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What it takes for consumer products companies to win in emerging markets

Gaining ground in fast-evolving markets depends on players’ ability to negotiate four critical developments.

By Pankaj Saluja, Mike Booker, Satish Shankar and Brunno Lannes

Published on May 23, 2012
min read


Companies racing to capture their share of emerging markets’ booming growth find something unexpected: Along with unprecedented expansion, these markets are undergoing rapid changes that make the opportunities trickier to pursue. From China to India to Brazil to Turkey to Vietnam, emerging markets will contribute around 60 percent of all global GDP growth by 2015, based on IMF projections, and more than 60 percent of retail growth, according to Euromonitor. Gaining ground in such fast-evolving markets will depend on players’ ability to negotiate four critical developments. Development 1: Category consolidation is raising the barriers to entry and leadership Companies considering the move into emerging markets face a daunting fact: Consolidation is well underway, especially in well-penetrated categories, with the top three to five players in most markets controlling a large and growing share. There are two major reasons for the consolidation. First, leading multinationals are aggressively investing for leadership across large and frontier emerging markets as sales flatten in their traditional Western strongholds. Second, selected local players are growing stronger, typically by playing one of three competitive cards. They pick “insulated” market niches and build defensible positions. Or they exploit their local knowledge to gain an edge - that’s how India’s Godrej Consumer Products was able to expand globally into similar markets for its hair dye in Africa and Latin America. Or they make the most of their low-cost model and “good enough” quality. Petra’s use of less-expensive compound chocolate ingredients has helped make it the leader in Indonesia. Given such rapid consolidation, acquisitions—either of local players or other multinationals-- may be the only option for building scale in categories and countries. Multinational players need to ask some hard questions: If already present, how can they secure their path to leadership? If not present, how to enter or grow—or is it already too late? Development 2: Segment and category creation is emerging as an alternative route to success As a middle class emerged in China, multinationals shifted their focus from selling luxury goods to a tiny fraction of consumers to the growing mainstream. Now, with incomes rising, companies are expanding the market by selling more value-added and new market offerings. For example, both Diageo and rival Pernod Ricard have made good headway in many of the nontraditional scotch markets like China and India. But rising incomes also lift categories at the value end of the market as more consumers move from unbranded products to branded. The shift reflects brand awareness and deeper distribution networks. Vietnam’s Masan Consumer, at the bottom end, grew its share of table sauces from just 2% in 2005 to 36% in 2009, according to Euromonitor, largely by branding more of its Nam Ngu sauces and upgrading consumers from unbranded sauces in open markets. To boost their odds of success, companies need to develop deep consumer insights that help accelerate brand growth. Development 3: Modern trade (and Internet) is growing fast, but traditional trade will remain relevant for the foreseeable future Modern trade is taking off in emerging markets as consumers evolve, regulatory barriers come down and multinational retailers seek new, high-growth markets. But the pattern of growth varies. Modern trade represents more than half the total retail share in some of Brazil, Russia and China’s more developed cities; the share is smaller but growing rapidly in Indonesia and Vietnam and lags behind in India due to regulatory hurdles. At the same time, online sales in emerging markets are growing rapidly. For example, online penetration of categories like infant formula in China is believed to have crossed the double-digit threshold. Our research shows that traditional trade, characterized by fragmented mom and pops, will remain relevant in the near future. Successful consumer products companies have to develop profitable business models for these vastly different channels by determining how to best serve both modern and traditional outlets, avoid channel conflict and create an organization to deliver. Development 4: Securing quality supplies at a reasonable cost will be an ongoing major challenge As demand outpaces supply in emerging markets, consumer products makers face the real threat of securing quality supplies, especially in the food sector, just as they build both capacity and trained manpower to keep their well-oiled supply chains running. One solution: establishing strategic partnerships with raw materials suppliers. Meanwhile, rising commodity costs and currency risk volatility have emerged as key challenges. Winners create capabilities to boost trading skills for exchange-traded products like coffee, manage for currency volatility and modify formulations without compromising the customer value proposition—and continuously tweak their strategic choices around sourcing and manufacturing locations. Leaders will be those that excel at identifying and riding these game-changing developments, even proactively shaping them, tailoring the approach based on whether they are new players or veterans. For companies looking to enter, it’s important to be clear about the entry rationale and chances of success. Winners will be those that pick battlefields carefully, plan a path to longer-term leadership, and identify growing underdeveloped markets, categories or segments. They’ll partner or acquire for market position and build tailored route-to-market, supply chain and critical capabilities. Companies already leading will be clear on the relevant arena that will deliver sustained leadership. They’ll develop a repeatable formula for pursuing appropriate segment and category creation opportunities. And they’ll build innovation and flexibility into their business models to deal with high complexity and the rapid evolution of route-to-market and supply chain networks. With consumer products makers at a historic crossroads, winning means patiently charting a course through the complex landscape of countries undergoing explosive growth—while navigating these four game-changing developments. Pankaj Saluja is a partner in Bain & Company’s Singapore office. Mike Booker, based in Singapore, heads the firm’s Consumer Products and Retail practices for Asia-Pacific. Satish Shankar is a partner in Singapore and Bruno Lannes is a partner in Shanghai.

Companies racing to capture their share of emerging markets’ booming growth find something unexpected: Along with unprecedented expansion, these markets are undergoing rapid changes that make the opportunities trickier to pursue. From China to India to Brazil to Turkey to Vietnam, emerging markets will contribute around 60 percent of all global GDP growth by 2015, based on IMF projections, and more than 60 percent of retail growth, according to Euromonitor. Gaining ground in such fast-evolving markets will depend on players’ ability to negotiate four critical developments.

Development 1: Category consolidation is raising the barriers to entry and leadership

Companies considering the move into emerging markets face a daunting fact: Consolidation is well underway, especially in well-penetrated categories, with the top three to five players in most markets controlling a large and growing share.

There are two major reasons for the consolidation. First, leading multinationals are aggressively investing for leadership across large and frontier emerging markets as sales flatten in their traditional Western strongholds.

Second, selected local players are growing stronger, typically by playing one of three competitive cards. They pick “insulated” market niches and build defensible positions. Or they exploit their local knowledge to gain an edge - that’s how India’s Godrej Consumer Products was able to expand globally into similar markets for its hair dye in Africa and Latin America. Or they make the most of their low-cost model and “good enough” quality. Petra’s use of less-expensive compound chocolate ingredients has helped make it the leader in Indonesia.

Given such rapid consolidation, acquisitions—either of local players or other multinationals-- may be the only option for building scale in categories and countries. Multinational players need to ask some hard questions: If already present, how can they secure their path to leadership? If not present, how to enter or grow—or is it already too late?

Development 2: Segment and category creation is emerging as an alternative route to success

As a middle class emerged in China, multinationals shifted their focus from selling luxury goods to a tiny fraction of consumers to the growing mainstream. Now, with incomes rising, companies are expanding the market by selling more value-added and new market offerings. For example, both Diageo and rival Pernod Ricard have made good headway in many of the nontraditional scotch markets like China and India.

But rising incomes also lift categories at the value end of the market as more consumers move from unbranded products to branded. The shift reflects brand awareness and deeper distribution networks. Vietnam’s Masan Consumer, at the bottom end, grew its share of table sauces from just 2% in 2005 to 36% in 2009, according to Euromonitor, largely by branding more of its Nam Ngu sauces and upgrading consumers from unbranded sauces in open markets. To boost their odds of success, companies need to develop deep consumer insights that help accelerate brand growth.

Development 3: Modern trade (and Internet) is growing fast, but traditional trade will remain relevant for the foreseeable future

Modern trade is taking off in emerging markets as consumers evolve, regulatory barriers come down and multinational retailers seek new, high-growth markets. But the pattern of growth varies. Modern trade represents more than half the total retail share in some of Brazil, Russia and China’s more developed cities; the share is smaller but growing rapidly in Indonesia and Vietnam and lags behind in India due to regulatory hurdles.

At the same time, online sales in emerging markets are growing rapidly. For example, online penetration of categories like infant formula in China is believed to have crossed the double-digit threshold.

Our research shows that traditional trade, characterized by fragmented mom and pops, will remain relevant in the near future. Successful consumer products companies have to develop profitable business models for these vastly different channels by determining how to best serve both modern and traditional outlets, avoid channel conflict and create an organization to deliver.

Development 4: Securing quality supplies at a reasonable cost will be an ongoing major challenge

As demand outpaces supply in emerging markets, consumer products makers face the real threat of securing quality supplies, especially in the food sector, just as they build both capacity and trained manpower to keep their well-oiled supply chains running. One solution: establishing strategic partnerships with raw materials suppliers.

Meanwhile, rising commodity costs and currency risk volatility have emerged as key challenges. Winners create capabilities to boost trading skills for exchange-traded products like coffee, manage for currency volatility and modify formulations without compromising the customer value proposition—and continuously tweak their strategic choices around sourcing and manufacturing locations.

Leaders will be those that excel at identifying and riding these game-changing developments, even proactively shaping them, tailoring the approach based on whether they are new players or veterans.

For companies looking to enter, it’s important to be clear about the entry rationale and chances of success. Winners will be those that pick battlefields carefully, plan a path to longer-term leadership, and identify growing underdeveloped markets, categories or segments. They’ll partner or acquire for market position and build tailored route-to-market, supply chain and critical capabilities.

Companies already leading will be clear on the relevant arena that will deliver sustained leadership. They’ll develop a repeatable formula for pursuing appropriate segment and category creation opportunities. And they’ll build innovation and flexibility into their business models to deal with high complexity and the rapid evolution of route-to-market and supply chain networks.

With consumer products makers at a historic crossroads, winning means patiently charting a course through the complex landscape of countries undergoing explosive growth—while navigating these four game-changing developments.

Pankaj Saluja is a partner in Bain & Company’s Singapore office. Mike Booker, based in Singapore, heads the firm’s Consumer Products and Retail practices for Asia-Pacific. Satish Shankar is a partner in Singapore and Bruno Lannes is a partner in Shanghai.