By James A. Gingrich
Multinationals need a disciplined approach to selling in emerging markets. They can't launch consumer products with a scattershot approach.
I would like to thank Jose-Luis Bretones from McDonald’s for alerting me to this article. I suggest going to the site and reading it in full. The following are excerpts that highlight the key learnings. The article is written in the context of consumer goods companies but I think the lessons learned are universal. My last two years at DuPont were spent deploying the Market Driven Growth (MDG) process in emerging markets. We found many of the same dynamics for industrial products –innovation across the full business design was critical!
THE IMPACT OF EMERGING MARKETS HAS AND WILL BE PROFOUND
Western Europe, Japan and the United States have been the engines powering the world's economy since World War II. That is no longer the case. Emerging and developing economies, on a purchasing parity basis, now total 44 percent of the world's economy, and in the last decade, emerging nations were responsible for two-thirds of the world's economic growth. The consumer base in these economies already measures in the hundreds of millions, is young and is growing three times as rapidly as in the developed world. As recent events have demonstrated, what happens in these economies affects us all.
Given these trends, multinational corporations face profound changes in the economic landscape. Over the next 10 to 15 years, most of the total world growth in consumption of consumer goods will likely be concentrated in the largest of the developing economies. In that time span, these strategic emerging markets will grow to be comparable in aggregate size to the Group of Seven leading industrial nations (the United States, Japan, Britain, France, Germany, Canada and Italy). The future scale and growth of global consumer businesses is dependent on their success in building strong positions in these new, challenging markets.
There are a handful of consumer goods companies that have already demonstrated the potential contained within the big, emerging markets. Companies such as Unilever, Coca- Cola, Gillette, Nestlé and Colgate- Palmolive all now capture one-third or more of their revenue from these markets, with profitability equal to, or higher than, what they achieve in developed economies. For example, the Coca-Cola Company now derives 37 percent of its revenue from Latin America, Africa and Asia, and these markets contribute a stunning 49 percent of its operating profits. Similarly, the Colgate-Palmolive Company receives 45 percent of its revenue from these same markets and nearly half of its operating income. …….
THE CHALLENGE IS LARGE – YOU CAN NOT EXPORT YOUR BUSINESS DESIGN FROM THE U.S. AND EUROPE
The success enjoyed by these pioneers, however, is not the norm. The largest group of multinationals has followed a flag-planting strategy: transplanting existing "first-world" products with minimal investment into a wide variety of new markets, without achieving significant market share in any of them. While multinationals are quick to cite the extent of their worldwide footprint, the global portfolio of most multinationals remains dominated by United States and Western European economies. The emerging markets combined in the portfolio of flag-planters are typically limited to less than 10 percent of their worldwide sales. Given their timid positions and weak understandings of these countries, the returns of those who have followed the "flag-planting" route are generally poor.
While there is a natural tendency for multinationals to build upon what made them successful in their core markets in Western Europe and the United States, it is this practice that routinely gets them into trouble. In reality, consumer goods companies cannot export their business models, products and marketing formulas wholesale from their core developed markets and expect them to work in places such as India, Turkey or Mexico. Emerging markets differ in their governmental policies, regulations and macroeconomic behaviors; in the structure of their consumer markets, distribution systems and competitive sets; in the needs and behaviors of their consumers……….
Late last year, Niall W.A. FitzGerald, chairman of Unilever P.L.C., summarized the challenge facing Western consumer businesses when he said, "The real action is increasingly going to be in the developing and emerging markets. Business should not be so mesmerized by the current economic difficulties in these markets that companies ignore the enormous long-term economic potential. However, realizing that potential will not be easy. It will not only require a greater emphasis on understanding what are the needs of the consumer, but a radically different way of approaching them."
1. Reach the masses: Manage affordability
When we discuss the consumer base in emerging markets, however, we need to recognize that it is still significantly poorer than the consumer base of the Group of Seven industrial nations. Middle class in the big, emerging countries is typically a family earning $3,000 to $10,000 a year when measured in equivalent purchasing power. There is an even larger mass of the population below this income level that is also prepared to spend, albeit selectively. Only a small fraction of the population of countries such as Turkey or India are well-to-do, middle class by American standards. For example, hypermarkets in Poland have captured only about 12 percent of the market there since they cater only to the portion of the population with cars. Most retailing in Poland is still done in local shops that people can reach on foot.
Reaching the masses frequently means that …. companies need to rethink their product lines with a sharp eye on the price/performance equation
2. Be ubiquitous: Invest in distribution
Finding cost-effective ways to build broad and deep sales and distribution coverage in the emerging markets is one of the most critical challenges facing consumer products companies. This can rarely be done on the cheap. Alliances with local producers that agree to provide distribution rarely work. Multinationals should also be cautious about relying too heavily on broad-line wholesalers/distributors in many of these countries.
3. Create desirability: Build strong brands (in our MDG work in emerging markets, we found it advantageous to first build a strong brand position in the top tier of the human pyramid and then take it down realizing that the offering had to be changed to meet the different price/value tradeoffs)
Interestingly, despite the limited financial means of the emerging market consumer, branding could well be more important in these markets than it is in markets such as the United States or Western Europe. In part, this is due to the aspirational attraction that strong brands have for lower-income consumers, particularly in "badge" categories. For instance, the number of lower-income consumers on the streets of Sao Paulo or Shanghai wearing $100 jeans, a price that represents a month's wages, is striking. ……….
A fact of life in almost all emerging markets is that multinationals will face competition from local entrepreneurs whose informal operating practices, such as tax evasion or selective attention to labor laws, secures them a large cost advantage. Brand equity becomes an essential weapon in defending market position in the face of this type of competition…….
Because the investment required to build and support a brand in these markets is high compared with the small size of many categories, companies should carefully weigh using umbrella brands in emerging markets as a means to create scale, particularly when exploring new categories.
4. Play to win: Pick your fights well
Multinationals must play to win in the emerging markets. Too many companies fool around in the high end of these markets and remain timid about investment. Rather than shielding these companies from losses, this flag-planting strategy only exacerbates them.
Emerging markets are no different in this respect from the United States or Western Europe. Consumer goods multinationals must build leading or strong No. 2 positions in their target categories to be profitable over the long haul. Further, getting to critical mass is vital, given the sizable minimum investments necessary in brand-building and sales, distribution and production infrastructure. Scale and the demonstration of long-term commitment also create an environment that is attractive to scarce local management talent. Dabblers in these markets should either get serious or get out.
5. Be local: Foster emerging-market entrepreneurs
The extreme volatility and unconventional business methods in emerging markets require different management skills than are needed in mature, Western markets. For emerging market managers, raging inflation, currency swings, new taxes, continually changing business regulations and interest-rate instability are all part of the normal macroeconomic environment……….
For managers who are unaccustomed to such an environment, the ride can be pretty wild. It can also be expensive for their parent companies. This is why the most experienced emerging market multinationals generally have strong country managers who generate significant value through their entrepreneurial spirit and intimate understanding of the local environment. They are provided with the right global support and the freedom to make decisions quickly. This ability to be more agile in the turbulent emerging-market environment is a significant competitive advantage.