The village roads can be impassable, home cooking is still a way of life and local products often have generations of loyal customers. Nevertheless, emerging markets in Asia such as India are delivering some of the strongest growth for global makers of fast-moving consumer goods (FMCGs)—everything from snacks to toothpaste— despite concerns that lower prices would translate into lower profits.
Emerging market leaders such as Coca-Cola Co., Unilever, Group Danone and PepsiCo, Inc. now earn 5-15% of their total revenues from the three largest emerging markets in Asia—China, India and Indonesia. The trend is likely to continue: the gross domestic product (GDP) of emerging markets equalled the GDP of advanced nations for the first time in 2006, with much of the growth coming from the “Bricet” nations—Brazil, Russia, India, China, Eastern Europe and Turkey.
With growth slowing in the mature markets of North America and Western Europe, some consumer goods companies have figured out how to tap the purchasing power of a new and growing middle class in these emerging markets with rising income, more credit cards and greater access to personal loans. But, what separates the winners from the losers?
Flexible thinking, to begin with. The successful firms reconfigure global products to compete with consumers’ preference for popular local brands, both in price and taste, or skilfully steer acquired brands with years of tradition under their own umbrella.
Take the example of Coca-Cola in India: It bought Limca, a popular Indian soft drink brand more than a decade ago, and continues to sell it under the same brand name. It continues to be sold in many parts of India today.
The rewards can be big. In some consumer product categories, growth in emerging markets is three times that of developed markets. While each market requires different adaptations, the emerging market winners share six common practices:
• Lower costs by achieving economies of scale
Originally, multinational firms targeted premium segments with higher profit margins in developing nations. But, as the middle classes ballooned, the leading consumer goods companies have realized that the mainstream opportunity is too big to ignore. What’s more, participating in those markets allows them to drive down the costs of their premium products by achieving economies of scale in manufacturing, distribution and brand building. In Malaysia, Nestlé captured mainstream sales—and made the most of scale —with a variety of products such as Nescafé instant coffee, KitKat chocolate and Maggi noodles.
• Localize at every level
Home-grown competitors have several built-in advantages, including consumer loyalty and lower costs. But, by mastering local market complexities, multinationals can gain a competitive edge. Often, it requires fundamental changes to the product offering, such as switching to smaller pack sizes or using unconventional distribution channels.
Unilever has used innovative distribution solutions to tap the growing consumer market in rural India. Its Indian subsidiary, Hindustan Unilever Ltd, has trained more than 25,000 Indian women in villages to serve as distributors, and extended its reach to 80,000 villages. This programme generates about $250 million (approx. Rs985 crore) a year from the villages that otherwise would have been too costly to serve.
• Develop a “good enough” cost mentality
In between the traditional premium and low-end market segments is the large and flourishing market for what we call “good-enough” products, with higher quality than low-end goods, but affordable prices that still generate profits. Feeding the good-enough market requires managing costs aggressively. Among the techniques—taking advantage of used plants, local suppliers and outsourcing. In 2000, Colgate invested $21 million for a 40% stake in Sanxiao, a low-cost toothpaste brand in China. The local firm had a 30% cost advantage over Colgate. By localizing manufacturing at a Sanxiao facility, Colgate was able to reduce its costs by 60%.
• Think global, hire local
Too often, multinational firms count on expatriates to guide their entry into emerging markets. Expatriates can drive up costs and sometimes fail to deliver the deep market understanding offered by local managers. A strong local management team can offer the kind of market insights that provide a competitive edge in product design, promotion and distribution. Consider the situation at Procter & Gamble Co., the most successful consumer products company in China. Chinese recruits represent 98% of its employees.
• Ensure local acquisitions have a strong business fit
A strategic acquisition can accelerate a multinational’s entry into an emerging market by adding popular local brands to its product line-up, broadening its reach with a stronger distribution network, providing a local talent pool, and lowering operating costs.
In India, Frito-Lay, owned by PepsiCo, increased its market share —and profits—when it bought a local brand, Uncle Chipps, in 2000. After the acquisition, Frito-Lay relaunched Uncle Chipps at a lower price, positioning it as cheaper than Lay’s. Instead of competing against each other, the two Frito-Lay products targeted different consumer segments.
• Organize for emerging markets
The leaders maximize their investments by building dedicated emerging markets capabilities. Danone, the French food conglomerate, relied on lessons learnt from its biscuits joint venture in India to push ahead with its Indonesian business. The two markets share common traits such as a huge geographic area, a high proportion of small retailers and low price points.
With consumer markets in Asia and Eastern Europe growing at double-digit rates, multinationals are moving fast to build their brands—and the expertise to manage them in emerging markets. Indeed, succeeding in emerging markets is essential in order to defend—and increase—their share of the global market. How they fare in emerging markets is a critical indicator of how they’ll fare in the world.
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Nicholas Bloch is the head of Bain & Co.’s European Consumer Products Practice, and a Bain partner in Brussels. Satish Shankar is a Bain partner in Singapore. Ashish Singh is the managing director for Bain & Co. in India.