Uncommon Sense: Going Premium in Southeast Asia

Uncommon Sense: Going Premium in Southeast Asia

In 1990, 57% of Southeast Asia was in poverty – defined by the World Bank as earning under $1.25 a day. The difference between the “haves” and the “have nots” was extreme. And access to daily necessities one could afford was not to be taken for granted.

Today, as the Southeast Asian middle class continues to grow, so much has changed that a new niche at the opposite end of the affordability spectrum has emerged to fan the aspirations of consumers. Premiumization aims at the willingness of consumers to trade up for some perceived additional value, be it emotional or functional.

In a region where the quality of life is changing so quickly for so many, trading up taps directly into the psyche of consumers who want to enjoy – and to display – their new prosperity. Premiumization – which we define as pricing products at least 20% more expensively than the average price for the category (but which includes increases of up to 1100%) – has been a striking success among fast-moving consumer goods (FMCG) brands in Asia.

It’s a tantalizing prospect for manufacturers looking for the bottom-line growth that has eluded them lately. It’s true that mainstream brands continue to dominate the market in Southeast Asia. But it is this premium segment that is growing twice as fast as any other price tier.

In which premium tiers are brands operating today, then, and where is the greatest growth opportunity? We have identified four premiumization tiers: low (goods priced at 1.2-1.5 times the category average price), medium (1.5-1.8), high (1.8-3) and affordable luxury (3+). Of these, the booming categories are low and high, each growing at about 20% over the last three years. We believe this is because of a steady widening in income levels now occurring in the region as the “haves” and “have nots” of the past change into the affluent class, which feeds the growth at the premium end of the spectrum, and the emerging middle-class, which is purchasing entry-level premium offerings.

How far can premiumization take you?

The premium trend is certainly a way for manufacturers to increase margins. Not surprisingly, however, growth in most countries in Southeast Asia is still predominantly driven by affordable mainstream brands. Manufacturers must not place too many eggs in the premiumization basket, but must diversify more broadly across price tiers to balance their risk and return among a portfolio of brands.

That said, in two markets at least — Singapore and China – the premium segment is driving more than half of each country’s growth in the 16 categories we analyzed. Important developing Southeast Asian markets such as Indonesia and Thailand have been slower to embrace premiumization, but appear to be viable candidates to follow Singapore and China into strong premium growth.  Indeed, with Singapore and China often viewed by many as early indicators for the rest of Asia, we are quite likely to see an accelerating adoption of premiumization in the rest of Southeast Asia generally, despite the recent slowdown.

In the past, it was multinationals that enjoyed the lion’s share of the premium segment. But local players have caught up, accounting for more than half of growth by value in the premium segment lately.

Consumers’ increasing disposable income is just one reason they are indulging themselves in premium products previously out of reach.  We see two other drivers of the premiumization phenomenon in Southeast Asia today.

First, manufacturers are consciously innovating to exploit this trend: in the last 12 months, premium products accounted for almost 20% of all new product development in Southeast Asia, and as much as 40% in certain categories. New brands bring excitement and increased marketing spend (both above and below the line), which helps entice consumers into this segment of the market. Manufacturers should bear in mind, however, that it is vital for them to deliver convincingly on the “promise of premium.” Consumers will not come back if they do not feel that the price premium is truly justified. The excitement of a new and glitzy looking product supported by heavy advertising is necessary but the core value must be there, too.

Second, there has been an underlying shift in the pricing strategy of the premium tier, making it a more affordable proposition to consumers today. A new caution among manufacturers of premium brands is making the segment more affordable than in the past. In non-premium tiers, new products tend to launch at price parity. In the premium segment, innovations are launching at a 5% cheaper price point than existing products. Is this a deliberate strategy from manufacturers to entice consumers into a segment that might be a stretch for many? Or are manufacturers becoming more risk-averse when launching into the premium tier and are more concerned that they succeed, even if it is at a lower margin?

It’s too soon to be sure, but in an innovation environment in which 85% of new products fail each year, a conservative approach is understandable. In the Philippines, when one multinational launched a fortified beverage product offering substantial health benefits over the existing competition, the launch price was a conservative price premium of only 20% higher than category average price, when it could be argued its value and uniqueness in market might have justified a “high” position.

What all this means is that consumers are actually in the driver’s seat: As many manufacturers price conservatively in many premium segments – we found that, in 10 of 16 categories, new brands were 4% cheaper than existing brands – consumers’ increased purchasing power gives them a wide variety of choices.

Of course, the result of manufacturers’ more cautious pricing strategies is that premiumization in many categories is now not that far out of reach of the general mass of shoppers. As noted, consumers’ exposure to premium in Southeast Asia is predominantly at the lower end. “Everyday premium” or “masstige” (price index of 1.2-1.5) has the highest share of premium sales for the majority of categories. But if a manufacturer prices a new premium product at 5% below the lower end of the masstige index, it will be only 14% more expensive than the category average. And if premium prices continue to come down while mainstream prices creep up over time, the difference will begin to blur. We see this most clearly in functional categories such as beverages, where premium brands still hold a very low share in overall sales.

But it’s not just the lower-tier of premium where we see this phenomenon. More conservative pricing in the more emotive higher-end categories such as personal care – where more than 50% of facial moisturiser and toothpaste sales fall into the higher end of premium, for instance – is making even higher-end premium brands a bit more affordable.

There is no magic rate card when it comes to setting price in the premium field, as evidenced by what is now a considerable range of price points. What we do know is that consumers are willing to pay more, but they are also demanding more. Premium products must differentiate themselves from the competitive set to induce trial – both in terms of the product itself and the advertising and packaging that promote it. Then they must deliver on the functional and emotional benefits they promise.

As Southeast Asia consumers urbanize at high speed, the premium segment represents an exponential growth opportunity. Local manufacturers are seizing the growth opportunity as this phenomenon emerges even outside the largest urban centres. If they are not to get locked into only the biggest cities, multinationals and regional players must ensure they are expanding into lower-tier cities, designing portfolios that stand out and that capture the hearts and minds of consumers. Otherwise, they will be beaten at what was once their own game.

For additional insights, check out this cool infographic about premiumization in Southeast Asia.