Rebranding for the Next Billion
Over the next decade, emerging markets will outstrip growth in the West by a significant margin. To stake a claim in these burgeoning new consumer markets, businesses in the FMCG sector must rebrand and innovate to reach beyond traditional customer bases. Sarah Pursey explores the challenges and opportunities that will reveal themselves in the global FMCG market over the next decade, through the emergence of the next billion shoppers.
It was in 1979 that then US President Jimmy Carter re-established full relations with China, following a prolonged period of Cold War stalemate between the two superpowers. With the thawing of the relationship, national embassies were re-instated in Beijing and Washington, and a bilateral trade agreement between the two countries completed. No sooner was the milestone document signed however, than beverage giant Coca-Cola was spiriting 20,000 cases of Coke from Hong Kong to the mainland.
If the commercial sagacity of the beverage giant was impressive back then, its continued form has since cemented its position at the frontier of new market opportunities. The company was swift to stamp its brand on another historical event – on 9th November 1989, on the day that the Berlin Wall fell, East Germany was reconnected not only with the West, but also the sweet theretofore contraband taste of Coca-Cola, as the company’s employees handed out free cans to revellers.
Today, there are just three countries where the beverage giant is not present – Cuba, North Korea and Myanmar. However, following the end of decades of oppressive military rule, and with the US government expected to re-establish trade relations there following a 60-year absence from the country, Myanmar will soon be another market that Coca-Cola can tick off its list.
The global market penetration of the flagship US drinks brand may appear bold, but with financial stagnation currently pervading most established Western markets, the strategy of crossing new frontiers into the emerging world where healthy GDP gains are still being enjoyed is a logical and increasingly necessary step for many international consumer goods manufacturers.
Indeed, according to the OECD Development Center’s 'The Emerging Middle Class in Developing Countries’, by 2020 there will be one billion more consumers in the world spending between US$10-100 per day. “According to our research, 73 per cent of executives say growth in the emerging markets is a top priority; but when we ask if they are actually prepared for this growth, only 13 per cent say they are,” says David C Michael, Senior Partner and MD at The Boston Consultancy Group (BCG).
Cracking such markets is just one of many challenges that the industry must face in the years ahead. Others include increasing volatility of commodity pricing, establishing a strong presence in the growing online sales stream, and remaining buoyant amid mounting cost pressures amid the recent shift to value.
Race to the bottom of the pyramid
The opportunities for FMCG suppliers and retailers in emerging markets are vast and varied. For instance, with Africa’s population growth of two per cent and continued urbanisation, consultancy firm McKinsey & Co. estimates that 221 million basic-needs consumers will enter these markets alone by 2015. "The African consumer has been underestimated, underserved and underserviced," says Mr Bob Braeken, Executive Vice President of Unilever in Africa, who feels that only now are multinationals starting to take the African consumer seriously. His company – the third largest household goods and personal goods manufacturer in the world – has been active in the continent for over a century, having initially ventured over there in search of plantations. Today, it has a presence in 15 African countries and employs thousands of workers in there.
At the beginning of the decade, Unilever set out its goal to double revenues by 2020 and at the same time halve the negative environmental impact of its products and supply chains through a comprehensive ‘sustainable living plan’. In the same year, global rival Proctor & Gamble – the world’s number one manufacturer of household and personal-care products – set out a similarly ambitious growth target: that of adding an extra billion shoppers by 2015, to boost its customer base by 25 per cent. And both companies made it abundantly clear that developing markets – home to the world’s next billion new shoppers – hold the key to realising those plans. Redesigning and refining products and brands to cater for the tastes and pockets of various demographics of poorer consumers in new markets is what both FMCG giants have since set out to do, including finding cost-efficient materials or manufacturing options, as well as marketing strategies, in order to engage custom at the bottom of the financial pyramid.
An example of such innovation can be seen in India, where Internet penetration is still relatively low, so both P&G and Unilever have taken to engaging with the consumer in person. Both companies have programmes that involve visiting Indian schools and preaching the health benefits of regularly washing hands with soap, and brushing teeth. Unilever has even employed an army of around 50,000 ‘shakti women’ to market its products in the country’s remote villages.
Adapting products to local preferences is an important factor for success, a good example being Coca Cola’s ‘Minute Maid Pulpy’ – an extra pulpy version of their Minute Maid juice brand, manufactured specifically to cater to Chinese tastes – it has become one of the company’s most recent brands to reach the hallowed US$1 billion sales mark.
Constraints will likely have an even stronger impact on how a brand is brought to market in the emerging world. An old but good example of this can be seen in the launch of the humble shampoo sachet by India’s CavinKare back in the 1980s – a monumental move in making shampoo affordable for a whole new and very large demographic group. A decade later, all the shampoo giants including Unilever and P&G, were copying the strategy – not only in India, but across the world.
The rise of the digital consumer
Another unavoidable trend that FMCG professionals will need to address in the years ahead is the inevitable rise of the digital consumer – a shift in consumer behavior that could completely upend traditional sales channels. And while online sales are swiftly picking up across the globe, the most dramatic story of growth can be found in China, which topped consultancy group AT Kearney’s recently released e-commerce index, and where online retail last year generated US$121 billion in sales (up 66 per cent from 2010 figures, according to Barclays Capital).
Moreover, the size of China's e-commerce market is expected to more than triple by 2015, to overtake America's and become the largest in the world. Needless to say, the opportunities that exist in China’s cyber-market for early entrants that can galvanise their online presence are colossal.
The country now appears to have ironed out some of the problems familiar to all new e-commerce markets – credit card fraud and counterfeit goods – through the use of online payment services like Alibaba's Alipay (similar to PayPal), which allows Chinese consumers to make purchases without showing card details to individual vendors, and which transfers money from the customer's account only after goods have been received and deemed satisfactory.
Alibaba-owned Taobao – ‘the eBay of China' – accounts for 90 per cent of transactions between consumers. While these consumer-to-consumer (C2C) transactions make up 85 per cent of total transactions in the country, over the next few years it is business-to-consumer (B2C) sales online that are expected to gain ground, and could account for some 40 per cent of the market by 2015. At present, TMall (another Alibaba-owned e-commerce site) is the platform for around half of all online B2C transactions – Gap and Nike are amongst the famous brands that have already set up shop alongside some 50,000 businesses represented on TMall, where an estimated US$16 billion in sales were generated last year, with consumer electronics and apparel the most popular products bought online – consultancy firm The Boston Consulting Group (BCG) expects such sales to double this year.
Little wonder then that Wal-Mart – the world’s largest public corporation when ranked by revenue, and already one of the top 10 chain stores in China – is working to establish a strong presence in China’s e-commerce market. Last year, it purchased a majority stake in Yihaodian, a fast-growing online retailer of groceries, consumer electronics and apparel. Before that, in December 2010, the company acquired online Chinese retailer 360buy.com, which sells mainly consumer electronics and has 15 million users and distribution facilities in around 60 cities.
Indeed, online retail in emerging markets presents retailers with attractive growth prospects either by adding e-commerce to already existing store networks or as a market-entry vehicle.
Developing a social conscience
An increasingly sophisticated population of internet users like that found in China also makes it easier to promote new brands cheaply through digital marketing. Unilever, for example, designed a Lipton Tea-branded new year’s message to send to friends that ended up being used by 130 million people in the country. And while social media is often perceived as a PR tool, consumer giants like Unilever, along with P&G and Reckitt Benckiser, are now exploring the potential for using Facebook and the like as an exclusive sales launchpad for certain products.
Of course, alongside the rise of online sales comes online reviews – interestingly, China’s e-shoppers seem to have taken to this form of peer-to-peer recommendation far more than their Western counterparts, with more than 40 per cent of online shoppers in China posting product reviews (roughly double the proportion of US online consumers that engage in this way, according to BCG). One reason for this could be that Chinese consumers are largely distrustful of advertising and news sources, which are often associated with state-controlled opinion.
A top concern of Chinese consumers today is product safety, says Shaun Rein of China Market Research Group. ‘Chinese fear safety problems that wouldn't cross American's minds when shopping – clothes doused in toxic dye, condoms lubricated with vegetable oil, watermelons injected with dirty water to make them heavier,’ he writes on Forbes.com. While Chinese manufacturers have long been harangued by Europe and the West for their perceived inferior quality, pressure for improvements now come from the upwardly mobile Chinese consumer, which today enjoys far more market clout. This has manifested itself perhaps most prominently in the rising cult of China’s Consumer Rights Day – known as ‘315’ (or 15th March) – which names and shames brands that have dropped the ball when it comes to quality issues (this year, Carrefour and McDonalds were slammed for allegedly selling food that was past its sell-by date).
Indeed, in an increasingly clued-up and plugged-in world, ‘Transparency’ is fast becoming the watchword for consumer product manufacturers – from the demand for quality, to the increased pressure on companies to pursue sustainable goals and reveal their product’s impact on both the environment and the communities from which their ingredients are sourced.
Strengthening the Supply Chain
Meanwhile, on the supply side, FMCG manufacturers face increasing supply chain volatility in the years ahead, with the spectres of price fluctuation and raw material shortages conspiring to disrupt even the most well-established global supply chains, which may have taken decades to develop.
The recent trend for specialisation – the commercial consolidation of natural resource producers/processors – in the production of certain commodities is one reason for this increased volatility. This means, for example, that today, 57 per cent of the world’s sugarcane is now produced in Brazil and India, while China and Russia together account for around half of the world’s aluminum production.
A natural disaster or political crisis in one of the major supply countries of a particular resource could cause severe disruption to global consumer goods supply chains. Indeed, the 2010 earthquake in Chile had just this effect on the global pulp market, cutting supply by eight per cent and triggering a spike in prices. Similarly, in late 2009, a fire at a large acrylic acid plant in Texas, combined with mechanical issues on a particular Dow Chemical plant, created a global shortage in super-absorbent polymer, the key ingredient in nappies and feminine-care products.
Increasingly, consumer products companies face the challenge of raw material volatility – for example, prices for commodities like sugar, wheat, corn and soy-beans are increasing between 20 and 70 per cent year-on-year – combined with the increased threat from shortages in natural resources such as water. The situation could become even more perilous in the years ahead.
While price changes may partly be transferred to the price of the product itself, FMCG companies will need to build flexibility and smarter systems into their supply chains in order to predict changes and remain responsive to this increasing likelihood of volatility.
Growth is no longer a given for FMCG firms in the West, and venturing into new markets and new sectors is likely to be the best way for such companies and groups to ensure long-term growth. Naturally, there is a big fear-factor associated with emerging markets. “We argue it might be a big play, but it’s a big play you have to make now,” says Andrew Hodgson at AT Kearney, speaking about opportunities in Africa – a market that many see as the ‘new China’.
Indeed, with large, young and upwardly mobile populations, the rewards for successful early entry will undoubtedly be huge. Taking root, however, will require substantial investment and no shortage of creativity. And emerging world competitors – the Tatas and the UB Groups – with knowledge of the domestic market and well-established in-country supply chains, could well be the strongest advocates of the innovation required to win over the next billion consumers in Africa, South America and Asia.