Consumers say they want experiences over goods. As always, they are looking to get the most value for their dollar. Even when it comes to sustainably produced products and services, the price must be right. On this episode of The McKinsey Podcast, McKinsey senior partner Sajal Kohli speaks with editorial director Roberta Fusaro and outlines recent research on today’s consumer: who they are, what they’re buying, and where they purchase—plus the influence of the East.
In our second segment, from our CEO Insights series, McKinsey senior partner Joydeep Sengupta explains how the best CEOs use storytelling as a way to build energy, excitement, and inclusion in their organizations.
This transcript has been edited for clarity and length.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.
The optimistic consumer
Roberta Fusaro: This year’s State of the Consumer report reveals some compelling data points on who is spending, what they’re buying, and where they’re buying.1 Changing demographics are clearly affecting the state of consumer spending. Who are the spenders of the future?
Sajal Kohli: We are seeing large-scale shifts in the global consumer landscape. Consumers are continuing to defy expectations and behaving in atypical ways. It’s keeping consumer goods companies, retailers, and consumer-facing businesses on their toes.
Who is the future consumer? The first exciting group is the young people in emerging markets. By 2030, about 75 percent of consumers in emerging markets will be between the ages of 15 and 34. That’s a pretty startling statistic if you’re thinking about where all the discretionary spend will be. It’s Asia and the Middle East that will be particularly important in the 18 to 24 age group for consumer-facing companies. These consumers are exhibiting all kinds of really interesting behaviors.
Roberta Fusaro: What kinds of behaviors?
Sajal Kohli: They’re showing a high willingness to spend. The younger consumer is about two times more likely to trade up to more premium products across brands and retailers versus their peers in different parts of the world. This is because they’re three times more optimistic about the economy versus their Western peers.
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Roberta Fusaro: I call them idealistic because, you know, youth is wasted on the young, but please continue regarding the other set of demographics.
Sajal Kohli: I think the second one is the other bookend of the spectrum. The folks I call “retired and ready to spend.” With longer life expectancy, declining birth rates—especially in advanced, more developed economies—all these economies are going to deal with a global population bulge of people older than 65, and it’s growing really fast. The data and consumer behavior and preferences of this group are often overlooked or misunderstood.
Just to give you a couple of examples, the higher-income baby boomer, or what I call the “silent generation” of consumers, folks who have household income of over $100,000, are a sizable cohort in the US—about 30 percent of the US economy in terms of purchasing power and spending power. This group is focused on spending disproportionately in experiential categories versus just consumption of goods.
Think about travel. Now, you might say this is a manifestation or an expression of the affluent in more developed markets, but it’s true in emerging markets as well. So wealthy aging consumers in emerging markets are also optimistic. To give you a stark contrast, 40 percent-plus of wealthy aging consumers in emerging markets said they’re expecting to spend much more on entertainment compared with only 7 percent of consumers in Europe and 11 percent in the US.
Roberta Fusaro: Interesting.
Sajal Kohli: The third cohort, to take my metaphor of the bookends, right down the middle is what I would call the “squeezed but splurging” middle class. The cost of living is up everywhere, across economies, both advanced and emerging. It doesn’t matter which inflation index or which sort of economy index metric you look at. And conventional wisdom would suggest that these folks would really clamp down on discretionary spending—things that are not necessities, amenities, or staples.
But instead, we’re seeing the middle-income consumer, in the US and Europe, for example, plan to splurge on discretionary items at a rate that’s comparable to that of high-income consumers. This group is looking at travel. They’re looking at dining out. Again, experiential. They’re also being more thoughtful and cautious but also leaning into spending on things that enhance their quality of life.
Roberta Fusaro: Across all three of these cohorts of consumers, you mentioned the word “optimism,” despite talk of economic downturn and inflation. Are there lessons here that we can draw about consumer confidence more generally?
Sajal Kohli: It obviously depends on the consumer, cohort, stage of life, preferences, and geography. But in general, I would say that consumers are more discerning. Value for money is still going to be the centerpiece of their spending habits and decisions that they make with regard to regular day-to-day amenities: groceries, staples, et cetera. When it comes to enhancing their quality of life and indulging in more experiences or discretionary spend categories—think about beauty or personal care—you’re going to see a much higher intent to spend versus historical levels.
What are consumers buying?
Roberta Fusaro: So what is the typical consumer buying? I’ve heard a lot about brand loyalty and the impact of the pandemic. Is brand loyalty still a thing? Are more people brand hopping?
Sajal Kohli: To answer your question more overarchingly, we have to ground ourselves in the reality that, in general, compared with previous times, we are seeing weakened brand loyalty. Consumers are putting affordability over sustainability. There’s a heightened interest in wellness products and services. When you combine these three forces, you see a different consumer reflection and expression in what their preferences and priorities are going to be.
So let’s talk about brand exploration for a second. The pandemic had a material and seismic shift where, when consumers couldn’t really find what they were looking for because of availability, et cetera, we saw some interesting switching behavior throughout the pandemic and postpandemic.
A lot of these behaviors stuck: switching brands, switching channels, exploring alternatives. I call it “promiscuity.” It might not be a great word, but consumers are exploring. For example, in more developed markets—think about the Western Hemisphere—over a third of the consumers have tried different brands, and approximately 40 percent of consumers have switched retailers or added new retailers to their sort of weekly, monthly rhythm. That is pretty unprecedented in terms of consumer choices. The other important thing is that the weakening of brand loyalty is not limited to one age group.
In the past, we would say the older, aging consumer was loyal to their preferred brands. Now, we’re seeing a pretty high propensity to try new things in this group. An important outcome of this weakened brand loyalty and the consumers’ brand exploration is increased penetration of private brands. About 35 percent of consumers still plan to purchase private label products more frequently. And, quite startlingly, 60 percent of consumers think that private brands are of equal or better quality than branded products.
Historically, we saw that in Europe quite a lot. We can see clear evidence of that in the US. We are seeing it in Latin America. I was speaking to a retailer in Brazil about a week ago, and they have the same issue. They are seeing some double-digit penetration in private label across multiple formats. It’s been a huge area of growth for them. You see this in Southeast Asia if you look at the Vietnam–Cambodia corridor. Singapore, which is a pretty developed Asian market and high income from a per capita GDP perspective, is also seeing some incredible run-up in private label penetration.
Roberta Fusaro: And this is happening across all categories? Or are we seeing winners emerge in specific categories?
Sajal Kohli: It’s across the board. If you look at apparel, which is a discretionary spending category, you’re seeing a lot of penetration in private label apparel when you look at department stores around the world or specialty, mall-based retailers. You’re definitely seeing it in the food category. If you go to a grocery aisle, you’ll see retailers have gotten quite sophisticated in terms of a three-tier private label strategy of good, better, best. We are seeing it in beauty products. So it’s pretty pervasive right now.
Does sustainability still matter to consumers?
Roberta Fusaro: According to the report, sustainability is also playing a central role in consumer purchasing decisions. Can you talk a little bit about what’s going on there and what we saw in the research?
Sajal Kohli: It’s a mixed bag right now. If you go back three or four years, even prepandemic, every time you did research and looked at any sort of consumer preference or behavior readout, you’d see sustainability in the top six or seven of criteria the consumer really cared about.
I think when you look at the reality of what consumers are doing, value for money is still far more important than the values of sustainability and being environmentally friendly. And, to point at a stark example, in the past, the younger generations would always vote with their feet, which is, “I really care about the environment. I care about sustainability.” When you look at the data now, they are the first group to walk away from that claim when it comes to paying a premium for sustainability and environment-friendly products or services.
Now, this changes quite dramatically as you look across geographies. I think Europe is still setting the pace. When I talk to retailers and consumer goods companies in Europe, this is a top-three item on a CEO’s agenda. When you switch to the US or you look at Latin America and large parts of Asia, this is not at the top of their priority lists. They’re largely reacting to the consumers’ choices and behaviors. So I still think this is a work in progress. There is no definitive trend that we are seeing. It’s a mosaic of mixed experiences around the world.
The wellness trend
Roberta Fusaro: That makes sense. Another spending trend among global consumers is in the area of wellness. We’ve talked about wellness and the trends in this area on this podcast before. What is motivating this groundswell of interest in the wellness space, particularly among women?
Sajal Kohli: We are seeing this across the globe. This is a tale of two cities. We talked about sustainability’s mixed record, but when you look at wellness, it’s clear this area is a winner. It’s initially being buoyed by the boomer market, the aging population, just given expectancy of life. People are retiring much later. And McKinsey just published its Future of Wellness survey, and the global wellness market is about $1.8 trillion and growing 5 to 10 percent annually. This, to me, is massively understated.
You might say this wellness trend is a luxury of the rich, right? When you have enough disposable income—in the Western world or the more developed world—you can talk about wellness. But we are seeing that 50 percent of the world’s population is going to be overweight or obese by 2035.
We’re seeing this wellness trend catch fire in emerging markets, right? Just to give you an example, India, China, and the Middle East have indicated that there’s two times more interest in increasing spending on fitness and wellness services versus advanced countries. And about 60 percent of the boomers in China plan to increase their spend on fitness. And wellness is not just fitness. It has many categories: sleep, nutrition, and experiences. So we have to challenge the paradigms of how we define wellness, and think about it as a broader ecosystem of consumer spending.
Roberta Fusaro: Are there any examples of cool, innovative wellness products that you’ve heard about or that clients are talking about?
Sajal Kohli: We’ve seen a surge in vitamin and supplement consumption. People are looking at the home category to enhance quality of sleep. We are seeing this across large-cap, leading CPG [consumer packaged goods] and retail companies. And we are seeing a ton of metabolic rate around this in the start-up world as well. So it’s across the board.
Roberta Fusaro: I could imagine that a lot of older consumers would be thinking about their health as they get older, and things slowing down or whatever. But the fact is, this goes across the board and there are a lot of younger consumers who also care about wellness products and fitness.
Sajal Kohli: Absolutely. At the epicenter of this wellness wave is actually wellness for women. In our recent report on women’s health, our estimation is that closing the women’s health gap could be worth a trillion-dollar opportunity annually by 2040.2
So it’s an underserved, underaddressed area. Once again, it’s pervasive across all parts of the world. I’ll give you an example: almost 50 percent of women in emerging markets demonstrate high intent to splurge on beauty and personal care products compared with women in more advanced markets. And the younger women cohort is particularly interested in wellness. If we look at Gen Z in both emerging and advanced markets, there’s a huge propensity to spend and consume these services going forward. So I think there’s a real call to action for consumer product companies that play in that space.
Urban hot spots and social commerce
Roberta Fusaro: Now that we have a sense of who is buying what, let’s talk about where consumer spending is occurring. What did the State of the Consumer report suggest about site-specific purchasing?
Sajal Kohli: We know both brick-and-mortar and e-commerce or omnichannel avenues are still going to be quite prolific. But there are two avenues I want to highlight that are really standing out, and I think these could be the opportunities of the future. The first one is new urban hot spots. If you look at the US, there’s a lot of growth that’s coming in the top 13 or 14 cities in terms of consumption growth. Take the Pacific Northwest and the Northeast.
But there are a whole bunch of what I would call secondary cities with populations of 50,000 to 500,000 that are also really emerging as the next growth frontier. If you contrast the US with China over the past couple of decades, a big chunk of the growth was in the big cities, the tier-one cities. We are now seeing equivalent or higher growth rates in tier-two and tier-three cities: Kuala Lumpur, New Delhi, Mumbai, and São Paulo. It’s the secondary cities where there’s a huge opportunity. They’re not rural at all—these are actual, real urban centers. In 2035, 43 percent of the Indian population is going to live in urban areas.
It’s an important pivot and a seminal and secular trend that creates lots of opportunities to serve these consumers. I think we are at a tipping point where a lot of trends in consumer behavior from the East are going to travel to the West, and social commerce is a perfect example. In India and China combined, about 40 to 45 percent of the consumers are actively engaged in social commerce. I think it’s just a matter of time before it takes root in the Western world.
Roberta Fusaro: Can you share an example or two of companies that are finding success with social commerce?
Sajal Kohli: There’s an example of a retailer in Brazil that’s created interesting social-commerce avenues where some of its most loyal customers will get a bunch of friends together, buy together as a group, and share a set of products and services. This has given the retailer incredible secondary-city and rural and urban penetration. In India, there’s a number of folks engaging in online marketplaces and social-commerce platforms for things that are high search and involvement categories. This is an untapped territory of opportunity, especially in the developed world, if I think about Europe and the US.
Roberta Fusaro: Are there any early examples in the West of this sort of social commerce?
Sajal Kohli: If you go back to the Home Shopping Network and linear TV, those were the beginnings of it. But it has not yet expanded into multiple alternate formats and platforms.
Entering the world of microtargeting
Roberta Fusaro: Interesting. We’ll be looking for more on that. What can and should listeners and readers of the report do with all this great data? What are some of the lessons for companies that are looking to deepen their connections with consumers?
Sajal Kohli: Folks reading the report, given their context, are going to draw different insights. But from my perspective, there might be three or four that are worth confronting and debating within management teams.
The first one is, it’s patently obvious to us, from the research and the work we’ve been doing, that we’re in a world of microtargeting and hyperpersonalization. The era of the tyranny of averages is over. This is actually all about granularity and hyperpersonalization. To pull that off in an organization, it’s about investing in data and advanced capabilities to really understand consumers at an individual, small, or microsegment level.
Roberta Fusaro: Are there any best practices in microtargeting that you’re seeing?
Sajal Kohli: We have an approach that we use with a lot of our clients called “smart reach,” an AI technique. There’s a lot of promise in AI and generative AI. It’s not completely mature yet, but there’s real room for experimentation.
I think retailers and consumer products companies should not forget they’ve had this long-standing relationship with their consumers, and the consumers have told these companies a lot about themselves. The question is whether you can harness that to actually tailor your offerings and engage with these consumers in a different way.
It’s also important for businesses, retailers, CPG companies, and other consumer-facing companies to step back and say, “If I look at my business, and I approach it from, what am I doing in my core business? What else can I do in anything adjacent to my business? Can I birth new businesses?” As they think about those moves, they should have wellness up front and center and consider how they could play with the wellness market.
The third one is social meets digital, like when we were talking about social commerce. This is a good place to start investing. And a big part of this will actually mean thinking about inorganic moves quite differently. I don’t mean inorganic just with these stereotypical acquisitions but partnerships you wouldn’t have envisioned before, where the combined benefits of your business and a partner who brings something incremental could open up a fantastic opportunity for both companies to serve the customer better.
Just imagine a financial-services company that has fantastic insights into consumers because of credit card data. Partnering with a retailer as a second partner who has third-party data, then partnering as a three-way partnership with a consumer products company that has first-party data. You add these three up and you get a 360-degree view of the consumer in terms of how you think about social and digital, just to bring an example to life.
Roberta Fusaro: And I can imagine lots of different applications or ecosystems that develop across different sorts of consumer organizations.
Sajal Kohli: There’s also premiumization. While there are clear signals from the consumer that value for money is important, for enhanced experiences and higher-quality products from trusted brands, they’re willing to pay a premium, which basically means that you can’t have a one-size-fits-all strategy. Retailers and consumer product companies have to really open up the aperture and think about different pricing, product portfolio, and category portfolio strategies.
And the reason is having premiumization at the heart of your strategic moves. Apart from it being a much better financial picture for the business, it also starts to address consumer needs in a much more sophisticated way versus just going down the value-for-money route. Now this will change by category, so you have to really think about the context of your business in the different categories.
Meeting consumers where they are
Roberta Fusaro: What surprised you most about the research? Or what are some of the trends you saw that maybe you’re most passionate about or looking forward to exploring more?
Sajal Kohli: The consumer defying our expectations was actually an eye-opening set of trends. It puts a heavy premium on depth of capabilities and sophistication of how you go to market. It needs to be much more evolved, and what’s worked in the past will definitely not work in the future.
And there is some real opportunity of cross-fertilization. And I mean that on two fronts. One is learning from markets that you’re not in today. And the second is taking some of your successful recipes and porting them over into markets, categories, consumer cohorts where they’ll actually work. So I think this is the whole idea of not being a prisoner of your context.
Roberta Fusaro: I love that. One of the notes that I have jotted down is this idea of innovative ideas and things around social commerce, for instance, coming from the East.
Sajal Kohli: It’s the East–West corridor, and it’s a North–South corridor. I’ll give you an interesting example. I was leading a forum with some CEOs in Latin America. And they basically said, “We live with volatility every day. We think volatility is a friend because it creates opportunities, whether it’s macroeconomic indices or all kinds of issues that have created the volatility.” That is quite instructive for the more developed, more stable economies to also learn from that.
Roberta Fusaro: I’m going to pull a Barbara Walters–type question and ask you to fill in the sentence. So, a one-word adjective to this following sentence: “The state of the consumer is . . .”?
Sajal Kohli: Can I take the liberty of just twisting it a bit?
Roberta Fusaro: Sure.
Sajal Kohli: Maybe I’ll say the state of mind of the consumer is optimistic but unequivocally more discerning.
Roberta Fusaro: Thank you so much, Sajal. This has been a great conversation. Thanks for joining today.
Sajal Kohli: Thank you, Roberta. I really appreciate it. Thanks for your time.
Your company’s best storytellers are your employees
Laurel Moglen: What do the best CEOs do to make sure their team understands the company’s story really well?
Joydeep Sengupta: What I’ve observed is good leadership likes to rally the organization around one big idea or audacious goal. And once you have that idea in place, I think the question is around, how do you translate that into a simple story? What are the values? What is the strategy? And importantly, what are you not going to do? And lastly, when you do something like this, you do it together, right? You don’t do it on your own. Many organizations who have created cohesion successfully, take the top team, sometimes even the entire organization together, to try and build this story.
Laurel Moglen: How do CEOs prepare their employees to share the story both internally and externally?
Joydeep Sengupta: Storytelling is really an art. CEOs pay a lot of attention to how they tell the story. People use different approaches. I remember when State Bank of India was going through a massive transformation, and the CEO used a movie to communicate the story. It was called The Legend of Bagger Vance, in which a golfer had lost his swing and was essentially trying to gain it back, and he used the movie as a metaphor for the organization and what they would have to do. And that movie went viral among the employees because he used that single movie over two-day workshops, communicating to employees, et cetera.
The other thing I found is that many CEOs use storytelling as a way to create a collaborative environment and build inclusiveness in the organization. Storytelling is such an important aspect of how you build energy and excitement. I think most CEOs think about this as a real science in terms of how they design and plan for it. And I would use what I would call the “four-five-six” of storytelling.
High-performing organizations are four times more likely to dedicate resources to communication. Five times more successful if you get your employees to participate in that process of providing input, and six times more successful if you’re really able to cascade this all the way through the employees, not by yourself. Those companies where lots of employees are engaged in talking about their strategy and their story, both internally and externally.
Laurel Moglen: How important is it for CEOs to role model the behavior that they are asking their employees to emulate?
Joydeep Sengupta: It’s really important. Our research shows that 86 percent of CEOs believe they’re acting as role models for such inclusive behavior. But we found only 50 percent of their direct reports say they’re watching the CEO do that, so there is a real disconnect. And I think the disconnect stems largely from self-awareness, and what it takes to give up, quote, unquote, “your power.” For example, CEOs often invest a lot of time in developing the strategy, the approach, the story, and they want to be in the limelight telling the story.
But the fact is the CEO may have incorporated inputs from the rest of the organization, and in doing so, they might have compromised their own personal point of view. Giving up that sense of control is not easy. But the best CEOs often do that, right? They’re quite comfortable with others telling the story and supporting the notion that the story is something the whole organization owns. In fact, many of them would be happy if someone were to say, “Oh, we didn’t know it was your story. We thought it was the story of the organization.” And I think that is something truly powerful and something that we have seen work consistently time and time again.
Laurel Moglen: So, there’s a degree of humility that comes with a CEO who is able to do that. How do we encourage this quality if it’s so important?
Joydeep Sengupta: I would say that CEOs increasingly realize that there are many forms of leadership: being authentic, inclusive, collaborative, and having the humility to sometimes admit that there may be others in the organization who might do things better than them or may have something interesting to say, and in fact, compliment their strengths. This attitude makes them even more effective and more powerful than if they needed the credit as the one person driving change. And I think our research increasingly continues to see that more and more CEOs are embracing this notion.
