Caveat vendor: western multinationals have been scrambling to exploit the huge potential of the emerging economies in the developing world. Anita Allott describes the pitfalls awaiting those that fail to tailor their marketing to consumer needs in these new territories. (Business Marketing Strategy).
Lured by the prospect of billions of sales in the marketplace of the global village, multinational companies are rushing to place their brands in developing countries. There are many opportunities and threats associated with emerging markets, and an understanding of these can help financial managers to advise their companies on the costing and design of appropriate marketing strategies.
There is a growing consensus that traditional western marketing methods will not work in these new territories, and many companies acknowledge that they need to think differently. Three years after Kellogg's first ventured into India in the 1990s, for example, its sales stood at an unimpressive $10 million. Most Indian consumers preferred a traditional breakfast, so cereals simply didn't appeal to the mass market. Kellogg's rethought its strategy and developed a brand of "breakfast biscuits" called Chocos. Available at roadside tea stalls Tea stalls are small-time vendors who primarily sell tea, coffee and milk along small road-side shops in India. Tea stalls have a movable kitchen set up either with a kerosene or an LPG stove. Indians gather at tea stalls right from daybreak to have a fresh coffee or tea. for 10 cents, these are now selling well.
Marketing in emerging economies can be an intimidating in·tim·i·date
tr.v. in·tim·i·dat·ed, in·tim·i·dat·ing, in·tim·i·dates
1. To make timid; fill with fear.
2. To coerce or inhibit by or as if by threats. task. What most companies in the developed world would see as a basic marketing infrastructure is largely absent. There are non-existent or poorly developed distribution systems, relatively few communications channels Also called a "circuit" or "line," it is a pathway over which data are transferred between remote devices. It may refer to the entire physical medium, such as a telephone line, optical fiber, coaxial cable or twisted wire pair, or, it may refer to one of several carrier frequencies and, often, unpredictable political and economic backdrops. But the potential for revenue generation is still extremely attractive. Coca-Cola, for instance, predicts that its $2 billion investment in India, China and Indonesia--which together are home to more than 40 per cent of the world's population--can produce sales in those countries that will double every three years for the foreseeable future.
The argument that consumers in developing economies are becoming more westernised does hold if you focus on the closing income gap. Today, they are far more affluent than they were before their countries liberalised trade, but they are still poor by western standards. This is the first big miscalculation mis·cal·cu·late
tr. & intr.v. mis·cal·cu·lat·ed, mis·cal·cu·lat·ing, mis·cal·cu·lates
To count or estimate incorrectly.
mis·cal that the multinationals can make. In most developing countries the mass market will remain poor well beyond the planning horizons Planning horizon
The length of time a model or investor or plan projects into the future. of most companies. The proportion of consumers in emerging markets who have westernised buying preferences and purchasing power Purchasing Power
1. The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase.
2. to match is tiny. Also, it is not a given that consumer tastes will converge with those of developed markets.
But marketing success will require more than increased cultural sensitivity. Multinationals have tended to approach emerging markets with assumptions that are often at odds with reality. Take segmentation, for example: fine-grained segmentation works only if its costs are low and the returns are high. Time has a low opportunity cost in nations where the vast majority of consumers are low earners. So the labour-saving benefits that sell western consumers ready-to-eat meals and two-in-one shampoos are unlikely to be effective in developing economies. Also in these nations the rich minority can hire others' time at low cost and are therefore less attracted to products positioned on their labour-saving benefits. This does not mean it's impossible to sell products such as fast food, but they need to be marketed on their status and fashion appeal rather than convenience.
Where products are adapted to suit emerging markets, it will affect their profit potential. The strategy that most multinationals adopt involves offering a narrow range of existing goods--that is, those already well established in other markets. Another approach is "backward innovation" consisting of basic or stripped-down products. These tend to be cheaper, easy to use, reliable and simple to maintain.
Although such policies have proved effective in the past, they may not be appropriate today. Consumers in emerging markets are starting to see there is no need to use products that are mature and even obsolete in the developed world--they want the latest products and they want them now. And, even when they seem to want the same products, some redesigning is often required to reflect local preferences. Because the Chinese use pagers to send long messages, for instance, Motorola has developed the pagers it sells in China to display more lines of text.
Most multinationals have slipped up in one way or another in their application of brand management to emerging markets. Coca-Cola, for example, overvalued Overvalued
A stock whose current price is not justified by the earnings outlook or price/earnings (P/E) ratio and thus, expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the market price of the stock or from a deterioration in a its appeal in India. The company applied a tried and tested advertising campaign using its worldwide image and then watched its advantage slip away to Pepsi. Having realised after two years of declining sales that it had made a mistake, it tailored its ad campaign by using local celebrities. Perhaps more importantly, it also bought out a local brand of cola called Thumbs Up and then held it up as a poor substitute for "the real thing".
The notion that consumers in developing nations will be prepared to pay a premium for imported brands as their economies evolve is flawed. In fact, they rapidly become more value conscious. A recent study conducted in major Chinese cities found that only 14 per cent of respondents were willing to pay a premium for imported goods over locally made equivalents.
One of the clearest threats to multinational branding is to ignore the advantage that local companies have--especially their knowledge of consumer tastes and regional differences. Jollibee, a family-owned fast-food company in the Philippines, has successfully staved off competition from McDonald's, for example. The company has captured 75 per cent of the home burger market by developing a menu customised for local tastes, while emulating the service standards of its much larger rival.
Pricing is another crucial area. Consider Ford's foray into Verb 1. foray into - enter someone else's territory and take spoils; "The pirates raided the coastal villages regularly"
encroach upon, intrude on, obtrude upon, invade - to intrude upon, infringe, encroach on, violate; "This new colleague invades my India with its Escort model, which it priced at more than $21,000. In India, everything over $20,000 falls into the luxury bracket. The bestselling car in India, the Maruti-Suzuki, is priced at no more than $10,000. Fiat has already learnt to serve that tier of the market in Brazil, designing a new model called the Palio specifically for that country. The company is now poised to transfer its success from Brazil to India.
Prices need to be set in the context of local consumers' purchasing power, rather than in relation to international standards. Purchasing power parity Purchasing power parity
The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies. (PPP (Point-to-Point Protocol) The most popular method for transporting IP packets over a serial link between the user and the ISP. Developed in 1994 by the IETF and superseding the SLIP protocol, PPP establishes the session between the user's computer and the ISP using ) exchange rates estimate the value of a currency in terms of the basket of goods that it buys (compared with the cost of a similar basket in a reference country and currency), rather than in terms of the existing market exchange rates. By this measure, most currencies in emerging markets are severely undervalued Undervalued
A stock or other security that is trading below its true value.
The difficulty is knowing what the "true" value actually is. Analysts will usually recommend an undervalued stock with a strong buy rating. relative to western currencies--meaning that they buy more than you would expect from the exchange rate.
Companies therefore need to work back from PPP numbers when setting prices. The use of exchange rates translates into overpriced o·ver·price
tr.v. o·ver·priced, o·ver·pric·ing, o·ver·pric·es
To put too high a price or value on.
costing more than it is thought to be worth
Adj. products that only the top earners can afford. Strategies that favour thin margins and large volumes tend to work better. Pricing needs to drive the marketing equation. Consumers in emerging markets are getting a fast education in global standards, but they are often unwilling to pay global prices. Their focus on price tends to give low-cost local competitors the edge in tough markets, but multinationals can turn this price sensitivity to their advantage. Consumers are looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. products that represent good value for money.
The common wisdom that emerging markets need more capital than western markets is a fallacy fallacy, in logic, a term used to characterize an invalid argument. Strictly speaking, it refers only to the transition from a set of premises to a conclusion, and is distinguished from falsity, a value attributed to a single statement. . Hindustan Lever, a subsidiary of Unilever in India, operates a $2 billion business with a negligible amount of working capital. One way in which it achieves this is by keeping a supply of signed cheques from its dealers. When it ships an order, it simply enters the correct amount. This way of doing business is unheard of Not heard of; of which there are no tidings.
Unknown to fame; obscure.
See also: Unheard Unheard here, but relatively common in India.
Hindustan Lever also manages to operate with minimal fixed capital. It does so through a programme of supplier management. There is less need for vertical integration in emerging markets than western companies may think. High-quality local suppliers are available with lower overhead costs overhead costs
see fixed costs. . Supply-chain management is an important tool for changing the capital efficiency of a multinational's operations.
Western firms often cite the lack of a functioning distribution infrastructure as a reason to delay entering new markets. In China the notorious problems of achieving coverage through fragmented distribution systems and of securing payments of accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying have deterred many companies. The contrast in supply and distribution between developed and emerging markets is stark. Consumers in developing countries buy daily and locally because they lack refrigerated re·frig·er·ate
tr.v. re·frig·er·at·ed, re·frig·er·at·ing, re·frig·er·ates
1. To cool or chill (a substance).
2. To preserve (food) by chilling. storage, for instance. Such conditions prevent the retail formats of developed countries from delivering products economically.
Ask most managers why they are steering their companies into international expansion and they will talk about increasing sales or securing cheaper labour and materials. Important as those objectives are, they will not ensure success abroad. You cannot overemphasise Verb 1. overemphasise - place special or excessive emphasis on; "I cannot overemphasize the importance of this book"
exaggerate, hyperbolise, hyperbolize, overstate, amplify, magnify, overdraw - to enlarge beyond bounds or the how different overseas markets are. Entering them successfully usually requires a lot more than a simple tweak To make minor adjustments in an electronic system or in a software program in order to improve performance. See calibrate.
1. tweak - To change slightly, usually in reference to a value. Also used synonymously with twiddle. of the home-market formula.
So, while it is natural to wonder how big companies such as Ford and Coca-Cola will affect consumer behaviour in emerging markets, western executives would be wise to turn the question around. Success will require innovation on such a scale that that the multinationals will themselves be transformed.
Tailoring products to emerging markets is not a trivial task--minor cultural adaptations or marginal cost Marginal cost
The increase or decrease in a firm's total cost of production as a result of changing production by one unit.
The additional cost needed to produce or purchase one more unit of a good or service. reductions will not do the job. While it is seductive se·duc·tive
Tending to seduce; alluring: "his sad and fastidious but ever seductive Irish voice" John Fowles. for companies to think of the developing world as a new outlet for old products, a preoccupation with incremental Additional or increased growth, bulk, quantity, number, or value; enlarged.
Incremental cost is additional or increased cost of an item or service apart from its actual cost. volume ignores the real opportunities.
Anita Allott is a research analyst at CIMA