Five rules, corresponding to the five elements of a business model, offer guidance:
- Customize the offering -- It hardly seems necessary to say that offerings for emerging markets need to be re-thought from the ground-up, yet countless firms keep making the same mistakes. They target a thin strata of the richest consumers with Western products and hope that demand trickles down. It doesn't. Not only are these products often poorly suited for local tastes, but consumers in some of the most critical emerging markets are increasingly nationalistic and eager to buy quality local brands. Coca-Cola seems to have learned this lesson with its Pulpy Super Milkly. True, its flagship soda is consistent worldwide, but the 64 flavors on offer at Atlanta's World of Coca-Cola illustrate that even this iconic firm knows how to shape-shift to succeed locally.
- Adapt competitive strategy -- While consumers embrace novel entries in some categories (such as beverages), in many areas it can be fiendishly hard to build share against entrenched local brands. Consumers spending a relatively large amount of disposable income on a purchase want reliability. It may be easier to create a new category. For instance, shop shelves will frequently carry local brands of toothbrushes, but Western brands do far better in mouthwash. The challenge then is to displace non-consumption, which is an entirely different task. Brands still matter, though in a different way; they help make an unfamiliar purchase seem less risky, and they create staying power against the local upstarts that are likely to emerge once a category becomes significant.
- Invest in partnerships and distribution -- The role of distributors in emerging markets can be vastly different than in the West. Where goods move inefficiently, the power to get them to widely-dispersed retailers is key. Distributors can also provide critical assets to retailers, such as refrigeration units, signage, and even stock on consignment. For retailers chronically short of capital, these partners are essential. Distributors can also drop retailers for stocking a rival's goods, and in a weakly-competitive distribution sector such a move can be devastating to a shop. Firms such as SABMiller, Coca-Cola and others make ironclad control of distribution a fundamental building block of their success with consumer products in emerging markets.
- Rethink financials -- Cost structures of course need to be kept thin in a market with price-sensitive consumers, but there is a broader need for financial innovation as well. While the gross profit on items may be relatively low, operating margins can be acceptible given inexpensive media costs and low staff overheads. Return on assets (ROA) can be quite high given the labor-intensive nature of these economies. Alternatively, a manufacturer can extend working capital to its distributors, lowering ROA but enabling higher price points. Of course, the challenging pre-condition for that latter model is an ability to get repaid, but new technologies such as mobile payments enable B2B commerce with same-day value, hitherto a real challenge in these settings.
- Value new competencies -- The art of brand building is important, but practical problem-solving may be the most critical skill in many emerging markets. When Zimbabwe's railways stopped functioning, Coke's bottler in Zambia lost its supply of glass. Sales screetched to a halt. Creative sourcing of alternatives saved the day, as scrappy approaches have countless times when the things Western firms take for granted suddenly go awry in these settings.
This post was written by Steve Wunker. Click for more of New Markets' thinking on consumer products and business models.