When you invest in global consumer companies as we do, you have to develop a framework to understand the consumer's state of mind—and one of those frameworks I casually refer to as “The Amazing First Date.”
This framework is based on American psychologist Abraham Maslow's hierarchy of needs, which is a theory of psychological health predicated on fulfilling innate human needs in order of priority. According to Maslow, an individual's base needs (such as food, shelter, water, security, and health) must be met before he or she can focus on higher needs (such as love and belonging).
In my experience, companies that were successful during most of the 20th century focused primarily on meeting consumers' base needs. They provided quality and predictability.
But that's changing. More and more, companies that are successful are focused meeting consumers' higher needs as well.
Today, not only do consumers want the quality and predictability a traditional brand represented; now they want the feeling the brand provides. They want the brand to inspire the emotions of a first date.
Moreover, consumers want their higher needs met in an interactive way. One survey, for example, asked millennials how brands can remain relevant. The most-cited response was that a brand should remain open to the opinions of customers and change accordingly. The second-most-cited response was that a brand should remain in an open dialogue with its customers through social channels.
That tells me that consumers are looking for a brand to identify with them—to represent their ideals, speak to how they view themselves, validate them. They also want the brand to make them feel like they belong to a group and inspire feelings of belongingness. These are all higher needs.
Consumers spending more on discretionary items in both developed and emerging markets is also evidence that they are focusing on higher needs. Over the past 20 years, emerging market consumers have increased their spending on discretionary items from 30% to 43% of their income (a 40% increase). And developed market consumers have increased their spending on discretionary items from 50% to 60% of their income (a 20% increase).
That's happening in travel and leisure, health and wellness, and luxury items particular. But even companies that seem to appeal to base needs can succeed with the changing consumer. For example, we're seeing water, milk, instant noodle, and even diaper companies responding to consumers in a very authentic way, essentially focusing on their higher needs.
Meeting base and higher needs is a very difficult balancing act. Consumers want a brand to feel familiar, yet create excitement. They want a brand to offer predictability and dependability, yet possess an aura of mysteriousness and provide for the possibility of adventure.
To differentiate companies that can provide this, it’s important to be out there, meeting with companies and talking to management teams, so you can identify management teams that really understand how to operate within this context.
The management teams that understand consumers' changing needs are separating themselves from the pack, driving sustainable value creation, and gaining substantial market share.
Kwesi Smith, CFA, is a research analyst on William Blair's Global Equity team.
Watch Kwesi Smith, CFA, discuss increasing expectations of brands.
