Another billion Business Trends 2014

Overview

Two decades of rising prosperity have reshaped and reoriented the global economy, but the effects have been remarkably uneven. The rising tide has created a new class of extremely wealthy individuals across the world, and vast numbers have been brought out of extreme poverty, yet the relative incomes of many in the affluent advanced economies have stagnated, and elsewhere far too many still languish in the direst imaginable circumstances. But perhaps the most surprising story has been the steadily growing wealth of huge numbers of previously very low-income consumers in Asia, Latin America, and Africa.¹

This is a trend that will continue and grow in importance. It is projected that by 2020 3.2 billion people will be “middle class,” up from 1.8 billion in 2009.² Almost none of this growth will come from advanced economies; instead, the increase will happen in Asia, Africa, and Latin America.³ As a rough (and prudent) estimate, a billion new people will be critical in shaping global demand over the next five years or so.⁴

Welcome to the “next billion”—and a huge chance to serve a vast new set of consumers. Will they have the discretionary spending power of traditional middle-class customers in advanced economies? No—they are poorer, less familiar, live in different conditions, and need somewhat different products and services. But they will provide the single biggest growth opportunity in many global companies’ portfolios.

As businesses turn their attention to the next billion, they’re finding that the past strategies of reducing costs and then exporting affordable, scaled-down versions of successful products or services may not suffice. But they also know that customizing for every local market is both impractical and expensive. New approaches and new ways of thinking—about categories, cultures, and commonalities—are needed. Serving the next billion is a tantalizing prospect, but reaching them profitably is anything but straightforward.

What’s behind this trend?

In 2013, the United Nations Development Programme called its annual report on human progress The Rise of the South. It reported: “The South is developing at a pace unprecedented in human history, with hundreds of millions of people being lifted out of poverty in developing nations and billions more poised to join a new global middle class.”⁵

The Organisation for Economic Co-operation and Development (OECD) concurs that a massive shift is underway. In a 2010 report, it looked at household-level data in 145 countries and found that Asia accounted for less than a quarter of the global middle class in 2010. Its projections, however, have that share doubling within a decade—which will mean that by 2020 the majority of the world’s middle class will be Asian.⁶ The report’s author, Homi Kharas, explains: “This is because a large mass of Asian households have incomes today that position them just below the global middle class threshold and so increasingly large numbers of Asians are expected to become middle class in the next ten years.”⁷

This is a remarkable story of economics and demography. Between 2000 and 2013, the real GDP of non-OECD countries grew by an average annual rate of 6.5 percent. In contrast, the advanced nations of the OECD saw real GDP growth average around 2 percent per year.⁸ At the same time, the ineluctable momentum of demography guarantees that the young and growing populations of emerging markets will be the dominant drivers of demand growth. Between now and 2025, a billion more people will be born, almost all in emerging markets.⁹

High urbanization rates are also contributing to the emergence of the next billion. Urban populations are more prosperous than rural ones (for example, 80 percent of Africa’s total GDP emanates from urban centers, yet currently only 30 percent of the population lives in towns and cities).¹⁰ As emerging-market urbanization continues over the decades ahead, wealth and consumption will inevitably grow.

With the emergence of the next billion, however, the playing field will increasingly shift from the largest and most attractive markets (rich megacities such as Shanghai and Mumbai) where doing business and getting to scale are—relatively speaking—much easier. Now, companies will also need to compete in smaller cities, towns, and rural areas where the absolute numbers of emerging middle-class consumers may not justify the degree of localization and investment made to date. This will require new approaches.

Implications

When Deloitte surveyed developed-market executives of global firms in 2013, the most common strategies reported that were related to operating in emerging markets extensively were employing local vendors, conducting market research locally, and transferring managers to local markets (figure 1).¹¹ Emerging-market executives reported that the most common strategies used extensively when operating in emerging markets were forming joint ventures with local companies, conducting R&D locally, developing customized strategies for specific cities, and employing local vendors (figure 1).¹² As companies build on these steps, our research and client experience suggest four more actions they should consider. All involve reframing the challenges of emerging markets, and rethinking how to address them.

Fully understand and shape how categories evolve

The first major implication of a new market opportunity as large as the next billion is that many firms will need to relearn—or learn for the first time—how to compete in unfamiliar emergent categories. Of course, new categories of goods are born every year (from smartphones and e-readers to single-serve coffee brewers and jeggings), and the science of management is growing ever more sophisticated with regard to the dynamics involved as products move from their introductory stages to maturity. But since most of the needs and desires of the next billion relate to categories that are mature in the developed world, Western managers sometimes assume that emerging markets need little in the way of product development or nuanced pricing. They take a Western brand and make slight variations so that it will appeal to those consumers who most resemble middle-class buyers at home. They too often regard emerging-market consumers as merely the latest of “late adopters” in categories that have largely played out.

In contrast, look at how Nestlé is growing its business in Central and West Africa. First, it innovated with the needs of these new consumers specifically in mind: Its Maggi-brand bouillon and other seasonings are fortified with the very micronutrients—iron, vitamin A, iodine, and zinc—that are deficient in the diets of over a third of people in developing countries.¹² Then it created a “Cooking Caravan” program that traveled throughout Cameroon, Côte d’Ivoire, and Nigeria, raising awareness of the importance of balanced diets, micronutrients, and culinary hygiene.¹³ This is classic early-stage category marketing, geared to educate and mobilize an underserved consumer base.

To achieve real leadership in markets relevant to the next billion, companies will often have to invest materially in such category development. And many will learn that there is a world of difference between market entry (competing in an existing category that consumers understand and are familiar with) and market development (competing in a nascent category that consumers have limited understanding of and experience with). Creating demand will often require moving further upstream in consumers’ buying processes—for example, “influencing influencers” such as local doctors and respected members of traditional communities.

How can a company gain the benefits of consistency in global segmentation without the hazards of a one-size-fits-all approach?

Strategies will need to be informed by a rigorous understanding of how increasing wealth shapes consumer behavior and drives category growth. For most categories, there are reasonably reliable empirical relationships that predict when adoption and significant growth will occur in a market’s socioeconomic development. Leading companies are rethinking how best to manage their category adoption curves. For example, Sony has recently announced its plans for a distinct pricing and portfolio approach in tier II and tier III cities in India. It plans to introduce small-screen Bravia televisions priced starting from 15,000 Indian rupees to tap demand in these smaller cities and towns across the country, while relying on sales of high-end products in tier I markets to support its margins.¹⁴

This strategy of “volume from the bottom, value from the top” will certainly become more common, but executing it will require much deeper consumer understanding, as well much more precise timing and execution, than most companies have yet shown. Managers should study which economic and demographic factors determine the adoption curves and tipping points for their categories. In particular, they will have to manage the tricky trade-off between prices and volumes, so that they do not forestall category growth by taking price increases too early, or miss value-creation opportunities by introducing new offers or stock-keeping units too late.

Segment consumers with global consistency, but local relevance

Corporations understand the value of segmentation—grouping their prospective customers into categories according to common needs and how they respond to marketing actions. They also know the power of standardizing what they do to leverage their scale. Many, therefore, have attempted to use the segmentations developed in their home markets to think about consumers, opportunities, and go-to-market strategies globally. The segmentations usually don’t travel well, as the Africa division of a consumer packaged goods company discovered. The categories rolled out by the global market development team covered only a small part—in Kenya, for example, just 10 percent—of what this division knew to be its addressable consumer base.¹⁵

How can a company gain the benefits of consistency in global segmentation without the hazards of a one-size-fits-all approach? Some marketing leaders are rethinking their segmentations to encompass a wider span of consumer types, and to recognize commonalities that exist across many developing economies. For example, in markets that are rapidly urbanizing, the “young adult who moves from a small village to the big city” is common enough, and strategically important enough, to be called a segment. Whether they are moving to Nairobi or Bangalore (also known as Bengaluru), the people in this segment share a set of behaviors and beliefs that affect what and how they buy. At the same time, companies are allowing more flexibility through a more modular approach that allows for the creation of “made to assemble” segmentations chosen from a set of predetermined segments that are relevant, to varying degrees, in different types of markets.

Look beneath the surface to find meaningful—and predictive—cultural similarities and differences

While companies must look for commonalities across geographies, they should be careful not to assume them within any given region. The next billion consumers often live in territories woven of many cultural threads. Their heterogeneity will require companies to look beyond surface-level commonalities, such as language and income levels, to find the deeper drivers of consumer behaviors. Recognizing variety at this level can help companies make choices about the attractiveness of different consumer groups, and about how to market and sell to them.

Cultural factors exert a huge influence on how consumers perceive and use brands, and on which types of marketing messages are more likely to work with them. For example, the perception and role of luxury brands is very different depending on whether or not people implicitly accept large imbalances in political and economic power. For one group, the brands serve as especially strong signifiers of status; for the other, they are investments in enduring quality.¹⁶ In fact, even when companies market their brands with great discipline and consistency globally, consumers from different cultures still interpret these brands differently (as shown by a study of Red Bull in 2008—the result has been replicated many times before and since).¹⁷

Cultural factors have been shown to influence everything from adoption rates for new products to the types of marketing messages that will resonate with consumers. By understanding how cultural factors drive consumer behavior for their categories, companies can choose their markets more strategically, and can develop a handful of tailored marketing approaches that will appeal to consumers with similar cultural drivers, even when they are from markets that appear to be very different.

Modify organizational structures

As we’ve outlined, greater commonalities often exist across borders than within them. What is required to win in Lagos is much more similar to what is required to win in Mumbai than, say, Kaduna. Yet organizational structures will (likely) have to reflect national and regional lines because of differing tax and regulatory regimes. Smart companies will find organizational solutions that allow them to transcend the barriers and capitalize on cross-border commonalities.

For many large companies, this is very hard to do. At best they transfer personnel who have cut their teeth in one emerging market to another that is at an earlier stage of economic development. The logic is that, for example, “Africa is like Latin America was 10 years ago,” so the people who experienced the earlier change are well equipped to navigate the newer one. More companies are at the stage where they are simply trying to create a management cadre that isn’t purely Western. Reckitt Benckiser, for example, moved the leadership of its Latin America operations from Miami to Sao Paulo. The senior vice president for Latin America said the company was “staffing up people in the developing markets and moving much more talent from the developed to the developing geographies.”¹⁸

As companies gain more experience in emerging markets, expect to see them do more with the structure of the organization to improve knowledge transfer and coordination across regions. For example, they will establish reporting matrices and virtual centers of excellence consisting of teams with expertise in specific types of submarkets. Best-in-class companies will increasingly have cross-national teams with expertise in how to understand and address specific types of markets, consumers, and cultures.

Competitive advantage will accrue to companies that first group and categorize submarkets with similar economic, demographic, and cultural characteristics and then develop ways to reliably execute in those kinds of submarkets, regardless of which national borders they happen to sit in.

Looking ahead

Economic growth almost never follows a straight-line projection. Emerging economies can suffer periods of slowdown and possible stagnation. But overall we can expect to see continued and sizable growth in emerging-market consumption—with a billion new consumers emerging from the “base of the pyramid” to enter the middle class, and steadily gaining purchasing power.¹⁹

Some global firms will be able find the commonalities that let them strike the right balance between standardization and localization. These companies will reap the rewards of this unprecedented growth. And then the companies that have distinguished themselves in this era will be better positioned to meet the demands of the next wave of growth. They will find that the strengths they forged in this decade—the 2010s—can serve them for many years to come, and allow them to profit from the next next billion consumers that will be brought along by the continued growth of emerging markets.

My take

By Kishore Mahbubani, dean and professor of public policy of the Lee Kuan Yew School of Public Policy at the National University of Singapore

The rise of the middle class in the developing world has been well documented in recent years, but the explosive growth that we are about to see in many Asian societies is truly unprecedented. The implications of this extreme growth on business, politics, and the environment continue to be a topic of heated debate, but what is clear and undeniable is that a significant and irreversible shift is occurring within the global economy.

As Asia and much of the developing world drive forward into a new age of growth and prosperity, the different cultural classes of the West have acknowledged and accepted these changes to varying degrees.

Business leaders from the West have for the most part recognized the importance of the Asian middle class for their future growth, although even some of the best managers continue to have strategies for Asia that are relatively pale reworkings of strategies they have deployed elsewhere. Still, they show promising signs of adjusting plans to accommodate this new global demographic.

Governments have also begun to understand the significance of this global shift, but have lagged in changing their perspectives and policies. Other groups, including the intellectuals and the media, appear to be slower in acknowledging the shift, although they too seem to be waking up to the international implications of the growth in the developing world.

What can we expect out of this new and powerful middle class? In the rise of the previous middle class, we saw a boom in the consumption of Western goods. In an effort to display their newfound wealth, consumers became avid customers of Western products. Expensive red wines and Louis Vuitton handbags became quite common. However, I expect these preferences to change quite dramatically with the emergence of the next wave of middle-class consumers. Rather than blindly purchasing Western goods, I see these new, more sophisticated Asian consumers looking for products that they can more closely identify with. They will begin to purchase products that not only meet their needs but also reflect their own cultural values and identities. Western businesses have begun to take note, but they will need to make significant investments to update their knowledge and understanding of Asian cultures, in order to ensure they are creating products that meet the needs of the new middle class.

At the National University of Singapore, where I am the dean of the Lee Kuan Yew School of Public Policy, we publish a quarterly magazine, Global-Is-Asian. Those who understand this idea will be the ones who lead us into a radically different world, while those who do not will be playing catch-up for years to come.

The bottom line

The expanding consuming classes of emerging economies have been an exciting area of growth for marketers. Thanks to economic and demographic growth, the global consumer demand has shifted dramatically toward emerging markets—and that shift will continue.

But capitalizing on the next billion consumers may require companies to reach beyond their past strategies of reducing costs and then exporting affordable, scaled-down versions of successful products or services—yet customizing for every local market is both impractical and expensive. To succeed, companies should look for and find commonalities and patterns across markets and consumers. Finding such commonalities will allow them to gain the economies of learning and scope necessary to capture the “next billion” opportunity at an acceptable cost and level of investment.

Successfully reaching the next billion should require investments in new capabilities. But the opportunity is too great, and the longevity of the rewards for success too enduring, for many companies to ignore.