Why local firms are winning in emerging markets

I have spent a lot of my career working in emerging markets. About a third of that time has been with international businesses trying to build market share and drive sustainably profitable growth. The rest has been with local businesses, nearly always family owned, with an almost limitless ambition to win. Everyone now knows the story about the emerging middle class and the growth of India and China. However, I believe the scale of opportunity is still underestimated by most companies and, more importantly, many of today’s global brands are losing out to local emerging market players. 

 

 

McKinsey’s relatively conservative forecast suggests that over the next 15 years, emerging market consumption will grow to $30 trillion dollars. It’s growing because of the sheer number of people who will achieve an income where they can enjoy consumption for the first time.

 

The biggest driver for this shift is urbanisation. On average, when people move from rural areas into cities, their income trebles. They may live in favelas, slums or townships in Africa, but that move gives them physical and financial access to basic healthcare, education for their children, paid employment and security. This, combined with liberalising economic policy, improving infrastructure and raw demographics, is powering growth in emerging markets, and while there may be bumps along the way, it is more likely we are underestimating the opportunity than overestimating it.

 

So let’s try to put this into context. We compared this latest phenomenon with other big economic events in history across two dimensions (Figure 1). This chart shows the length of time it takes to double GDP per capita, starting back in 1700, right through to the present day.

 

 

Second, we’ve looked at the number of people affected. And we’ve compared the recent rise of China and India with a number of other pivotal world events: the Industrial Revolution that started in the UK; the expansion of the US into the West; and the rapid industrialisation of Germany, Japan and South Korea.

 

Our conclusion was that the rise of emerging markets is the biggest economic force in history ever: bigger than both world wars; bigger than the internet; bigger than Henry Ford. In fact, if we compare consumption growth in China to the UK’s Industrial Revolution, it is happening 10 times faster, and across 100 times more people. This is a big opportunity.

 

The good news is that the $30 trillion of consumption will be spread out. About half this consumption will be outside the BRIC markets (where many companies have found it quite hard to get going). As an example, there is more growth collectively in easter Europe, the Middle East and Africa than there is in China.

 

The bad news is that the companies that most of us work for are not winning. We looked at over 700 of the world’s leading companies and found two things. First, Western companies are already significantly under-represented: 36% of today’s consumption is in emerging markets, but these countries only account for 17% of the sales of the West’s biggest companies.

 

In addition, emerging market competitors are growing more quickly – on average, twice as fast as their developed market rivals. Interestingly, that’s not just because they are in higher growth markets. They have also outperformed in developed markets. Given the anaemic growth that many of us see in Europe, this is a potential disaster – the biggest economic opportunity in history and we are being left behind.

 

 

So I want to explore why global brands are losing out to local companies and, in particular, what lessons we can learn from the players that are winning

 

It’s certainly true to say that emerging market consumers do not have high incomes. But it is important to look closely at what they do have. For example, a thumbnail sketch of the woman pictured right is typical of an Asian middle-class woman. She enjoys what she gets from the goods she buys.

 

When she shops for clothes, she often buys bespoke and always in vibrant colours. Her gold jewellery helps to define her status and gives her financial security.

 

She is also incredibly concerned about hygiene – her house is spotless. She can phone her local store to have goods delivered by hand, in less than an hour, on credit. In fact, she enjoys richer consumption experiences and dramatically higher levels of convenience than most of us would aspire to. She is among the most demanding consumers in the world.

 

So to meet those demands and build a business with women like this, marketers need to do four things differently.

 

1. Prepare to deliver much more at much lower price points
When we shop for most categories we know exactly where we are in the price hierarchy. The notion of good, better and best is built into the products we buy and the shops we buy them from. In emerging markets that breaks down.

 

One example is the whisky category in India. When you speak with consumers buying whisky for the first time, it’s clear that they are looking for the same benefits as consumers much higher up the price ladder. A 400 rupee bottle of locally made whisky will deliver the same sense of professional accomplishment, discernment and a more sophisticated vision of masculinity to a less well-off consumer as his richer counterpart gets from Chivas or Johnnie Walker.

 

The benefits and, to a large extent, the communication are the same. So the first lesson is that we must abandon an idea of ‘good enough’ and deliver compelling value at a lower price point.

 

A store check I did last year in Koboko, a frontier town in Uganda near the border with South Sudan and the Democratic Republic of Congo, provided a good example.

 

Many of you will know Lucozade as the classic marketing case study in reinvention, changing its identity from a product given to kids in hospital recovering from tonsillitis, to a leading sports drink used by Daley Thompson. Lucozade is also selling very well in this part of Uganda. When I asked the supermarket owner why, he explained for HIV sufferers – something for which a product with high glucose and caffeine is actually very appropriate.

 

When I started out working in FMCG, the prevailing wisdom was that global brands would always win and the key question was how many global brands you had in your portfolio because in the end we would all drink Heineken. It’s interesting that as the world gets more connected, local relevance is more important, not less. 

 

We recently carried out research into buying factors and found that emerging market consumers place far more value on family and friends’ recommendations as a source of advice on what brands to buy. In fact, 92% of consumers in Egypt say they consult their friends or family before they buy, compared with just 29% in the UK. Even without the revolution in social media, it would be important to change the nature of the marketing campaigns we use to communicate.

 

Not surprisingly, this is often where local companies really win out. A typical example is an international manufacturer, which was really frustrated at how hard it was to get good data and stock control at its distributor, despite having invested heavily in IT systems to help. It turned out that the IT system was

great at supporting logistics but less good at managing tax exposure in an informal economy – a key factor in staying competitive.

 

 

So which brands are doing this well? A brand that most Westerners probably won’t recognise is a beer called Snow or Snoflake. Yet it’s the biggest beer brand in the world.

 

It’s sold by a joint venture between SABMiller and China Resource Enterprises – one of the biggest retail and consumer businesses in China. It is now the market leader, with a share above 20% in what has become the biggest beer market in the world. The business was built through a series of acquisitions in second-tier provinces that were growing fast and where they could  tightly control distribution. The company is present in Shanghai and many big cities, but that’s not its focus. It maintains an extremely local portfolio of Chinese brands, many of which are built on a platform specific to a region or province.

 

The business has focused on delivering that brand promise at a low price point and has built huge scale as a result. And on SABMiller’s part, it has found a creative partnership arrangement with a business that is owned by the Chinese government. None of these choices is obvious, but by adopting a truly emerging market-oriented approach, the partners have created a world-class business that’s winning locally.

 

More detail of this case can be found in our recent publication, The $30 Trillion Decathlon. We believe winning in these markets is not just a sprint, or even a marathon, but requires a whole range of capabilities, and the four marketing and sales themes discussed above are at the heart of what it takes to win.

 

 

In conclusion, I offer three thoughts. First, emerging market growth is the biggest economic opportunity in history and is happening now. Second, to deliver world-class performance we will need new capabilities; with marketing and sales being the most critical. And finally, if there’s a place in the world with the right companies, the right brands and, most importantly, the right people to go after this opportunity, it’s London. 

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Peter Haden is a consultant at McKinsey in London [email protected].

 

This piece was taken from the Q2 issue of Market Leader. Read more from the archive in our Library.