Building on the BRICs Redraw the global map of opportunity and competition

BRIC countries have been effective stepping-stones for multinationals from developed nations. But as growth cools in the BRICs, where should multinationals turn? Seven new emerging markets are enticing alternatives, providing fresh opportunities—and competition—for businesses in Western countries.

Overview

The economies of Brazil, Russia, India, and China (the BRICs) have commanded significant attention in recent years as they transcended emerging market status and became global players. Now, as their growth pace decelerates, focus is shifting to a new tier of emerging markets, including Indonesia, Malaysia, the Philippines, South Africa, Thailand, Turkey, and Vietnam. The gross domestic product (GDP) growth in these new emerging markets has caught up with and even surpassed that of some of the BRIC nations, creating large numbers of middle-class consumers and spawning competitive local businesses.

Looking ahead, these new emerging markets could become significant B2B and B2C growth opportunities for multinationals from developed countries. But they are also producing tough competitors, both at home and abroad.

What’s driving this trend?

Five common traits of companies headquartered in the new emerging markets underscore the nature of this trend:

See endnote ⁷

1. Bursting onto the global stage. Businesses anchored in these countries are effectively penetrating their own local markets and expanding aggressively into other emerging and established markets globally.¹ Three companies profiled in this report (headquartered in Turkey, South Africa, and the Philippines) have created a strong presence in multiple regions, including Europe and North America. Current direct investment outflows from the new tier of emerging markets increased to $39 billion in 2012.²  South Africa, which has met with BRIC representatives at their annual summit since 2011,³ is the third-largest investor in least-developed countries, trailing only China and India.⁴ Further, 36 percent of executives based in Southeast Asian⁵ markets are making new market expansion a top priority.⁶ Multinationals entering these markets will likely face stiff competition from local firms, companies from other new emerging markets, and multinationals from other Western countries.
2. Hybrid business models. Companies in new emerging markets are leveraging innovative products and business models perfected in their home markets, even as they pursue expansion in other emerging markets. This is an important objective according to executives based in Southeast Asia, who cited expansion into both Asian and non-Asian emerging markets as among their highest priorities (see figure 2). We have seen this tendency in companies from other new emerging markets as well. They are likely to be strong contenders given their home-market advantage and the cultural and socio-economic similarities of the markets.

See endnote ⁸

3. Aggressive growth strategies. Many companies from new emerging markets employ a potent combination of organic and inorganic growth strategies. Organic growth typically is the preferred method of expansion, yet inorganic growth is also a major factor in their plans. For example, companies based in South Africa are highly focused on organic growth in the next three years to increase revenue in emerging markets, but they’ll also use joint ventures as needed (see figure 3).⁹

See endnote ¹⁰

4. Proximity to home markets. This is an important consideration in the expansion plans of new emerging market companies. For example, two of the three companies featured in this report focused their expansion plans on countries within the same region—Eastern Europe and Africa, respectively. This inclination is further evidence that Western multinationals are likely to face formidable competition in new emerging markets.
5. Focused innovation. Low-cost disruption is giving way to market-focused innovation and R&D as the basis of competition for local companies. Rather than merely offering “good enough” products at cheaper prices, these companies are focused on product and business model innovation to compete effectively. We’re not talking Silicon Valley-style innovation, but rather incremental shifts aimed at solving unmet needs, building brand strength, and improving customer service. For example, our featured company in Turkey employed innovations in barley production and corporate sustainability to gain a competitive advantage. The Philippine company we profile invests heavily in food products and tailored promotional programs developed specifically for the new markets it enters. Western multinationals may need to adjust their strategies to compete effectively against these approaches.

Lessons learned: What works and what doesn’t

Three main factors are helping companies in new emerging markets flourish—alongside their burgeoning economies.

First, although China and India are expected to lead all emerging markets in terms of real GDP growth in the near term, countries in Southeast Asia, Eastern Europe, and Africa are seeing strong economic growth rates, equal to or greater than that of BRIC countries.¹¹ They may even outperform Brazil and Russia by 2016 (see figure 4).¹² Such impressive GDP growth rates are the product of improved infrastructure and an expanding middle class. Local companies too are benefiting from strong organic growth at home and in similar nearby foreign markets. Of course, each country is growing at a different rate and, therefore, represents a different level of opportunity. But the opportunities appear to be strong overall.

See endnote ¹³

Second, companies in new emerging markets often profit from local product and business model innovations. For example, many companies focus on just a few specialty product lines when they enter a new market, requiring fewer and lower-scale facilities. Such structural choices can create sustainable competitive advantage. Often, emerging market competitors are also willing to sacrifice profit margin on individual products to gain market share, whereas multinationals from other countries may not.

Finally, participation in new emerging markets can require multinationals to undergo a steeper, more experimental learning curve than is typical in more developed countries. That learning curve is likely to be different in different markets, and may be steeper in some than others. Local companies, on the other hand, can often translate lessons learned from one emerging market to another more efficiently. This, when added to agile corporate governance structures, proximity to other emerging markets, advantageous cultural and ethnic factors, and a focus on long-term growth (rather than a capital market-driven short-term focus), can enable these companies to redeploy assets and capabilities easily and effectively.

See endnote ¹⁴

These three drivers are self-reinforcing and multiplicative in nature. For example, strong growth often spurs strong investment in innovation, and that, in turn, can lead to timely deployment of assets, which reinforces and restarts the cycle.

Looking ahead

The Building on the BRICs trend has four broad implications for Western multinationals.

Business as usual will likely not prevail. Western multinationals expanding abroad into new emerging markets today may understand the importance of local relationships and use of low-cost operating models. But they also should understand hybrid business models, including:

• Developing market-specific product lines
• Reviewing ROI metrics frequently with a willingness to redeploy assets in a timely manner to more profitable uses when necessary
• Dealing with structural impediments, such as limited telecom capabilities, slow or irregular supply chain partners, and undependable power supplies, by bringing more activities in-house
• Leveraging local market advantages, such as resources, labor, and willingness to adopt new technologies in a timely manner
• Adopting tactics used by emerging contenders, such as expanding in a timely manner into new markets, developing market-specific innovative products and services, and focusing on long-term growth

Where it’s happening 

A number of locally headquartered companies display many of the specific traits underlying our “Building on the BRICs” trend. The activities, strategies, and achievements of three companies, in particular, are prominent examples.

Anadolu Efes

As a large beverage company in Turkey and one of the top 12 beer brewers in the world, Anadolu Efes exhibits all five traits of new emerging market companies:

Bursting onto the global stage. The company operates 16 breweries in 6 countries, runs soft drink operations in 10 countries, and exports the Efes brand to 74 countries.¹⁵

Hybrid business models. Anadolu Efes leverages product and business models perfected in Turkey to hedge risk before entering new markets. It frequently acts as a holding company by purchasing stakes in breweries and plants. It also creates subsidiary companies to oversee international beer operations and sales, and develops local product portfolios to build brand loyalty in new markets.

Aggressive growth strategies. To achieve strong growth in local markets, Anadolu Efes uses joint ventures and acquisitions for expansion, targeting breweries that lead sales in their respective countries. Seeking partners with complementary brand portfolios, logistics, and sales forces, it has partnered with SABMiller, Heineken, and ABIn Bev to break into nearby markets, and expanded its portfolio to include beer varieties and cocktail mixers.

Proximity to home markets. Although growing, Anadolu Efes has set its sights on markets close to home, such as Eastern Europe, the near Middle East, and North Africa, and has acquired breweries exclusively in neighboring countries. The company favors joint ventures with multinational companies that want to expand into Turkey and the region.

Focused innovation. Anadolu Efes has invested in improvements to seed quality and crop yield in barley farming, and has launched corporate social responsibility and sustainability initiatives, such as reducing fuel, water, and electricity consumption in barley farming.

Shoprite

Shoprite is a leading food retailer company in Africa. It exhibits four of the five traits of new emerging market companies.

Bursting onto the global stage. Founded in 1979 in South Africa, Shoprite today owns and runs more than 1,300 corporate stores and 400 outlets in 17 countries across Central and Southern Africa, employing roughly 100,000 people.¹⁶

Hybrid business models. One important aspect of Shoprite’s business model is how it leverages experience in South Africa to enter other emerging markets, establishing retail locations in countries that generally have poor infrastructure and lack supply chains. In this way, it effectively competes against multinational retailers as they try to enter its markets. One of the biggest challenges Shoprite faces is locating shopping malls and complexes with adequate infrastructure. As a result, the company set up an entire division for finding real estate that supports operations in countries experiencing frequent power outages.

Aggressive growth strategies. Shoprite’s primary growth has been organic, but it has also aggressively acquired companies in markets close to South Africa, which produce complementary products to its own. It also recently sought to acquire furniture, hardware, and other non-food retail brands.

Proximity to home markets. Outside of South Africa, Shoprite’s largest footholds are in Namibia and Zambia, and the company is gaining ground in other Central and Southern African countries. It plans to investigate expansion to Western Africa in coming years.

Jollibee Food Corporation

Jollibee Food Corporation (JFC) is a restaurant company headquartered in the Philippines. It exhibits all five traits of new emerging market companies.

Bursting onto the global stage. In addition to its own Jollibee brand fast food restaurants, JFC owns the Red Ribbon pizza chain, a Chinese restaurant chain called Chowking, and a number of other restaurant brands. Currently, JFC owns and operates approximately 2,500 stores globally, and is expanding its presence in Southeast Asia, China, and the Middle East.¹⁷

Hybrid business models. The JFC brand is largely differentiated by its focus on quality and strategy of increasing transaction volume rather than competing on price—a strategy it developed in the Philippines and exports to its other markets. It also tailors menus to local palates and uses effective advertising and promotions developed in its core market.

Aggressive growth strategies. JFC’s aggressive international expansion has been achieved through a potent combination of organic growth, acquisitions, and joint ventures. It has opened approximately 25 stores in the United States in regions with large Filipino populations; acquired the Burger King franchise in the Philippines, along with a number of Chinese restaurant brands; and entered into a joint venture with Vietnamese restaurant chain SuperFoods to expand its reach in Vietnam.

Proximity to home markets. Until its expansion into the United States, JFC’s expansion plan was, and to a great extent still is, focused primarily on Southeast Asia, East Asia, and Middle Eastern markets.

Focused innovation. JFC capitalized on its R&D and product innovation, introducing new products targeted at specific local markets, such as Saudi Arabia. Its Greenwich Pizza brand invested significantly in market research and consumer testing to develop a wildly popular new pizza crust. JFC’s Hong Zhuang Yuan brand leveraged a new prototype restaurant, new products, and refinements to its service model to achieve 12 percent sales growth in 2011. The company’s Mang Inasal brand achieved nearly 40 percent growth in 2011 due to new product, marketing, and promotional innovations.¹⁸

 Competitive threats from emerging market challengers will likely increase. Emerging market companies are winning in their home regions, and are now looking to expand into developed markets in Western Europe, North America, and Japan. For example, while smaller companies such as JFC are making inroads through gradual footprint expansion, BEKO—a Turkish appliance and consumer electronics manufacturer—has established a credible presence in a number of developed markets. This trend is likely to accelerate.

Competitors will likely exploit structural advantages. New emerging market companies possess many structural advantages, including streamlined operations and large, low-cost labor pools. They are also investing in R&D to drive higher product quality. Such companies are likely to challenge multinationals in developed markets through disruptive innovation strategies.

Conventional business models could become obsolete. New emerging market companies may deploy self-improvised, non-traditional business models that they have tested in emerging markets to overcome market constraints in developed countries.

New emerging markets benefit from strong GDP growth and locally headquartered businesses that are both aggressive and innovative. For Western multinationals looking to build momentum, even as developed markets continue to sputter, these new markets could represent the next major frontier. But it won’t be easy. The leaders of the new emerging market companies could challenge Western multinationals, both in emerging markets and even in mature Western markets.

My take

Jeff Watts, Deloitte Global Leader, Strategy & Operations, Deloitte Tohmatsu Consulting Co., Ltd.; Regional Leader, Asia Pacific Consulting

To achieve differentiating growth in the future, established multinationals will likely need access to a broader set of emerging economies—BRIC countries alone are no longer sufficient. The new emerging markets identified in this trend represent exactly that broader set of opportunities.

As they enter these new emerging markets, multinationals in many industries will likely face increasing competitive intensity from local and regional rivals. Winning will likely require the ability to translate customer and market insight into appropriate products and business models. Customer insight, as simple as it may sound, is remarkably hard for global players to achieve in new emerging markets. Another significant challenge is gaining access to those markets. What channels will be most timely, most efficient, and most profitable?

At the same time, there is a sense among local companies in new emerging markets—Thailand and Indonesia are good examples—that the gold rush is now. Many believe they have the opportunity to set the foundation and grow, with strong returns to capital for those that make a move sooner. There also may be a sense of nationalism that comes into play. Many corporate leaders I’ve met in some of these nations feel they are on a mission for their nations and are very connected to their role in society as stakeholders in their country’s success.

Reinforcing these dynamics are trade and economic development policies in the new emerging markets. Changes to free-trade regulation are reshaping the competitive landscape and giving favor to companies headquartered in new emerging markets. Consider the 2015 objective of the Association of Southeast Asian Nations (ASEAN) to have a single production market to counterbalance those in China and India. Such policy changes can give competitors in those new emerging markets a degree of freedom that Western multinationals should understand really well if they are to compete effectively there.

Important questions for Western multinationals may include: Which markets are most favorable? How do you compete and win against companies that may be younger and less mature, yet potentially have a structural cost advantage or understand the local markets more fully? That’s where the real battle will likely be in the future.