New Global Middle Class Consumers: Strategies for "Early Capture"

Aug. 18, 2010 - PRLog -- By David Caploe PhD, Chief Political Economist, EconomyWatch.com

At this particular time, one of the fabulous things for a Westerner living in Asia, or, indeed, anywhere outside the “developed” world,

is the opportunity to see concretely the rise of what is often called “the new global middle class.”

There is little question that a good deal of this radical transition

is being carried out by multi-national corporations, as well as, of course, local companies.

It is therefore extremely interesting – and important – to get a sense of how multi-nationals

are approaching the attempt to “capture” this emerging global middle class as early as possible,

given the somewhat surprising fact that in 17 product categories in the US,

market leader in 1925 remained #1 or #2 player for the rest of the century.

These companies include Kraft Foods (Nabisco), which led in biscuits; Del Monte Foods, in canned fruit; and Wrigley, in chewing gum.

The importance of “early capture” is underscored by rapidly growing ranks of middle-class consumers

in more than a dozen emerging nations, not just the fast-growing BRIC countries,

& include almost two billion people, spending a total of $6.9 trillion annually.

Research suggests that this figure will rise to $20 trillion during the next decade—

about twice the current consumption in the United States –

and who knows how long THAT figure is going to be so high ;-) .

These new spenders offer an opportunity for early winners to gain lasting advantages,

just as companies in Europe and US did at similar points in their development.

Despite having strong global brands, multinational companies face challenging competition in these markets,

as these economies already boast aggressive local players that have captured a significant portion of spending.

Chinese beverage maker Hangzhou Wahaha, for example, has built a $5.2 billion business against global competitors such as Coca-Cola and PepsiCo

by targeting rural areas, filling product gaps that meet local needs, keeping costs low, and appealing to patriotism.

Further complicating matters is the fact that multinationals’ business models

are usually based on practices established in the markets of the developed world,

where the game is won slowly, by finding cost savings

& making product improvements that capture single percentage points of market share over time.

Among emerging markets, perhaps only China can provide enough short-term growth to justify that strategy.

Meeting the needs of most consumers in emerging markets requires a different course,

which often elicits anguished cries in the corridors of the multinationals:

“You want me to change my business model and go across the world for $50 million in revenue?”

It’s an understandable lament for executives who not only fear ending up with little to show for their efforts

but also are wary of the battles already under way among emerging-market champions.

While there are multiple approaches to capturing emerging-market consumers,

the two critical factors are SPEED and SCALE.

One way multinationals can quickly gain the scale they need is to identify clusters of similar consumers across multiple markets.

That approach allows these companies to build revenue and profit streams that are collectively material

and justify significant, ongoing capital investments to fuel growth.

Another tack is to work at a more local level, gaining scale in specific regions and categories

by teaming up with deeply knowledgeable on-the-ground partners.

They can help not only in product development but also in distribution and market positioning—

the crucial final steps to reaching highly local consumer markets.

All of this is easier said than done, of course, because middle-class consumers in these markets are extremely diverse.

In some ways, they resemble those in developed nations:

they are aware of and have a fondness for brands

and want access to a variety of products at different prices,

including products they aspire to but can’t currently afford.

Yet their tastes are often localized, and while they are middle-class in regional terms,

they are still not wealthy enough to replace products regularly, because their percentage of truly discretionary income is lower:

in China and India, for example, about 40% of average household income is spent on food and transportation,

compared with 25% in US,

although that could be changing depending on whether the de-flation or stag-flation scenario ends up dominating.

The best way to make sense of this picture is to take a granular view using product categories.

For individual categories, multinationals should FIRST identify whether consumer needs in emerging markets are fundamentally global or local.

A good proxy for this issue is the similarity of product offerings across geographies.

SECOND, multinationals can assess the consumer’s ability to afford a given product.

Useful approximations include category penetration and product availability in key developing markets,

as well as the willingness of consumers to “stretch” to buy less-affordable products.

By developing a perspective on whether and to what extent consumer tastes are global or local

and combining that w clear view on affordability and accessibility of a given product,

multinationals can go a long way toward determining the strategies and business models that will allow them to gain scale quickly.

Broadly speaking, there are FOUR categories of different goods and services,

each one of which requires a different strategy

if a company is going to successfully reach the consumer needs and taste of the “new global middle class.”

The FIRST category comprises products and services for which consumer needs

are similar across geographies and affordability is not a constraint.

There is little need to create marketing plans to roll out such products in different countries, one after another:

it seems most efficient to identify similar consumer segments across countries

& build scalable business models for each cluster.

Examples of products in this category include personal banking, mobile communications, consumer electronics, and pharmaceuticals,

which have similar industry structures, rates of consumer adoption, and socioreligious factors across geographies.

A leading multinational retail bank’s marketing team, for example,

used longitudinal consumer data to identify five clusters across multiple Asian countries.

These segments included one of conservative users very loyal to their local banks – India, Indonesia, the Philippines, and Taiwan –

and another of remote-channel users who were highly price sensitive: Hong Kong, Singapore, and South Korea.

The bank successfully designed & implemented a specific product and channel strategy for each of these five segments across countries.

A SECOND category comprises emerging-market consumers who have the means to buy products and services

that are widely available or even mass market in the developed world ...

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