Entering emerging markets can mean huge profits.
Take Procter & Gamble Co. It knew that winning over Chinese toothpaste consumers meant catering to local preferences and health beliefs. After extensive research, P&G rolled out a reformulated version of Crest. Now, Chinese consumers can find the Crest brand in fruit and tea flavors with herbal elements. There’s even a salt version, catering to the Chinese belief that salt promotes whiter teeth. P&G’s approach helped boost its toothpaste sales in China from nearly zero in 1997 to 25% of the market in 2007.
Companies are often concerned that selling their products in emerging markets will translate into lower profits. After all, in parts of Asia, Latin America and Eastern Europe, product prices are lower than the production costs in developed markets. Still, for those that make fast-moving consumer goods, these geographic areas are also delivering some of the strongest revenues and profit growth.
Coca-Cola, Unilever, Colgate-Palmolive, Groupe Danone and PepsiCo earn 5% to 15% of their total revenues from China, India and Indonesia. These companies also often dominate their target categories in Russia and Eastern Europe. This trend is likely to continue: For the first time in 2006, emerging markets’ gross domestic product equaled advanced nations’ gross domestic product.
Until the past few years, leading consumer product companies didn’t prioritize emerging markets, even though they are home to about 85% of the world’s population. And there remain real obstacles: Multinationals must compete on unfamiliar terrain that local players dominate, they must sell price points lower than those in their home countries and they must wrestle with deep-seated social and cultural customs.
But as growth has slowed in the mature markets of North America, Japan and Western Europe, certain companies have tapped into the purchasing power of these emerging markets’ growing middle class. The question is, what separates the winners from the losers?
Flexible thinking, to begin with. Successful companies break away from business as usual and reconfigure their products to compete with popular local brands, adapting Western marketing and business management practices to local customs. Also, they are resourceful in overcoming barriers. If transportation infrastructure is poor, for example, they develop workarounds to distribute their products, as Unilever Group did in using a fleet of motorcycles to reach customers in Indonesia’s remote villages.
In fact, each market requires different adaptations, but those succeeding in emerging markets share five common practices.
First, they enter the mass market to achieve scale in distribution, brand building and operations. Historically, multinationals targeted niche premium segments -- those that traditionally delivered the highest profit margins. But these companies struggled to bring their costs low enough to sell to less affluent consumers and were mired in low growth.
Second, they localize at every level. Homegrown competitors have several advantages, including customer loyalty and lower costs. But multinationals can gain a competitive edge by taking the time to learn and master local market complexities. That often requires fundamental changes to the product offering -- switching to smaller pack sizes, using unconventional distribution channels and developing products to local tastes.
Third, they develop a “good-enough” cost mentality. There are the extremes of traditional premium markets and low-end market segments. But in the middle is a large and flourishing market of products that are higher in quality than low-end goods but still affordable enough that they generate profits. Feeding these good-enough markets requires aggressively managing costs. Companies must take advantage of used capital equipment or more labor-intensive production processes, as well as use local suppliers and outsourcing. They need to reduce overhead and localize management. Consider a food company that discovered it could source capital equipment from India at a third of the price it paid to European suppliers without compromising its quality standards. Organizations that succeed try to shift the competitive dynamics in their own favor.
Fourth, they think globally, hire locally. Too often, multinationals count on expatriates to guide them into emerging markets. But this can backfire. Expatriates drive up costs and frequently fail to understand markets deeply the way local managers can. Companies should cultivate local management teams that will provide competitive edges in product design, promotion and distribution. Expatriates should instead be used to manage and develop local talent and knowledge transfer.
Fifth, they make sure the companies they acquire are a good fit. A strategic acquisition can allow multinationals to enter emerging markets faster. They add popular local brands to their product lineups, which broadens their reach, provides a stronger distribution network, provides local talent pools and lowers operating costs. In July 2007, for instance, Coca-Cola acquired the Russian beverage group Aquavision, which gave it state-of-the-art, expanded production capabilities in Eastern Europe.
For more information on this topic is available at http://sloanreview.mit.edu/smr/issue/2008/spring/09/