Should Modern Retail Target the Upper or Lower Middle Class? A Customer Selection Dilemma in Emerging Markets

Abstract:     
Should modern retailers entering emerging markets target the richer upper middle class or the larger value-conscious lower middle class? We answer the question by investigating how these segments differentially tradeoff attributes such as product offerings, prices and travel costs. Using primary household level survey and panel data on purchases from modern and traditional retailers in India, we find: (1) while modern retail is chosen for superior product quality and assortments, lower perceived prices and store services such as credit card acceptance; traditional retail is chosen for store proximity and services such as store credit and stronger relationships with store keeper. (2) Surprisingly, modern retail patronage is nonlinear in socioeconomic class in that both the upper and lower middle class have greater share of expenditure at modern retail, relative to the middle-middle class. (3) The lower middle class contributes nearly half of modern retail’s revenues and this share will continue to grow as modern retail increases its efficiency and improves its pricing advantage over modern retail. We conclude that it is optimal to target the lower middle class even in the early stages of entry.

Number of Pages in PDF File: 37

Keywords: Emerging Markets, Retailing, Middle Class, Segmentation, Socioeconomic Status

JEL Classification: D10, D12, L66, L81, M30, M31, Q13, R21, L11

working papers series