18 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com
At this particular time, one of the fabulous things for a Westerner living in Asia, or, indeed, anywhere outside the “developed” world,
is the opportunity to see concretely the rise of what is often called “the new global middle class.”
To a very real extent, this is an entirely new phenomenon in the history of the modern world,
and we at EconomyWatch are delighted to be able to help people from everywhere understand the salient elements of this process,
both in and of itself AND how it relates to the so-called “developed” market economies.
The dynamics of this phenomenon are obviously different from country to country / region to region / continent to continent.
But there is no question that the economic growth going on OUTSIDE the US / EU / and Japan,
which in this case is definitely part of the West,
is extremely exciting from both a human and economic point of view.
Obviously, at Economy Watch, we necessarily focus on the economic aspect
of what the great anthropologist Karl Polyani called “the great transformation,”
although we hope our readers will find here an underlying concern for the human aspects of this revolutionary change.
There is little question that a good deal of this radical transition
is being carried out by multi-national corporations, as well as, of course, local companies.
It is therefore extremely interesting – and important – to get a sense of how multi-nationals
are approaching the attempt to “capture” this emerging global middle class as early as possible,
given the somewhat surprising fact that in 17 product categories in the United States, for example,
the market leader in 1925 remained the number-one or number-two player for the rest of the century.
These companies include Kraft Foods (Nabisco), which led in biscuits; Del Monte Foods, in canned fruit; and Wrigley, in chewing gum.
The importance of “early capture” is underscored by the rapidly growing ranks of middle-class consumers
in more than a dozen emerging nations, not just the fast-growing BRIC countries, as we have pointed out,
and include almost two billion people, spending a total of $6.9 trillion annually.
Research suggests that this figure will rise to $20 trillion during the next decade—
about twice the current consumption in the United States –
and who knows how long THAT figure is going to be so high ;-) .
These new spenders offer an opportunity for early winners to gain lasting advantages,
just as companies in Europe and the United States did at similar points in their development.
Despite having strong global brands, multinational companies face challenging competition in these markets,
as these economies already boast aggressive local players that have captured a significant portion of spending.
Chinese beverage maker Hangzhou Wahaha, for example, has built a $5.2 billion business against global competitors such as Coca-Cola and PepsiCo
by targeting rural areas, filling product gaps that meet local needs, keeping costs low, and appealing to patriotism.
Further complicating matters is the fact that the multinationals’ business models
are usually based on practices established in the markets of the developed world,
where the game is won slowly, by finding cost savings
and making product improvements that capture single percentage points of market share over time.
Among emerging markets, perhaps only China can provide enough short-term growth to justify that strategy.
Meeting the needs of most consumers in emerging markets requires a different course,
which often elicits anguished cries in the corridors of the multinationals:
“You want me to change my business model and go across the world for $50 million in revenue?”
It’s an understandable lament for executives who not only fear ending up with little to show for their efforts
but also are wary of the battles already under way among emerging-market champions.
While there are multiple approaches to capturing emerging-market consumers,
the two critical factors are SPEED and SCALE.
One way multinationals can quickly gain the scale they need is to identify clusters of similar consumers across multiple markets.
That approach allows these companies to build revenue and profit streams that are collectively material
and justify significant, ongoing capital investments to fuel growth.
Another tack is to work at a more local level, gaining scale in specific regions and categories
by teaming up with deeply knowledgeable on-the-ground partners.
They can help not only in product development but also in distribution and market positioning—
the crucial final steps to reaching highly local consumer markets.
All of this is easier said than done, of course, because middle-class consumers in these markets are extremely diverse.
In some ways, they resemble those in developed nations:
they are aware of and have a fondness for brands
and want access to a variety of products at different prices,
including products they aspire to but can’t currently afford.
Yet their tastes are often localized, and while they are middle-class in regional terms,
they are still not wealthy enough to replace products regularly, because their percentage of truly discretionary income is lower:
in China and India, for example, about 40 percent of average household income is spent on food and transportation,
compared with 25 percent in the United States,
although that could be changing depending on whether the de-flation or stag-flation scenario ends up dominating.
The best way to make sense of this picture is to take a granular view using product categories.
For individual categories, multinationals should FIRST identify whether consumer needs in emerging markets are fundamentally global or local.
A good proxy for this issue is the similarity of product offerings across geographies.
SECOND, multinationals can assess the consumer’s ability to afford a given product.
Useful approximations include category penetration and product availability in key developing markets,
as well as the willingness of consumers to “stretch” to buy less-affordable products.
By developing a perspective on whether and to what extent consumer tastes are global or local
and combining that with a clear view on the affordability and accessibility of a given product,
multinationals can go a long way toward determining the strategies and business models that will allow them to gain scale quickly.
Broadly speaking, there are FOUR categories of different goods and services,
each one of which requires a different strategy
if a company is going to successfully reach the consumer needs and taste of the “new emerging global middle class.”
The FIRST category comprises products and services for which consumer needs
are quite similar across geographies and affordability is not a constraint.
There is little need to create marketing plans to roll out such products in different countries, one after another:
it seems most efficient to identify similar consumer segments across countries
and to build scalable business models for each cluster.
Examples of products in this category include personal banking, mobile communications, consumer electronics, and pharmaceuticals,
which have similar industry structures, rates of consumer adoption, and socioreligious factors across geographies.
A leading multinational retail bank’s marketing team, for example,
used longitudinal consumer data to identify five clusters across multiple Asian countries.
These segments included one of conservative users very loyal to their local banks – India, Indonesia, the Philippines, and Taiwan –
and another of remote-channel users who were highly price sensitive: Hong Kong, Singapore, and South Korea.
The bank successfully designed and implemented a specific product and channel strategy for each of these five segments across countries.
A SECOND category comprises emerging-market consumers who have the means to buy products and services
that are widely available or even mass market in the developed world.
For the vast majority of the emerging middle class, however,
these products and services are neither affordable nor accessible—they are premium items.
While most forecasts predict less than 3 percent of total emerging-market households will be in this category in 2025,
their prosperity and the fact their behavior resembles consumers in the developed world
has historically made this category appealing to multinationals.
Capturing the loyalty of these consumers and, as they develop new needs, upgrading them is the key.
Since emerging-market consumers want value—even in this category—
companies should offer products at “mass premium” price points.
Consumer electronics manufacturer LG has found that
people in many developing markets are more willing to pay for better service
than are their counterparts in the developed world.
The company launched a premium offering that
not only gives consumers a full-time contact person who acts as a go-between with LG and monitors the health of products
but also guarantees maintenance visits within 6 hours, compared with the normal 24-hour commitment.
The THIRD category comprises affordable and accessible products,
such as low-cost snacks and highly localized baby-care hygiene products.
In this category, there’s clear merit in evaluating how companies can scale up across markets, even if needs are local.
One approach is to shape the market through minor product enhancements and sharper positioning
that encourages consumers to shift toward more globally convergent offerings over time
and allows companies to enjoy greater economies of scale and lower delivery costs.
In India, for example, PepsiCo successfully shaped the snack market by creating a new platform, called Kurkure, for younger consumers.
The product feels entirely local, though it is packaged and distributed by Frito-Lay.
Other strategies for penetrating this affordable, accessible, and local market are to use celebrity endorsements and to leverage local knowledge,
either selectively, in areas such as distribution, or through more comprehensive alliances.
The partnership between Norwegian telecommunications company Telenor and Bangladesh’s Grameen Telecom, for example,
resulted in the creation, in 1997, of Grameen Phone, now the country’s largest mobile operator.
The FINAL category represents products and services for which needs are, and will probably remain, very local, making affordability a challenge.
In this segment, the potential available market share is high, though the market looks small,
since consumers often substitute cheaper products, from adjacent categories,
that satisfy similar needs rather than buy a higher-priced global product.
The first step for multinationals is to define the market by measuring current total consumption,
examining product alternatives that satisfy similar needs,
and studying potential spending likely to be unlocked once incomes grow.
Companies then need to make their products more affordable and accessible,
looking at everything from capital expenditures to product features to distribution.
There’s real value in working with local players to drive product, distribution, and sales innovations
in that “last mile” before reaching consumers.
Beer manufacturer SABMiller, for example, one of the companies we discussed in our recent feature on South Africa,
decided it could not achieve price points that would spur demand in Africa
without changing its business model.
It retooled its factories for cheaper, locally sourced ingredients,
such as cassava and sugar rather than barley and maize,
and used local distributors to ensure the availability of its products.
The result: lower prices, growing demand, and significant increases in market share across several African countries.
Traditional approaches in which companies enter markets one by one
and focus on a handful of brand and market combinations
will not meet the challenges of the developing world’s large and growing body of middle-class consumers.
Companies need to become adept at building and sharing customer information across markets
and more willing to work with others to gain scale quickly.
In some regions, such as Africa, multinationals may even need to work with the public and social sector
to ensure that consumers have adequate income to generate demand.
Structural changes might also be required.
Because multinationals may have to adopt different business models by market, category, and brand,
they need flexible and responsive organizations.
Cisco, for example, has created a second world headquarters, in India, to spearhead its push into the country,
while other companies are establishing centers of excellence to identify, recruit, and develop staff that can be deployed locally.
Using local vendors is critical to running a lean operation:
many multinationals have found, for example, that capital outlays in emerging markets
are often only 30 percent of those required for a factory in the West
if they use local resources for plant and process engineering and to execute projects.
Finally, companies need to be aware of perhaps the biggest bottleneck
to seizing the emerging middle-class opportunity: local talent.
Relying excessively on expatriates is likely to stifle an organization’s ability to scale up adequately across markets—
there simply won’t be enough staff, according to this fascinating study by McKinsey.
Building talent academies inside companies to accelerate leadership development is a good step.
Yet the rapid growth in many emerging markets may make traditional “grow your own” or “hire from within” approaches manifestly inadequate to meet staffing needs.
By addressing these structural and operational imperatives
and identifying the best approaches to achieve the scale needed to serve the growing middle class,
multinationals can meet their high expectations for international growth.
And, we hope, become a vital and positive component of the process
of making life better for the “new global middle class.”
David Caploe PhD
President / acalaha.com