Multinational companies seeking to tap the vast potential of emerging markets often find themselves stumbling through a fog on unsure feet, discovering that their usual way of doing business will not necessarily bring them either the desired growth or success. In this article, Professor Amitava Chattopadhyay offers some important insights to MNCs operating in emerging markets based on the experiences of companies in India who cracked the code and broke the mould.
The centre of gravity of growth has been steadily but systematically shifting away from the traditional markets of the developed world − North America, Western Europe and Japan − to the emerging markets. A few quick numbers tell the story. In the current decade, the BRICS economies (Brazil, Russia, India, China and South Africa) have grown 3.5 times faster than the G7 economies,1 and according to the World Bank, China today is a hair’s breadth away from becoming the largest economy in the world in purchasing power parity (PPP) terms, followed by India, having over taken the usual stalwarts of the last decade, such as Japan and Germany. As such, the so-called emerging markets have become the future of growth, and companies are rushing in or expanding their footprint in them to sustain growth. Thus, for example, Unilever plans to increase the percent of sales coming from emerging markets, which is currently around 60 percent to 70 percent.
Challenges of Competing in the Emerging Markets
Competing in the emerging markets, however, poses a different set of challenges from those in the developed markets, as many of the world’s leading multinational companies (MNCs) are discovering to their chagrin. For example, Kellogg’s, the world leader in breakfast cereals, has only managed to eke out sales of US$100 million in India after almost 20 years of being here! Here we will discuss three key issues that any MNC hoping to succeed in emerging markets needs to take into account:
- Creating consumer value
- Creating access for consumers
- Creating new business models
Creating Consumer Value
Perhaps, the defining characteristic of emerging market consumers is that they are less affluent − yes, there is an affluent class, but it is tiny. Consider India, for instance, according to McKinsey by the end of 2015, India should have some 26 million individuals earning more than US$10,000 per annum. Compare this with the 243 million who will earn between US$4,000 and US$10,000, or the 549 million who are expected to earn between US$2,000 and US$4,000.2 These consumers collectively offer a huge market. A back-of-the-envelope calculation suggests that these two segments comprise a market of roughly US$3.3 trillion, making these consumers a very attractive sales target.
However, given their lower incomes, these consumers are extremely price sensitive. This means that you have to get the price tags right. The way MNCs tend to deal with this is to produce smaller packets for packaged goods and lead with stripped down products for more complex durable products. Unfortunately, neither approach on its own helps in success.
Smaller Pack Sizes alone do Not Work
Let us go back to Kellogg’s. It experimented with smaller packets for years in India, but didn’t succeed very well, until recently, that is. What made the big difference was the realisation that Indians like their breakfasts hot and savoury, not cold and sweet − the mainstay of the cereal business. This led Kellogg’s to look at its portfolio and focus on oats, which could be cooked and served hot. Kellogg’s launched Heart to Heart Oats, which are served hot and are flavoured to tickle the Indian palate (e.g. Green Pudina [mint] flavoured oats). The product’s taste factor, combined with a smaller, 200 g pack size priced at just INR 29 (US$.50) along with the health benefits of oats for heart disease and hypertension, helped to push Kellogg’s revenues from approximately US$70 million in 2012 to US$100 million in 2013!3 What is even more interesting is that this insight can help Kellogg’s improve its performance across the emerging markets of Asia, where the name of the breakfast game is invariably hot and savoury.
However, given their lower incomes, these consumers are extremely price sensitive. This means that you have to get the price points right. The way MNCs tend to deal with this is to produce smaller packets for packaged goods and lead with stripped down products for more complex durable products. Unfortunately, neither approach on its own makes for success.
So, what’s the moral of the story?
•You definitely need to get the price tag right, but unless you combine it with the local habits and concerns of consumers, it isn’t going to work.
•To do this, you need to invest on consumer insights, attitudes and behaviours.
•You can often leverage your insights across emerging.
Stripped Down Products May Not Work
A second way MNCs try to meet the higher price sensitivity of, emerging market consumers, is by offering stripped down products. This approach, often too does not work because stripped down products are still not cheap enough to really penetrate the market deeply. The way forward is to develop products from a zero base.
Consider the case of General Electric (GE). Its typical electrocardiography (ECG) machines sell for around US$2,000 to US$10,000. GE’s India laboratory, starting with a clean slate, was able to develop the MAC India, a portable ECG machine that could be sold for US$500 and perform 500 ECGs on a single charge of its battery. This has led to the drop in the price of an ECG from around INR 200 to “as little as the price of a bottle of water for rural patients,” according to GE4 (a bottle of water retails for between INR 15-20 in rural India).
Such innovations do well. GE has sold over 10,000 of these units. The company reports that 90 percent of its MAC units are acquired by individual rural physicians. This, on the one hand, creates an extra revenue stream for these physicians, while on the other, and more importantly, it gives rural, less affluent Indians access to proper, affordable diagnosis and treatment, without having to travel significant distances.5
So, what’s the moral of the story?
•The MAC India was only possible because GE decided to build a new product from scratch. There is no way to create a product that is 75 percent cheaper than the cheapest product in your portfolio by simply stripping away “nice to have” features, without compromising quality.
Creating Access for Consumers
Once you have the product, creating access can become a huge challenge. 70 percent of Indians still live in villages, and there are over 640,000 villages in the country. Modern trade – the large format stores MNCs are used to dealing with, account for less than five percent of retail sales in India. 95 percent of retail sales happen through “mom and pop” stores, and these are far smaller than their counterparts in the home countries of MNCs. On an average, those stocking fast moving consumer goods (FMCGs) have monthly revenues of less than US$300.6 Small mom and pop stores in emerging markets can be as small as one square metre in size!
Access in India, thus, requires getting your product placed in thousands of small mom and pop stores. To give you some idea of the scale, in the durable goods space, LG Electronics retails its products in the U.S., which is nine times bigger, in terms of geography than India, not to mention in terms of sales, through some 5,000 outlets. In India, which was LG’s largest international market in the world after the U.S. a few years ago, it distributed its products through some 16,000 outlets. To manage and service these stores and to provide service to customers spread across India, LG Electronics opened over 100 branches and remote area offices in India. These efforts paid off for LG, which was a late entrant to the Indian market, making its appearance only in April 1997. By mid-2000, LG was the number one consumer electronics player in India, having beaten global competitors such as Whirlpool and Samsung, which had entered India early.7
In the FMCG sector, the challenge is even more acute. Take the example of Unilever. In India, there are some 7-8 million stores that carry fast moving consumer goods to serve the over 600,000 villages and 5,500 towns that dot the nation. By the end of financial year 2011-12, Hindustan Unilever (HUL), Unilever’s arm in India, managed a distribution network of over two million outlets that it served directly8 and many others that it served indirectly through wholesalers and distributors.9
To manage these numerous retail outlets, many of which are run by individuals with very limited knowledge of business and which can stock only a limited number and quantity of stock keeping units (SKUs), players such as HUL and India’s Marico have developed an effective and low-cost distribution management system that leverages mobile phones. Marico’s system, for instance, allows a salesperson to rapidly scan stocks on a retailer’s shelves to determine what he has, what is selling (and how quickly), and, thus, what needs to be restocked, enabling small business owner to place a restocking order immediately using the now ubiquitous mobile phone network. Such systems enable the company to optimise the revenues and margins of the small mom and pop retailers, buying their loyalty and setting up barriers to entry for potential new entrants. These systems also help the company bring down costs that are inevitable with such fragmented distribution systems by making the order placement and fulfilment process efficient.10
So, what’s the moral of the story?
•To succeed in emerging markets, you need to develop and manage a highly fragmented distribution system.
•Managing them requires the development of new ground up business solutions, taking into consideration the specific local context.
Creating New Business Models
To enhance access to villages outside the reach of retail, and yes, such villages still exist in India,
HUL launched a door-to-door rural distribution system called Project Shakti that leverages village women who have the time and entrepreneurial spirit to sell HUL products in their community and the contacts and credibility to do so.11 The project, conceived in the 1990s, not only gets a select portfolio of HUL brands into the hands of rural consumers who would otherwise not have had access to such products and brands, but also creates much needed income, estimated at INR 1,000 per month by HUL, for the so called Shakti Ammas, the entrepreneurs who distribute the products.
To set up the unit, HUL started with strong top management support. It invested on customer insight generation and built a community-level relationship using local entrepreneurial women. It carefully selected a targeted portfolio of brands that would meet the unmet needs of rural consumers, creating smaller formats that would fit their budgets. It provided training to the targeted women who became HUL’s independent sales force. The Shakti Ammas received stocks from HUL’s rural distributor, and the company worked with microfinance institutions to provide the needed working capital to these rural entrepreneurs.
To manage these numerous retail outlets, many of which are run by individuals with very limited knowledge of business and which can stock only a limited number and quantity of stock keeping units (SKUs), players such as HUL and India’s Marico have developed an effective and low-cost distribution management system that leverages mobile phones.
Initially, Project Shakti began with 17 women in Andhra Pradesh in 2000. HUL tried a variety of approaches before settling on the final shape of the initiative and expanding it to two states in 2002. Thereafter, growth was rapid; by 2004 there were 13,000 Shakti entrepreneurs in 12 states.12 Today, the initiative has been scaled and reaches four million households in 165,000 villages across India. By 2013, Shakti provided livelihood enhancing opportunities to about 65,000 entrepreneurs in 15 states. The number of Shakti entrepreneurs is expected to grow to 75,000 by 2015.13 The initiative contributes to more than 15 percent of rural turnover, generating an additional US$15 million in profits for Hindustan Unilever.
So, what’s the moral of the story?
•Coming up with novel business models requires experimentation and takes time.
•You need to start small, figure out what will work through a test and learn process of experimentation.
•Scale up only when you have a robust model.
•You need top management support because it will take time to show results.
1Organisation for Economic Co-operation and Development (2014). “Quarterly National Accounts: G20 Quarterly Growth Rates of GDP in Volume”, Accessed September 23, 2014 http://stats.oecd.org/index.aspx?queryid=33940.
2 Ablett, Jonathan et al. (2007). “The ‘Bird of Gold’: The Rise of India’s Consumer Market”, McKinsey Global Institute, 194.
3Malviya, S and R Bhushan (2013). “Kellogg Grows 31 percent to Cross Rs 500 Crore Sales Mark in India”, Economic Times, December 27, Accessed September 23, 2014, http://articles.economictimes.indiatimes.com/2013-12-27/news/45626714_1_kellogg-india-breakfast-cereal-market-chocos.
4 GE Healthcare (2011). “Market-Relevant Design: Making ECGs Available Across India”, Accessed September 23, 2014 http://newsroom.gehealthcare.com/ecgs-india-reverse-innovation/.
6 Chattopadhyay, A, V Anand, and J Wee (2014). “Healthy Oils Limited: Cooking Up a Success in the Indian Edible Oils Market,” Case #02/2014-6051-U, INSEAD.
7 Chattopadhyay A, E Park, and N Paavola (2008). “LG in India: Reinventing the Brand,” Case # 11/2008-5558, INSEAD.
8 Agarwal, Sapna (2014). “HUL Expands Distribution Network by 50 percent in Two Years”, Live Mint, June 2, accessed September 23, 2014, http://www.livemint.com/Companies/ZzGVBz0dRGg83OazY7rYDN/HUL-expands-distribution-networkby-50-in-two-years.html.
9 Dawar N and A Chattopadhyay (2002). “Rethinking Marketing Programs for Emerging Markets”, Long Range Planning, 35: 457-474.
10 Chattopadhyay A, R Batra, A Ozsomer (2012). The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands (New York: McGraw Hill).
11 Hindustan Unilever website, Accessed September 23, 2014, http://www.hul.co.in/sustainable-living-2014/casestudies/Casecategory/Project-Shakti.aspx.
12 Hindustan Unilever (2012). “Project Shakti: It is all about Empowerment,” Indian Management, February, 87-89.
13 Hindustan Unilever website, Accessed September 23, 2014, http://www.hul.co.in/sustainable-living-2014/casestudies/Casecategory/Project-Shakti.aspx.