How to Win in Emerging Markets

Village roads can be impassable, home cooking is still a way of life, product prices can be below the cost of production in developed markets, and local products often have generations of loyal customers. Nevertheless, emerging markets in Asia, Latin America and Eastern Europe are delivering some of the strongest revenue and profit growth for global makers of fast-moving consumer goods — everything from snacks to toothpaste — despite concerns that lower prices translate into lower profits.

Emerging-market leaders like Coca-Cola, Uni-lever, Colgate-Palmolive, Groupe Danone and PepsiCo earn 5% to 15% of their total revenues from the three largest emerging markets in Asia: China, India and Indonesia. The story is similar in Russia and Eastern Europe, where these companies often dominate their target categories and routinely exceed internal corporate benchmarks for profitability. And the trend is likely to continue: The gross domestic product of emerging markets equaled the gross domestic product of advanced nations for the first time in 2006, with much of the growth coming from the “BRICET” nations — Brazil, Russia, India, China, Eastern Europe and Turkey.

Until the past few years, emerging markets were a relatively low priority for the leading consumer products companies with a few exceptions, even though these markets are home to about 85% of the world’s population. The obstacles are still real — in emerging markets, multinationals compete on unfamiliar terrain dominated by local players, sell at price points below those in their home countries, and wrestle with deep-seated social and cultural customs. But with growth slowing in the mature markets of North America, Japan and Western Europe, some consumer goods companies have figured out how to tap into the purchasing power of a new and growing middle class — which has rising income, credit cards and access to personal loans — in these emerging markets. The fast-moving consumer goods market leaders have proved that, when armed with the right strategies, they can beat domestic competitors. But what separates the winners from the losers?

Flexible thinking, to begin with. Successful companies are willing to break away from business as usual. They reconfigure global products to compete with consumers’ preferences for popular local brands, both in price and taste. Or, as with Rossiya — the leading chocolate brand in Nestlé S.A.’s Russian portfolio — companies skillfully steer acquired brands with 50 years of tradition under their own umbrella. They adapt Western marketing and business management practices to local customs. And they develop the resourcefulness to overcome inevitable barriers. For example, where the transportation infrastructure is poor, they might develop workarounds to distribute their products, as Unilever Group did with its fleet of motorcycles to reach customers in remote villages in Indonesia.

For those that surmount the obstacles, the rewards can be great. In some consumer product categories, growth in emerging markets is three times that of developed markets. While each market requires different adaptations, the emerging-market winners share six common practices. (See “Keys to Emerging-Market Success”)

They enter the mass market to achieve scale in distribution, brand building and operations.

Historically, multinationals in developing nations targeted niche premium segments — those that traditionally delivered the highest profit margins. Typically, these companies could not bring their costs low enough to sell to less affluent consumers, many of whom still lived in the countryside. The multinationals often were stuck with low growth, while local players were expanding rapidly in the low-end segments. And local players — making the most of their low costs, better distribution and increasing sophistication — also began launching brands in the premium segment as the middle class started to grow.

A good example is the cigarette business in Indonesia, where foreign players were limited to less than 10% of the market with brands like Marlboro, Dunhill and Lucky Strike. In 2003, one local player, PT Hanjaya Mandala Sampoerna Tbk., launched A Mild, a kretek (clove and tobacco) cigarette for the premium segment. The success of that brand propelled local players like PT Djarum to attack the premium and near-premium segments with brands like L.A. Lights.

As local companies moved into the premium and near-premium market segments, multinationals realized that the mass-market opportunity was too big and important to ignore — they needed to enter the mass market for both the opportunity and to play defense. What’s more, participating in the mass segment allows multinationals to drive down the costs of their premium products by achieving economies of scale in raw materials purchasing, manufacturing, sales, distribution and brand building.

In 2005, for example, Philip Morris International Inc. purchased family-owned Sampoerna in a $5.2 billion transaction. It was the largest deal by a foreign investor in Indonesia. In addition to the many benefits that come with achieving scale, the acquisition will help Philip Morris and Sampoerna make the most of distribution synergies that can help them expand both companies’ brands in Indonesia and in markets like Malaysia, Singapore, Brunei and Brazil. Said Sampoerna president director Martin King, “In Indonesia, Sampoerna has an unparalleled distribution network, whereas Philip Morris has a very good distribution system and sales force in many other countries around the world.” Among the first offspring from the corporate marriage: In July 2007, Philip Morris introduced Marlboro Kretek Filter, a new cigarette aimed at extending the Marlboro brand in Indonesia’s market for clove-and-tobacco cigarettes.

The Philip Morris-Sampoerna acquisition has been an enormous success — the combined company’s volume jumped 9.1% in the first year, and market share rose 1.5%, to more than 28%, enabling it to overtake Jakarta-based PT Gudang Garam Tbk. as market leader.

They localize at every level.

Homegrown competitors have several incumbent advantages, including consumer understanding and loyalty, lower costs and home court advantages with government regulators. But by taking the time to learn and master local market complexities, multinationals can gain a competitive edge. That often requires fundamental changes to the product offering — switching to significantly smaller pack sizes, using unconventional distribution channels and developing products in local flavors, to name a few.

For its part, Procter & Gamble Co. knew that winning over Chinese toothpaste consumers meant catering to local preferences and health beliefs. After extensive research, P&G rolled out a reformulated version of Crest. Chinese consumers can find the Crest brand in fruit and tea flavors, with herbal elements, and there’s even a salt version, catering to the Chinese belief that salt promotes whiter teeth. P&G’s approach to localization helped boost its toothpaste sales in China from nearly zero in 1997 to 25% of the market in 2007.

The Coca-Cola Co. accelerated its growth in the Russian soft drinks market by acquiring the second-largest Russian fruit juice maker, Multon, through its Greek subsidiary, Coca-Cola Hellenic Bottling Co. S.A., in 2005. It thus positioned itself to ride the local preference for fruit juice drinks. Russia is the largest producer and consumer of fruit juice in Eastern Europe, where fruit juice sales shot up 64% between 1998 and 2003. Coca-Cola credited the acquisition, along with a marketing push, with helping deliver an above-average sales increase of 7% in 2005 across North Asia, Eurasia and the Middle East.

Unilever has used innovative distribution solutions to tap the consumer market in rural India. It trained more than 25,000 Indian village women to serve as distributors, extending its reach to 80,000 villages. The program generates about $250 million yearly from villages that otherwise would be too costly to serve.

Localizing also means taking an aggressive approach to brand building. That was the foundation for Coca-Cola’s dramatic success in China, where it leads all carbonated soft-drink sales, with a 51% market share led by its Coke and Sprite brands against PepsiCo’s 30% share. Coca-Cola’s sales maintained a 16% to 17% annual growth rate in the latest five years, and it even hit 18% in the second quarter of 2007. By spending twice as much as PepsiCo on advertising and promotion — including sponsoring sports events in China, Chinese Olympic teams and Beijing’s 2008 Olympic bid — Coca-Cola eclipsed domestic and multinational competitors alike to attain the No. 1 position. Now, China is Coca-Cola’s fourth-largest market, approximately 5% of its worldwide sales.

At the crux of all localization strategies is pricing. Global marketers cannot beat out local brands unless they find the local pricing sweet spot — a price that is competitive in the local marketplace and that also delivers a profit. (See “Can Mass Yield Profits?”) Finding that affordable price point usually requires reconfiguring existing products or creating new ones specific to a market. For example, Singapore-based Petra Foods Ltd., the world’s fourth-largest chocolate maker, prices its popular chocolate treat for Indonesian consumers at two pricing sweet spots — 500 and 1,000 rupiahs (approximately five and 10 U.S. cents). Those prices coincide with the pocket money typically given to children for treats.

They develop a “good-enough” cost mentality.

Between the traditional premium and low-end market segments is the large and flourishing market for what we call “good-enough” products, with higher quality than low-end goods but affordable prices that still generate profits. Feeding the good-enough market requires aggressive management of costs. Among the techniques: taking advantage of used capital equipment or more labor-intensive production processes, using local suppliers and outsourcing. For example, a major multinational food company discovered that it could source capital equipment from India at a third of the price it paid to European suppliers without compromising its stringent quality standards. Cost discipline also means reducing overhead and localizing management.

Winners look at everything they can control to shift the competitive dynamics in their favor — from changing the specifications for packaging material to imposing greater operating efficiency to lowering overhead and using local equipment.

For multinationals catering to the premium end of the market, a strategic acquisition can help slash costs enough to make them competitive. (See “Subsidiaries Growing.”) For example, in 2000, Colgate-Palmolive Co. invested $21 million for a 40% stake in Sanxiao, a low-cost toothpaste brand in China. The domestic company had a 30% cost advantage over Colgate. By localizing manufacturing at a Sanxiao facility, Colgate was able to reduce its costs by 60%, which allowed the company to lower the price of its goods by an equal percentage and thus expand into the good-enough segment. Colgate’s benefits multiplied when it started using the factory as a worldwide distribution center.

They think globally, hire locally.

Too often, multinationals count on expatriates to guide their entry into emerging markets, an approach that can backfire. Expatriates can drive up costs and frequently fail to deliver the deep market understanding offered by local managers. Instead of parachuting in expert expatriates on short assignments, winning multinationals cultivate world-class local management teams that provide a competitive edge in product design, promotion and distribution. The primary role of expatriates shifts from managing to developing local talent and transferring knowledge.

Market leaders foster loyalty by empowering local teams and providing them with global opportunities. It’s a talent pool they can tap when entering other emerging markets. Procter & Gamble, the most successful consumer products company in China, has staked its future on its Chinese recruits, who represent nearly all of its employees in China — with one-quarter of them holding Chinese university degrees. When companies do hire expatriates, they make sure there’s a long-term commitment.

But the tight local management pools also require creativity, flexibility and commitment. Fast-moving consumer goods players risk becoming the training ground for their local competitors, which are sometimes ready to promote faster and pay better than traditional pay scales allow. A sales force turnover exceeding 50% per year can result.

They 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, broadening its reach with a stronger distribution network, providing a local talent pool and lowering operating costs. In July 2007, Coca-Cola acquired the Russian beverage group Aquavision, giving itself state-of-the-art, expanded production capabilities. The move builds on Coca-Cola’s previous purchase of Multon, the leading Russian fruit juice maker, strengthening the multinational’s position in Eastern Europe’s hotly contested soft drinks market.

In India, Frito-Lay Inc. increased its market share — and profits — when it bought the local brand Uncle Chipps in 2000. The Indian chips complemented Frito-Lay’s brand portfolio, both in price and flavors. After the acquisition, Frito-Lay relaunched the Uncle Chipps brand at a lower price, positioning it as cheaper than Lay’s, its flagship potato chip brand. Instead of competing against each other, Frito-Lay has two products targeted at different consumer segments. It also trimmed the number of Uncle Chipps flavors, dropping one that was similar to its saucy ketchup offering. Again, the goal was to have complementary, not competing, flavors. To reduce manufacturing costs, Lay’s moved production to a local plant.

Gillette, which was acquired by P&G in 2005 and is the world’s largest battery maker, scored a major coup in 2003 by acquiring the Fujian Nanping Nanfu Battery Co. Ltd., the major Chinese rival to its Duracell batteries. The acquisition gave Gillette much more than just a hot-selling Chinese battery brand. The deal had hidden assets: a state-of-the-art manufacturing plant and a distribution network with over three million retailers throughout China. With Nanfu’s low-cost factory, Gillette was able to reduce production costs and use the retailing network to extend the reach of its Duracell product line. Gillette protected both Duracell’s and Nanfu’s brands in their respective segments. The dual branding, cost synergies, sales growth, broadened product portfolio, economies of scale and superior distribution access to more than three million retail outlets in China enabled Gillette to increase its operating margins in the country significantly.

They organize for emerging markets.

The leaders maximize their investments by building dedicated emerging-market capabilities. This enables them to approach each emerging market with strategies crafted to distinguish the characteristics they find there from the established practices they pursue in developed economies. For example, British American Tobacco PLC, one of the most successful consumer goods companies in emerging markets, has long had a stable of international management talent that it deploys across Asia, Africa and Latin America.

A U.K. multinational has taken this a step further by creating a formal emerging-markets organization separate from its other international operations. By putting the emerging-markets operations under one tent, it expects to sharpen management’s focus and improve managers’ ability to evaluate the relative risk-return trade-offs across its emerging-markets portfolio. This will also promote cross-market learning about what works and what doesn’t — crucial lessons that otherwise might be lost if emerging-market insights were blurred in a vast global operation.

Groupe Danone, the French food conglomerate, has substantial presence in major emerging markets in Asia such as India, Indonesia and China, which share several common characteristics — huge geographic area; a high proportion of mom-and-pop outlets, especially in rural areas; and low price points. The company has learned a lot from operating in these markets, such as positioning brands to appeal to local consumers, using low-cost Asian production equipment, keeping a tight lid on overhead and changing the specifications for packaging and raw materials to produce “good-enough” products. These lessons have been effectively cross-pollinated across the various emerging markets in which Danone operates.

With consumer markets in Asia and Eastern Europe growing at double-digit rates, multinationals are moving fast to build their brands — and the expertise to manage them in emerging markets. Indeed, succeeding in emerging markets is essential if multinationals are to defend — and increase — their share of the global market. How they fare in emerging markets is a critical indicator of how they will fare in the world.