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 are delivering some of the strongest growth for global firms despite concerns that lower prices would translate into lower profits.
Leaders like Coca-Cola, Unilever, Danone, and Pepsi now earn 9 percent to 15 percent 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 of emerging markets equaled that of advanced nations for the first time in 2006.
As growth slows in the mature markets of North America and Western Europe, some consumer goods companies have figured out how to tap into the purchasing power of a newly prosperous and growing middle class in emerging markets. The rewards can be substantial; in some product categories, growth there is three times that of developed markets. While each market requires different adaptations, the emerging market leaders share six common practices. What does it take to win?
Drive down costs by entering the mainstream. Originally, multinationals targeted premium segments with higher profit margins in developing nations. But leading firms have started selling brands aimed at the masses. Cosmetics giant L'Oreal took that approach in Eastern Europe, introducing a line of facial and body-care brands targeting the mass market, as well as its affordable "luxury" skin-care brands. Sales in Eastern Europe have grown steadily year to year. In the first quarter of 2008, L'Oreal's sales reportedly grew 25.9 percent in Eastern European markets while North American sales slumped 3.9 percent year over year, and Western European sales grew by only 2.3 percent.
Localize at every level. Homegrown competitors have several incumbent advantages, including consumer loyalty, lower costs, and sympathetic government regulators. By taking the time to master local complexities, multinationals can gain a competitive edge. That often requires fundamental changes to the product offering. Procter & Gamble, for example, knew that winning over Chinese toothpaste consumers meant catering to local preferences. After extensive research, P&G rolled out reformulated versions of its Crest brand in fruit, tea, and herbal flavors. P&G's approach to localization helped boost its share of toothpaste sales from nearly zero in 1997 to 25 percent in 2007.
Develop a "good enough" cost mentality. In between the traditional high- and low-end market segments is the large and flourishing market for what we call good-enough products, offering higher quality than low-end goods at affordable prices that still generate profits. Feeding the good-enough market requires that companies keep a tight lid on costs, taking advantage of used plants, local suppliers, and outsourcing. Unilever's India subsidiary, Hindustan Lever, aggressively managed production, packaging, distribution, and marketing outlays to help create a low-cost laundry detergent line to compete with a popular new domestic brand. By hitting the pricing sweet spot, Hindustan Lever gained a 36 percent market share in the segment.
Think global, hire local. Too often, multinationals count on expatriates to guide their entry into emerging markets. Market leaders cultivate strong local management teams with market insights that give them an edge in product design, promotion, and distribution. Empowering local teams fosters loyalty and develops a talent pool to tap when entering other emerging markets. Consider P&G, the most successful consumer products company in China: 98 percent of its employees are Chinese.
Make sure 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 lineup, strengthening its distribution network, and lowering operating costs. Last July, Coca-Cola acquired Russian beverage group Aquavision, adding state-of-the-art production capabilities. The move builds on Coke's previous purchase of a leading Russian fruit juice maker, strengthening the multinational's position in Eastern Europe's hotly contested soft-drinks market.
Build dedicated emerging-markets capabilities. The leaders approach each emerging market with strategies crafted to distinguish the characteristics they find there from established practices they pursue in developed economies. One UK multinational has a formal emerging-markets organization separate from its other international operations. Putting the emerging-markets operation under one tent sharpens focus and improves managers' ability to evaluate the relative risk-return trade-offs across its emerging-markets portfolio.
For multinationals, succeeding in emerging markets is essential in order to defend and increase their share of the global market. Ultimately, how they fare there is a key indicator of how they'll fare everywhere else in the world.
Satish Shankar is a partner who leads Bain & Company's Southeast Asia Consumer Products Practice. Vijay Vishwanath is a partner in Bain's Boston office, where he leads the firm's Global Consumer Products Practice.
To learn more about emerging markets, read "How to win in emerging markets" (MIT Sloan Management Review, Spring 2008) by Satish Shankar, Charles Ormiston, Nicolas Bloch, Robert Schaus, and Vijay Vishwanath.