealthiest country on earth”, even if that’s far from true.

Because western countries have a larger middle class than some emerging markets where income distribution has yet to play out, there are fewer really rich people who can truly afford to lavish themselves with whatever luxury goods they want.

Boutiques like Prada know that western consumers are the “Income Statement” consumers; they earn money at a job and spend either what little money is left over, or go into debt, to buy a $1,500 bag.

Few western consumers feel poor in the same way as a poor Cambodian or Iranian would, while fewer consumers feel truly wealthy.

Consider that 17% of those households earning $50,000 or less per year have an “unemployment event” in their home. Or that real incomes of some of the biggest spending demographic groups have literally been cut in half since the recession. Not good.

On the other hand, emerging world consumers are “Balance Sheet” consumers. This doesn’t mean they are all fabulously rich, but it does mean they know how to save.

In China, getting a mortgage requires a 50% down payment, causing many young men to work around the clock to save up in order to be quality marriage candidates with their own apartment.

While there certainly are a glut of consumer loan establishments cropping up in this part of the world to finance things like motorbikes, debt is not part of the culture.

You have poor people who know they are poor, and rich people that know they are rich.

The fact that you may or may not like this concept does not mean it shouldn’t be recognized when it comes to investing and studying global trends.

No matter how low the ruble goes, the uber-rich of Russia will still be able to buy Prada bags for their mistresses, drink fancy French wines, and visit Budva in the summer.

All for the same reason that the US dollar could collapse and Warren Buffett wouldn’t be homeless.

I have always advocated selling to either really poor or really rich consumers when doing business in the west, and selling only to really rich consumers if in emerging markets.

Running a strategic business that targets hundreds of millions of middle class consumers is a tedious task I’d rather leave to Proctor and Gamble and McDonald’s.

The problem, however, is that while there are plenty of easily reachable upper class emerging consumers, the truly rich consumers in the west are harder to find.

Perhaps that’s because so many of the “new rich” moving into places like South Beach and Beverly Hills ARE emerging market consumers buying winter homes near Rodeo Drive.

Case in point: a high-end asset manager recently told me that while the $2,000-2,500 price tag for our Passport to Freedom event in Cancun was “a bargain” for the information being presented, that she worried some consumers would find it hard to fit in alongside holiday gifts.

“Income statement” consumers can’t balance too many expenses at the moment, whereas “Balance sheet” consumers are more forward looking.

That’s why I’ve shared that our business in the Middle East is booming much faster than business in the United States. When you sell to people who have to wait until their next paycheck arrives, you’ve got a slower business.

And on a macroeconomic scale, a country built on debt at both the government and the personal level is merely a bubble waiting to pop, wreaking havoc on those without and without debt.

Andrew Henderson
Last updated: Dec 29, 2019 at 12:25AM

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