What does a modern, informed teenager from São Paulo have in common with his New York counterpart? Probably more than with another teenager from his own country but from a smaller city like Manaus, the capital city of the state of Amazonas and Brazil’s seventh largest city. Ethnographic studies show that culture and consumer behavior across the world capitals are more comparable than within a country’s capital and its second- and third-tier cities. This does not suggest that the average, middle class teenager from Manaus has everything in common with another from a place like Hyderabad (India), Chongqing (China), or Krasnoyarsk (Russia). However, it does imply that they are all witnessing an incredible economic development of their countries, and together, with the rest of their generation, they are in fact the driving force behind it.
During the past 10-15 years, the economic growth in emerging markets has lifted millions of people out of poverty and into a new, global middle class. The development is driven by both rural migration and urban population growth. As income and opportunities increase, the standard of living, lifestyle, and consumption patterns shift from basic necessities towards increased expenditure on discretionary products and services.
The rise of the new middle class consumer in emerging markets is not growing incrementally, but rather exponentially. It is the fastest-growing segment of the world’s population, and for the first time in history, the middle class now accounts for more than half the world’s population.
In the coming decade, the development will intensify as another 700 million people enter the new middle class. According to a 2009 report by the World Bank, the number of middle class households, defined as having an annual disposable incomes of US$5,000-15,000 as a percentage of total households, was estimated to be 31.7% in China, 14.6% in India and 35.7% in Indonesia. By 2020, these percentages are expected to reach 46.2% in China, 41.1% in India and 58.3% in Indonesia.
The growth in emerging market countries is significantly outpacing those of the developed countries such that in the next 15 years the global economic landscape will be completely altered.
Lessons Learned, At a Price
This rapid economic development has been called the world’s largest growth opportunity for international companies specializing in consumer goods. The new class of consumers have created a vast market, such that, for instance, in 2008 alone, the number of cars sold in emerging markets, for the first time, exceeded the number of cars sold in America. In a similar vein, by 2007, India had more mobile-phone users than America, with China having more than twice as many by comparison. By the end of April 2011, the number of Chinese mobile phone subscribers reached 900 million against 300 million in the US.
Traditionally, the strategy for multinationals to penetrate into emerging markets involved building a single presence in the capital city and offering existing or downscaled products at a reduced price to the local market. To simply transfer existing consumer goods from developed countries to new markets have proven an inadequate strategy, and for some, a costly lesson.
A classic example is Kellogg’s attempts to introduce its cereal products to India’s consumers. Kellogg’s launched Corn Flakes as a premium brand in India in 1995. But without the proper strategy, the product failed miserably. It achieved less than 20% of its initial sales target.
The predominant faux pas was the firm’s inadequate research and understanding of the local market and its insufficient knowledge of Indian consumption patterns and culture. Kellogg also underestimated the competition from domestic brands, as well as a misjudgment of consumers’ willingness to pay a premium price for an unknown, foreign product, particularly since as a culture, Indians were unfamiliar with the consumption of processed foods.
Additionally, Kellogg’s lack of cultural consideration prior to marketing its product meant they missed the mark with their consumers: Indians typically start the day with a hot meal, but by contrast, Kellogg’s Corn Flakes required cold milk – using hot milk the cereals turned soggy. In essence not a pleasant way to start the day and no one would be keen on eating it.
Because of the inadequate research into its consumer base behavior, Kellogg’s struggled in India for years. It was only after revamping its products and making a cereal suitable for hot milk that Kellogg’s became profitable in India. Today, Kellogg’s has a market share of over 75% in the breakfast cereal category in India, a success that can be partly attributed to knowing your consumer base behavior.
Managing Director of McDonald’s India, Vikram Bakshi clearly articulates the point that “When you go into any country, very clearly, you have to understand the culture; you have to understand how you intend to be relevant to the consumer in that country. I don’t think any brand, no matter how big it is, can take the market lightly. And I think the biggest mistake is when you think you have a big brand and that everyone is overwhelmed by it. Because whatever the brand, it has to be relevant to the consumer of that country”.
Pockets of Growth in Emerging Markets
Until recently, international brands concentrated their emerging market efforts in places where a metropolitan culture with western exposure prevailed – typically in the capital city. But it is becoming increasingly evident that a much bigger potential for growth is hidden in smaller areas among second and third tier cities. The sum of consumers in these areas far outnumber, without comparison, the number in capital cities. Today, 717 emerging market cities have populations of more than 500,000 and an additional 371 cities will reach this size by 2030. As a market, even though these second and third tier cities are relatively poor, the large population provides the incentive to offer consumer services cheaply but in also increased volumes of sales.
A successful retail innovation in emerging markets is Casas Bahia in Brazil. Due to careful research of its consumer base, it is now better aligned to its customer needs. It has made home appliances affordable to low-income consumers by having a large assortment of products, fast delivery services, convenient store locations, and a reasonable pricing scheme through installment plans that feature low payments over long periods of time. People who could previously not afford a washing machine, a refrigerator, or a flat-screen TV can now purchase it with no down payment, and pay back over a year’s installments with little or no interest rate. Proving hugely popular, the retail chain even ventured to open a store in Paraisópolis, one of São Paulo’s notorious favelas.
Consumer products giant Proctor & Gamble’s (P&G) CEO, Bob McDonald, also sees emerging markets as key growth areas. Last year, he announced his ambition to add another 1 billion consumers from emerging markets within five years. In a place like China, where they currently reach about 60 percent of the population, P&G’s goal is to reach 100 percent. The plan is to extend its distribution network and product offerings into rural areas where stores and economies don’t currently exist today. Some of their targeted consumers get by with as little as a couple of dollars a day. Furthermore, P&G is investing heavily in R&D, to understand consumer behavior among people with very limited discretionary income.
Some of the consumer studies commissioned by P&G include tenacious details of potential consumers. For instance, observing how a woman from a poor, rural family, washes her hair without having access to running water in the house. P&G has a large team of consumer behavior researchers who travel to distant locations to document this kind of insights. Understanding these new consumers is so crucial for a company like P&G, that sometimes even a high-ranking executive participates in a case study of new middle class consumers. Based upon their extensive studies, they innovate products specifically tailored to the new consumer group.
Reaching Consumers in Fragmented Markets
To sustain and accelerate growth in the emerging markets, companies have to respond well to fragmented regional cultures and sub-cultures by constantly launching new, customized offerings. They also need to understand perhaps subtlety, the dreams and aspirations of its consumers as these influence their behavior. In many ways, success in emerging markets will depend in large part to how quickly companies can understand and respond to differences in attitudes, spending behavior, and preferences among the increasingly affluent consumers.
When developing products for the potential consumer, international brands have for too long relied solely on macro-economic data, and simply offered existing products or services without considering the nuances of the local market.
In order to succeed in these new market economies, brands needs to use qualitative methods to discover what their customers think about their products and services. Qualitative techniques including visual ethnography, focus groups and open-ended survey questionnaires, have proven to be valuable strategies to delve deeper into the relationship between the brand and those who buy or use their products. These techniques also allow potential customers to express their opinions using their own words, not the words of a brand executive. In an increasing competitive economic landscape, a hands-on approach, and face-to-face conversation with consumers is essential for becoming successful in emerging markets.
It is very difficult to stand upto customer's expectations; but the trick is to exceed them by a fair margin, only then the companies can allure the rising middle class around the globe.
Wow, that was a simple idea served with a big deal of technocratic language to sound more complex than it actually is. So yes, it's a revolution: sellers talk again to their buyers after years of mental monolog? So we're all more "consumers" than people to your eyes, I understand during the repetition of the label throughout your "analysis" (selling your services). It's a good reconversion from documentary photography to "local consumer field research" to help Mc Donald's or Procter & Gamble make even more profit & increase their hegemony over this world. The multinational trusts lead politics nowadays, so you better be on their side. Thanks for sharing your point, although I can see the dirty spots between the well written lines. It's all a matter of personal ethics, don't you think? JM Babonneau, photographer
Jacob, I absolutely agree with you in the description of what the behavior of the emerging economies. I am delighted that you've brought these reflections and projections of future indicators. The conclusion you've accomplished is very important on different topics, so I would like to add to strengthen the conclusions that has been happening around the world, with different pace but conceptually comparable, since the industrial revolution. The same thing that has been found in the pattern of consumption was described by Celso Furtado in the 1970s (a Brazilian scientist little known in global education.)I think that we should recommend that politicians consider the needs of its people without repeating the road made by Kellogs in India, but that made McDonald on the same site. Ah! I think that someone should be introduced to Obama and Vikram Bakshi. And because not with Harry Reid, Merkel, Sarkozy and Berlusconi? Do not you think?