Rethinking marketing in emerging markets

INSEAD SPECIAL

Many multinationals have rushed head-on into emerging markets over the past decade, eager to claim the billions of prospective consumers newly liberated from planned economies and protectionist barriers.

But corporations are quickly realising that local consumers do not reciprocate their enthusiasm. In fact, the paths to entry into emerging markets are littered with failure.

Typically, multinationals transfer winning products or marketing ideas from their home markets, which are generally highly developed ones, and wait for the emerging market consumers to evolve towards them.

Unfortunately, this rarely works. While failure is often attributed to market difficulties, more often than not it can be traced back to the multinational's inability to recognise the fact that emerging markets are different.

Marketing models that work in developed markets, i.e., those that rely on product innovation, fine segmentation, high margins and global brands, do not necessarily work in emerging economies. Instead, more effective models rely on consistency and basic functionality of the product, coarse segmentation, low margins and more adaptable brands for localisation.

Consider, for example, Harlequin Enterprises Limited. It entered Eastern Europe through Poland in 1991, choosing to introduce only two series from its much larger novel portfolio.

Aiming to appeal to a wide cross-section of women, Harlequin priced its books aggressively, even below the level of local competitive offerings; developed local advertising to connect with consumers' local sensitivities; and built up a wide distribution.

This led it to achieve a dominant market share within the first year. Since then, Harlequin has successfully expanded across Eastern Europe and Russia and onwards through India, China, Southeast Asia, and Central and South America.

While adopting a different marketing model for a single emerging market may be perceived as problematic due to the high cost of adaptation, our research shows that market characteristics are common enough across emerging markets to justify constructing an "emerging market strategy".

We began constructing this strategy first by interviewing managers at firms such as Cadbury's, Coca-Cola, Nestle, South African Breweries, Unilever and United Phosphorous about their experiences in developing markets.

Then, we reviewed local emerging market press and top business school case studies and found that three factors characterise emerging market environments: low income and its impact on consumer behaviour, variability in consumers and infrastructure, and relative cheapness of labour.

Low income
Multinationals bring their implicit understanding of market structures from developed market contexts. Assumptions about consumer preferences and buyer behaviour justify the wholesale import of marketing programmes from developed markets, but these come nowhere close to matching the real needs of the emerging market.

Specialisation and niche marketing are the name of the game in developed countries and are based on the high returns of meeting consumer needs in a highly fragmented market.

Such a strategy is justified only if consumers are willing and able to pay for those products that better meet their individual needs. This is not the case in emerging markets, where consumers' incomes limit their ability to pay high prices, and often their lack of knowledge of the category makes it hard for them to understand the need to have more than one kind of a given product.

Also, catchy stickers with messages such as "Bigger, faster, better" and "New and improved!" do not have the same ring in emerging markets as in developed ones. Consumers with low incomes tend to purchase basic, functional, long-lasting products rather than continuously innovated products, a critical element of the competitive apparatus in developed markets.

For pricing in emerging markets, large volumes and low margins drive profitability. Consumers use a "local basket" gauge, measuring the price of a good or service against the price of a basketful of local purchases, when assessing the value of a good or service.

Thus, the multinationals' practice of using market exchange rates to determine local prices makes for overpriced products, inaccessible to most consumers and not conducive to moving goods off the shelves. Aggressive pricing was a key to Harlequin's success, one illustration of how prices need to be established in the context of the local consumers' purchasing power.

An argument multinationals often use is that the relatively high savings levels found in emerging markets are due to a lack of options on the market, and that once the market is populated with products, the savings will convert.

Our research shows that this has happened in some instances, but does not occur across the board. Emerging markets' lack of an institutionalised "social net" produces what might be referred to as a "depression-era mentality", where people save in expectation of the worst: (e.g., being laid off or handling medical expenses or family obligations) or to plan for retirement.

Investing in the right kind of distribution in emerging markets is also important. Hypermarkets and superstores are not the norm, which means that distribution plans for multinational products can benefit from being multi-layered, using a mix of direct delivery, wholesalers and distributors.

This is a complex and new management challenge that many multinationals shy away from. However, the rewards of developing a ground-up distribution are high.

This is illustrated by Procter & Gamble's strategy in Russia. It rapidly expanded market coverage by appointing promising local distributors in whom it invested in terms of information technology, vans, working capital and training in exchange for a commitment to distribute only P&G products. As a result, P&G became the only foreign competitor across Russia, outside of markets such as Moscow and St Petersburg.

Variability in consumers and infrastructure

In emerging markets, the variability factor manifests in countless ways. In terms of market segmentation, for example, income flow is highly variable in terms of how and when people are paid. Also, in emerging economies there tends to be huge variability in the transportation, telecommunications, power and financial infrastructures.

Multinationals, therefore, must be highly adaptable, and we noticed that the best-selling products were designed to cope with variability. One example is how P&G packaged its Fempro product for Russia; it included fewer pads in a single package to make its product more accessible to consumers.

Also, when thinking about distribution, although urban and rural retailers may look similar, they operate on different principles.

It pays to be first in rural markets, which usually carry one single brand on the shelf, whereas it pays to be differentiated in an urban market, where standing out amongst many products is key to survival.

Size and accessibility of retailers must be considered, too, as sometimes products must be shipped into remote areas. This means losing some degree of quality control, but conversely, it can give consistently good products a marketplace lead "" consumers will rely on brands because they are useful and dependable.

Multinationals would do well to consider different pricing in developed and emerging markets. Price promotions in emerging markets yield large volume gains, but as those sales boosts are rarely sustained, it is clear that varying prices is not always the best way to do it.

It does show, however, that the emerging market is ready to be tapped, but at a point that is below the developed market price. When Unilever re-entered Russia in the ice cream category in 2001, it priced its Magnum brand at $1 a piece, well below the prevailing price in the developed markets.

Relative cheapness of labour

From ultra-powered dishwashing detergents to ready-made meals to washing machines, developed markets often centre on labour-saving concepts. In emerging markets, labour is cheap, and consumers are willing to forgo convenience or time saving for a low price. Cheapness of labour also has implications for manufacturers, as people, rather than machines, provide a cost-effective means of delivering products to consumers.

However, that does not mean that labour-saving products cannot sell in emerging markets. Although Dupont struggles to sell its non-stick products in China, fast food places slide into big profits "" not because they deliver fast service, but because they position their products as trendy.

Thus, the sales angle of the product simply needs to be positioned to fit. Whirlpool learned that consumers in India who have hired people to wash clothes by hand will not purchase washing machines in order to save time, but they will invest in a machine that guarantees reliability and high performance.

Prepared goods such as ready-made meals are positioned in developed markets as time savers, and thanks to mass manufacturing and low transport costs, they are profitable.

In emerging markets, consumers cut costs by preparing products and services at home instead of buying manufactured ones. For example, less than 1 per cent of the food consumed in India is preprocessed, compared to more than 95 per cent in a developed country such as Japan.

Understanding this consumer behaviour led dairies in several Indian cities to eliminate individual-level packaging for milk. There, milk is distributed though vending machines to which consumers bring their own containers to carry the milk home, one instance in which a multinational ended up substituting consumers' labour for their capital.

No more copy-and-paste

Emerging markets represent a real opportunity for global companies with products to sell. But multinationals beware: The traditional "copy-and-paste" marketing strategy will not work. These emerging markets do not deserve to be brushed off as "incremental".

Successful marketing programmes will challenge traditional assumptions, revamp the strategic approach and, most important, consider the local consumers when it comes to marketing each area of expansion.

This article was originally published in INSEAD Quarterly. Copyright: INSEAD 2004