In 2004 the late C.K. Prahalad published The Fortune at the Bottom of the Pyramid, his brilliant contribution to understanding how companies and investors can help to eradicate poverty among the world's three billion poorest without sacrificing--and indeed improving upon--their profit-driven business models. In a sense, his ideas were a precursor to the "doing well by doing good" meme as it applies to the world's less developed markets. Within the education sector, C.K.'s standard bearers today could include companies such as Khan Academy, the world's free-tutoring platform, higher education courses delivered online, anywhere by Coursera and the successful private schools for the poor approach exemplified by Bridge International Academies in Africa.
Yet from a pure economic perspective one thing is clear: the majority of sustainable and profitable opportunities for developing educational products and services in emerging economies are focused on "mass luxury" rather than "mass poverty" markets.
To be sure, the world's aggregate demand for education still lies squarely at the bottom of the pyramid but spending habits are changing. I have written previously about the ways in which education technology companies and Universities are investing in more disadvantaged student segments and geographies and recognize how the most underdeveloped educational regions such as sub-Saharan Africa can offer outsized returns to both investors and students. But whether we like it or not, education is becoming a global luxury good with some of the most lucrative and impactful investment opportunities being derived from this segment.
Consider for a moment where the bulk of household discretionary spending on education is now targeted: sending children abroad for college, enrolling them in personalized academic tutoring, providing them with specialized foreign or English language coaching, placing them in international boarding or private day schools, accessing unique educational experiences for children after school, packing them off to uber-competitive summer camps. These activities go beyond basic educational needs, and although parents and students may view these expenditures as a necessary luxury to stay ahead in the global brain race, that is just semantics: this type of consumption is aspirational, brand conscious and, in relative and often absolute terms, expensive.
There will be profound investment implications from both projected wealth increases among the emerging market middle classes and their higher propensity to spend on premium goods and services in education.
Here are a few observations:
1. Global middle class consumers located in emerging markets, and particularly Asia, will disproportionately drive global consumption through 2030. Higher income levels will create natural demand for more aspirational and experiential consumption of goods and services.
Figure 1 charts the rise of Asia's higher-end consumers (measured at >$20 per day income) which increased from a mere 1 per cent of its population in 2008 to approximately 21 per cent by 2030. By comparison, Latin America begins at a much higher percentage--25 per cent of population was at "high" income in 2008--and hence grows far less through 2030 but notably exceeds the projected percentage of high income populations in Emerging Europe.
Figure 1: Higher Income Bracket (>$20/day) as % Total Population by Development Region: Asia Moves from 1% to 21% Between 2008 and 2030F
The full impact of Asia's relative position in terms of emerging wealth at the individual level is even more profound when considering the percentage changes in Figure 1 against overall population size, as measured in Figure 2. On this calculation Asia's middle class incomes rise from less than USD 1 trillion in 2008 to a mind-bending USD 31 trillion by 2030. Let's repeat that: a $30 trillion bracket expansion for populations over $20/day in 15 years.
Figure 2: Total Wealth Created From "High" Income Bracket by 2030 in Developing Regions (Unit in Chart: Billions) Skews Largely to Emerging Asia Exceeding USD 31 Trillion
2. A sizable part of middle class consumption--as measured by disposable household expenditure--will be devoted to private, supplemental and mobile education.
To cite just one example, I have written previously about the demand for academic tutoring across Asia and the interesting finding that spending is not confined to rich countries; in fact some of the poorest households in Asia, such as Myanmar and Bangladesh, are now enrolling among the highest proportion of their children in extra tutoring and academic preparation. Given the low per capita income in such countries we can reasonably assume that these expenditures constitute a significant amount of household income.
This is illustrated in Figure 3, where both low income and high income countries across Asia are participating widely in some form of academic extracurricular activities. Wealth expansion in future decades will only deepen expenditure pools.
Figure 3: Low Correlation Between Household Affordability and Participation Rates in Academic Tutoring, Making it a "Necessary Luxury"
3. Private school supply options are gradually widening with the advent of more permissive regulatory frameworks, greater dissatisfaction with public education, a desire for international academic standards, and increasing parental status anxiety.
As Figure 3 illustrates, the relationship between general affordability (measured by GDP per capita in PPP terms) and the number of premium international schools in major international cities is not statistically significant since population size, the quality and availability of domestic education options, the level of expatriate children enrollments and English language usage can differ widely by geography.
However what Figure 3 does indicate is that a large cluster of emerging cities above the $20,000 per capita GDP threshold begin to establish significant numbers of private international schools in places such as Beijing, Shanghai, Sao Paolo and Abu Dhabi. Moreover a few cities at much lower income levels, such as Ho Chi Min City and Mumbai, have already established over 50 international schools and may foreshadow the level of potential future demand as wealth rises.
Figure 4: GDP Per Capita and Growth in International Schools Clusters Above Affordability of $20,000 PPP Levels
This demand for premium-priced private education is consequential for education investors. Between 2014 and 2024 alone, international schools are projected to add almost USD 30 billion additional annual revenue to school operators, reaching USD 64 billion annually (see figure 4). In comparative terms, corresponding levels in 2000 were only USD 4.9 billion and indicate just how firmly this growth has taken root.
Figure 5: Robust Global Expansion of International Schools Projected to Create USD 65 Billion Annually by 2024, Almost Double Current Levels
4. Although low-price or freemium models are naturally scalable across emerging markets, companies serving the middle to top portion of the education affordability bracket may benefit more extensively by achieving both an increasingly relatively high volume of customers and premium-priced education services.
Consider travel, which is the single largest luxury consumption item worldwide and contributes more than US$460 billion or 25 per cent of the annual US$1.8 Trillion luxury market as estimated by Boston Consulting Group in 2012.
Youth, student and language travel account for a considerable proportion of this--an estimated US$194 billion (based 207 million arrivals) in 2012--and as Figure 6 indicates, a market projected to reach US$320 billion in annual value (300 million arrivals) by 2030.
Figure 6: Language Travel and Study Represents the Purest Form of Education as Luxury Good, Part of a $200 Billion Industry
5. The world's leading education companies and those waiting in the wings are decidedly not serving the the bottom of the pyramid, but rather emerging mass luxury segments and the pathways that feed them.
Tables 1 and 2 list some of the more well-recognized and financially impactful education companies in the world across respective segments mentioned previously: Test Preparation, English and Study Tours, International Private Schools, Early Education, Higher Education, International Study and Supplementary Skills. The majority of these companies serve the haves rather than have-nots.
Table 1: Representative Companies By Education Segment: Test Prep, English and Study Tours, International Private Schools, Early Education/Tutoring
Table 2: Representative Companies By Education Segment: International Study, Higher Education, Supplementary Skills
There are many competitors not included here, some of which are public and private schools, free online platforms and world-class NGOs. Their work should be lauded; a few will succeed in achieving a superior ROI to both investors and students.
But these entities and the student demographic they serve are exceptions to a much more prevalent rule: the coming age of mass luxury education consumption based in rising wealth, inadequate local provision, global academic hyper-competition, and a desire for more engaging, meaningful and unique education experiences for both children and their status conscious parents.