Consumer and Retail Companies Must Focus on Distribution and Localization in Emerging Markets

September 19, 2012. According to the Business Perspectives for Emerging Markets 2012-2017 Report by M-Brain (formerly Global Intelligence Alliance) , emerging markets will continue to play a larger role in generating global revenues for the consumer and retail sector by 2017. In fact, the 39 global consumer and retail players surveyed in the report expect to generate on average, 28% of their global revenues from emerging markets by that time.

Despite several global economic maladies, the consumer and retail industry can remain optimistic regarding its growth in emerging markets, as global retail spending is expected to increase from US$ 12 trillion to US$ 40 trillion a year by 2020 according to ATKearney. Even with the US fiscal policy issues, the EU economic crisis and slowing growth rates in BRIC countries, the forecasted spending increase is certainly a positive indicator of things to come.

M-Brain (formerly GIA)’s research shows that consumer and retail companies will choose to focus on China, Brazil and India as their primary emerging markets, with Indonesia and Vietnam beating Russia as favored as secondary emerging markets. Much fewer respondents selected Russia, compared to China, India, Brazil, Indonesia and Vietnam. On par with Russia were Malaysia and Mexico.

Consumer and retail companies see markets such as Indonesia and Vietnam as good test beds for other large emerging markets.

With 30% of its population aged under 15 and only 6% aged over 65, Indonesia is a high growth retail market in the middle-to-long term. Retail sales in Indonesia are expected to grow between 4% and 5% annually til 2015. Similar in development and close in geography to China, Vietnam has many consumer and retail companies, including P&G and Unilever, adopting market entry models for the fifth top rated emerging market.

Merely looking at economic or demographic figures however, will not explain all the preferences. In Russia for instance, 30 million more people have been lifted into the middle class and some estimate that it will become the second largest economy in Europe by 2013. The country however falls behind to sixth choice as a top emerging market. So while the opportunities are there, but the actual market potential for international consumer and retail companies may be offset by bureaucracy, regulation, competition and corruption, as shown in the list of top threats identified in the report.

Success factor and threats

Where logistics networks may still be underdeveloped in emerging markets, nearly half of the respondents (49%) in M-Brain (formerly GIA)’s study say that distribution and access to customers is their number one success factor, unlike the automotive or energy and resources industries that ranked such factors sixth and ninth respectively.

Consumer and retail companies also said that building strong brands (44%) and pricing (31%) were vital for successful in emerging markets. Adapting to local culture (26%) and first mover advantage (23%), were ranked as relatively important, perhaps due to the need for greater market differentiation and the availability of local resources, such as distributors.

Interestingly, 18% of the respondents said that “lack of understanding of emerging markets at headquarters” was a threat. Lack of market intelligence (15%) was another. Both of these are internal factors and show that some companies have yet to find the best solution in information sharing and analysis. Conversely, grey markets, parallel imports, lack of demand and repeated losses are things that worry consumer and retail players the least.

To truly capture the potential of the emerging markets, companies must address emerging markets individually, and products need to reflect their unique geographies and cultures.

Multinationals such as Korean-based LG have successfully entered developing markets such as India with effective pricing strategies for its middle and low-end products. LG has now captured 25% of the television market in India, and now pulls in 80% of the company’s sales in India from the low-end segment. In 2009, LG generated US$ 3 billion in revenues in India. LG was only able capture the Indian market after several false starts and learning to depend on local market intelligence.

The opposite is true for Mattel, which attempted to introduce its range of Barbie dolls in China. After two years of poor sales, it was forced to close its six-storey store in Shanghai. The doll from America was considered too provocative and therefore not an ideal example for Chinese children.

Success Factors in Emerging Markets for Consumer and Retail Companies 2012-2017

Rank Success Factors
% Respondents
1 Distribution / access to customers 49%
2 Building a strong brand 44%
3 Pricing 31%
4 Adapting to local culture 26%
5 First mover advantage 23%
6 Product/service quality 21%
7 Localization of products/services 18%
8 Flexibility to change as the market develops 15%
9 Local partner(s) 15%
10 Finding the right talent 13%
11 Government relations 13%
12 Local business relationships / lobbying 13%
13 After-sales service/spares/maintenance 10%
14 Localized competitive positioning 10%
15 Appetite for risk 8%
16 Availability of finance 8%
17 Cost control 8%
18 Access to local sources of financing 5%
19 IP protection 5%
20 Supply chain 5%
21 Reliable access to energy sources 3%

Source: M-Brain (formerly GIA)’s Business Perspectives on Emerging Markets 2012-2017 Report Consumer and Retail respondents=39

Threats in Emerging Markets for Consumer and Retail Companies 2012-2017

Rank Threats
% Respondents
1 Bureaucracy and red tape 44%
2 Regulations and taxes 33%
3 Competition from local companies 28%
4 Corruption / weak rule of law 26%
5 Economic volatility 26%
6 Lack of local market understanding at headquarters 18%
7 Political risk 18%
8 Unreliable local partners 18%
9 Lack of reliable market intelligence 15%
10 Poor infrastructure 15%
11 Competition from other foreign companies 13%
12 Foreign exchange rate changes 13%
13 International supply chain cost 13%
14 Rapid change in the market 13%
15 Difficulty breaking into local networks 8%
16 Grey markets / parallel imports 8%
17 Lack of demand 8%
18 Repeated losses 5%

Source: M-Brain (formerly GIA)’s Business Perspectives on Emerging Markets 2012-2017 Report Consumer and Retail respondents=39

Looking into the future

Retail and consumer multinationals entering emerging markets need to understand consumer behavior and local culture. As M-Brain (formerly GIA)’s survey revealed, adapting to local culture is a vital success factor for the consumer and retail industry in emerging markets. Emerging markets are experiencing changes in their economic, societal, and demographic conditions that will certainly have an influence on their consumers’ spending, creating new growth opportunities for the retail and consumer industry.

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