Roland Berger Strategy Consultants January 2013

Study In-depth knowledge for decision makers

In 2030, about 80% of the global middle class will live outside the developed world. 80% Asia, Africa and other emerging regions

20% Europe, US

Consumers – how to reach emerging market consumers with new strategies

In 2030, about 80% of global middle-class consumers will live outside the US and Europe. global topics This publication will highlight prominent trends that influence what consumers in emerging 8 billion markets buy.

Study 3 global topics 8 billion Consumers – how to reach emerging market consumers with new strategies

Introduction p 4

Product portfolio and brand positioning – Meeting the needs of diverse consumers p 6

Marketing and distribution – Think local but act global p 22

Conclusion p 28 Roland Berger Strategy Consultants introduction

Key questions for reaching CONSUMERS in emerging markets Study 5

In 2030, about 80% of global middle-class consumers will live outside the US and Europe. In this fifth publication, we highlight the trends that are likely to influence how these consumers in emerging markets weigh up their purchases, choose particular items and complete their transactions.1

We examine four areas in particular: product portfolio, brand positioning, marketing and distribution. In each area, we ask some key questions:

Rapidly growing economies attract competitors and empower consumers. How can companies identify new consumer profiles and design versatile product portfolios?

How do brand reputation and consumer values influence consumers' buying behavior?

What techniques ensure that marketing messages really resonate with consumers in emerging markets? How can companies use new mobile technology and networks to build their market share?

Distribution strategies need to closely reflect local conditions. What distribution strategies work in countries with predominantly low-density rural populations?

1) Some of these consumer trends are also discussed in publication 1. We will repeat these briefly wherever necessary to show the impact of the trend on a company's strategy. Roland Berger Strategy Consultants

Product portfolio and brand positioning – Meeting the needs of diverse consumers

Socio-demographic change IS DRIVING consumer power Study 7

Socio-demographic change IS DRIVING f1 Every minute, fifty households in developing countries join the consumer power middle class. By 2030, an estimated 66% of the world's middle class will live in Asia, compared to just 21% in Europe and the In publication 1, we saw how population growth – at extraordinary United States. Indeed, China's burgeoning middle class is already levels almost everywhere except Europe – will profoundly shape bigger than the entire American population. As for the rich, the tomorrow's global economy. According to forecasts, between 2012 number of millionaires in China surpassed that in America some and 2030, some 1.2 billion of the world's 1.3 billion new citizens time ago. Other countries – not least Indonesia, India, Pakistan will be born in emerging or developing countries. That's equivalent and Nigeria, along with other African nations – are also seeing an to 95% of all births. expanding middle class with money to spend. These upwardly mobile sectors of society share a common wish: to create for their What does this mean for specific regions between 2012 and children and grandchildren a world of affluence, political stability 2030? A predicted 600 million people in Asia, 500 million in Africa and opportunities. and about 90 million in Latin America and the Caribbean will be added to the local population. Europe will be tiny by comparison, Disposable incomes are also on the rise. By 2020, many emerging with only 1 million new people, representing 0.1% of the new countries will see more than 80% of their population with annual global population. disposable incomes in excess of USD 10,000. More than 25% of households in Saudi Arabia, Turkey, Argentina, Iran, Russia and Emerging markets will be extremely young in terms of Malaysia will command incomes above USD 50,000 a year. demographics. In 2030, 40% of the population will be under 25, compared to just 26% in developed nations. This fact will have a Changing spending patterns profound influence on consumption patterns. f2 Total consumer spending in the developing world will nearly The number of young people in emerging markets who enjoy a double over the next eight years, from USD 14 to 22 trillion. Per better education will also increase. In the period up to 2020, capita consumer expenditure is forecast to reach USD 3,319 a year private expenditure on education in emerging markets is set to in 2020. This growth will be largely driven by improved education grow nearly 7% per annum, reaching a level of USD 143 billion. and rising incomes. In particular, BRIC countries will see consumer spending grow from USD 7 to 11 trillion, Mercosur countries from Take China, for instance. Chinese society places a strong emphasis­ USD 2 to 3 trillion, and in the Middle East and North Africa from USD on education. The 2009 Pisa world education rankings put China 1 to 2 trillion. Per capita consumer expenditure is forecast to grow in first place in all three educational categories: reading com­ at least 3% annually in each region by 2020. Mercosur will see prehension, mathematics and science. Many other develo­ping the highest per capita spending with USD 10,112, followed by the countries, India and Brazil in particular, are also set to see BRIC countries with USD 3,619 and the Middle East and North an increasing number of university graduates. Since 2006, the Africa with USD 3,615. number of students in China and India has grown by over 7% a year. China now produces half a million new engineers each year – f3 Traditional consumer goods segments such as fashion, leisure and while engineering skills shortages in Germany are leading to communications are likely to enjoy per capita growth of about 30% an estimated annual economic loss of USD 2.3 billion for German by 2020 in emerging and developing countries. European fashion business. chains such as Zara are already a familiar sight in major cities across India, Indonesia, the Philippines, Saudi Arabia, Thailand and Young people with better education and skills also have a greater South Africa. Per capita clothing expenditure is forecast to reach chance of employment. Over the last 25 years, the number of USD 183 a year in 2020, or a total of USD 1.2 trillion – including people living in poverty in emerging and developing countries has USD 800 billion in our Focus 20 countries alone.2 Russia, Brazil and fallen by half. Education has played a major role in this Turkey will be home to consumers spending the most on fashion. development, improving lives on the ground. China, India and Vietnam will see a sharp increase – more than 8% Roland Berger Strategy Consultants

F1 The emerging middle class – By 2030, approximately 80% of the middle class will live outside Europe and the United States

Share of the global middle class in 2030 (%)*

7% 14% 7% 6% 66%

Source: OECD * The "global middle class" is defined as households with daily expenditures between USD 10 and USD 100 per person.

F2 Spending on consumer goods will Emerging and developing countries 14 increase significantly 22 Total consumer expenditure in selected regions, real value, 2012-2020 (USD trillion) BRIC 7 11

2012 Mercosur 2 3 2020 Middle East and North Africa 1 Source: Euromonitor 2 Study 9

a year – in spending on leisure and entertainment. Indeed, by distribution. The most successful new products are often "frugal 2020, emerging markets will spend a total of USD 924 billion a innovations" or feature frugal (or "Gandhian") engineering. This year on leisure and entertainment. involves removing non-essential features and thereby significantly reducing the cost and complexity of manufacturing Consumers in the developing world will also invest strongly in processes.3 improving and protecting their health. Spending will reach around USD 219 per capita per year by 2020. This is roughly USD 86 per One good example is ChotuKool, a USD 70 refrigerator produced by capita more than at present, and represents a much greater per the Indian firm Godrej. The appliance uses sophisticated cooling capita increase than that for fashion, communications or leisure. chips and a fan similar to computer temperature control systems Of the Focus 20 countries, Argentina, Peru and South Africa will in place of more costly conventional compressor technology. see the highest per capita expenditure. Other affordable "Chotu" innovations are a low-cost washing machine, ChotuWash, and an inexpensive water purifier. Communication technologies will have a strong impact on these new consumers. Consumer expenditure on communications will Sometimes all that is needed is a simple change of packaging. almost double between 2012 and 2020, from USD 593 billion to Beiersdorf sells shampoos to the low-end market under its USD 1.1 trillion. The countries with the highest spending on subsidiary Beiersdorf Hair Care China in standardized plastic advertising per capita are likely to be Malaysia, Russia and Turkey. bottles with simple brand labels. Bottles that have expensive labels with special, glossy colors are used only for the con­ As consumers become better educated, they also require better sumer segments in tier-1 and tier-2 cities. information. In response, Nokia has developed its "Nokia Life Tools", a product that informs consumers about healthcare, agri­ Sophisticated consumers can also distribute bottom-of-the- culture, entertainment and education issues via cell phone. For pyramid solutions. Grameen Bank, for instance, organizes clubs of example, the company will shortly launch a diabetes program via 5-10 people – most often women – who share the responsibility cell phone in India. Nokia Life Tools are currently in use in India, for managing microloans. The clubs also regularly review the 66% China, Indonesia and Nigeria. performance of borrowers. In a similar vein, Johnson & Johnson launched its "Text4Baby" Another example is the brewer SABMiller. The company has product in 2010. This is a free mobile information service that sold beer to Africans for over a century, their upscale products helps educate pregnant women and new parents about childcare including the European brands Peroni and Grolsch. The com­ issues. More than 20 million people in China, India, Mexico, pany now plans to cater to lower-income rural Africans who Bangladesh, South Africa and Nigeria currently use the program. drink "informal" home-brewed beers. To this end, they developed Chibuku, a beer in a carton, which costs up to 40% less than Bottom-of-the-pyramid consumption bottled beers, has a similar taste to home-brewed beers and is hygienically produced. The company estimates that the informal Yet despite rising incomes and consumer expenditures, the beer market in Africa is four times larger than the clear beer majority of people in developing nations continue to struggle. The market. Over the next three years, it plans to expand distribution proportion of Nigerians living on less than two dollars a day is of the new product to around a dozen countries. currently 85%. In India the figure is 70%, in Indonesia 46%. Overall, an estimated four billion people worldwide survive on two dollars a day or less. 2) Our Focus 20 countries – the 20 emerging markets projected to The poor are what we might call "bottom of the pyramid" con­ see the most economic growth in the period to 2030 – are sumers. Thanks to new technology and novel distribution Argentina, Brazil, China, Colombia, Egypt, India, Indonesia, Iran, Iraq, methods, they too have become a potentially profitable market Malaysia, Mexico, Nigeria, Pakistan, Peru, Russia, Saudi Arabia, for companies. Consumer goods manufacturers are delivering South Africa, Thailand, Turkey and Vietnam. 3) See Publication 4 for inexpensive, easy-to-use products to them using low-overhead a discussion of key frugal innovation strategies. Spending will grow in many segments

Annual per capita consumer spending by segment, real value, 2012-2020 (USD) F3 Leisure Communication Fashion Health Transport Housing Food CAGR

558 2.2% 662 399 4.7% 574 270 5.5% 440 133 6.4% 219 135 3.9% 183 100 7.3% 175 98 4.7% 142

Source: Euromonitor Roland Berger Strategy Consultants

Low-income consumers can also be attracted by new service Looking at specific regions, Latin America will have the highest portfolios. The Mexican cement manufacturer Cemex, for instance, share of urban residents as its cities grow to include 80% of the sells a versatile support package to low-income families to help total population by 2030. The share of urban residents in Africa will them build homes inexpensively. For just USD 14 a week, the increase from 39% to 48%, in India from 31% to 40%, in China from company provides inspections, materials warehousing, advice 49% to 69%, and in the rest of Asia from 44% to 56%. By 2025, from professional architects and the required cement products. China will have no fewer than 139 cities with over a million inhabitants, the largest number of such agglomerations of any Unilever's African portfolio includes both affordable products and country in the world. training services. It offers low-cost food items, water-thrifty washing powders and grooming products that suit local tastes. In Urban house and household sizes are also changing. In India, for addition, it provides professional training to African entrepreneurs. instance, per household floor space has doubled every 14 years to In 2011, the company opened an academy in Johannesburg that its current level of 31.5 m2. This is still two and a half times less each year will train 5,000 hairdressers who plan to open their own than China's 85 m2. According to projections by Credit Suisse, India salons. The academy also functions as a forum for testing new must construct three million houses and China five million houses products, business models and distribution methods. every year through 2030 to accommodate future population growth. In some areas, new methods of delivery have emerged, such as medical services provided to poor rural communities by mobile Although global sanitary conditions have improved considerably clinics. The Sanjeevan Mobile Clinic operating in parts of India over the past several decades, 2.6 billion people still have no resembles a large bus. But inside it contains a fully equipped access to toilets and 70% live in cities without proper sanitation doctor's office with X-ray, ultrasound, mammography or electro­ facilities. Lack of sanitation causes environmental pollution, social cardiogram machines, a second treatment room and a small problems, unsafe surroundings and substantially more potential darkroom to develop X-rays. It even has its own generator so it can operate independently of the local power grid. Each mobile clinic can service hundreds of temporary treatment sites. In one year, for example, a single such vehicle traveling across the Uttarakhand Province in northern India set up more than 800 medical camps, helping some 60,000 patients. Siemens F4 has equipped 18 of these mobile surgeries over the last 7 years. In several Focus 20 countries, a large share of the population needs better Urbanization access to sanitary facilities Percentage of the urban population that Since 2008, over half the world's population has been living in currently has no access to sanitary facilities (%) cities. Enterprising companies will discover that urban landscapes offer many new business prospects. Supply chains, trade, transportation and Internet connections are expanding, often Nigeria 64 rapidly, to serve ever more city dwellers. India 46 f5 The scale of this rapid change is startling: Some 200,000 people will move to cities every day through 2030. Emerging markets will China 42 see most of this migration. Between 2010 and 2030, the global share of people inhabiting cities will climb from 45% to 55%. Most Indonesia 37 will be in the developing world. Thus, 3.9 billion – or 80% – of 4.9 billion city dwellers worldwide will live in emerging and developing countries as the world's total urban population grows by more than 1.3 billion. Source: Euromonitor Study 13

F5 By 2025, 80% of cities with more than a million inhabitants will be outside the developed world

Number of urban agglomerations with over a million inhabitants, 2025

50 57 81 74 305

China 139 India 54 US 45 Nigeria 21

Source: UN World Urbanization Prospects: The 2011 Revision Roland Berger Strategy Consultants

for epidemics. Indeed, one child dies every 15 seconds as a result to build houses. Assisted by experts in London, a Nigerian building of consuming water polluted with human excreta. Diarrheal project initiated by the non-governmental organization DARE diseases cause up to 50% of all deaths in emergency, refugee and (Development Association for Renewable Energies) is creating IDP camp situations – more than 80% of them children under two homes out of plastic bottles that can withstand earthquakes, years of age. fire and even bullets. By using unconventional building materials, DARE seeks to address two problems simultaneously: plastic Potential solutions bottles that pollute roads, sewers and gutters are recycled into buildings, and at the same time help alleviate housing shortages These health and environmental challenges stimulate innovation. in Africa's most populous country. For example, Swedish architect Anders Wilhelmson designed "Peepoo", a personal, single-use, self-sanitizing, fully bio­de­ Demand for prime location luxury buildings in emerging markets gradable toilet that prevents feces from contaminating the is growing almost as fast as local incomes. The international immediate surrounding area and ecosystem. After use, Peepoo property consulting firm Knight Frank regularly surveys top real turns into valuable fertilizer that can improve livelihoods and estate advisors to ask which nationalities will become the most food security. important prime property buyers over the next five years. Chinese, Russian, Middle Eastern, Latin American and other high-growth In India, 40% to 60% of the urban population live in poorly developed, economies consistently lead recent predictions. For example, unhygienic conditions. In an effort to improve standards, an emerging market cities such as Nairobi have seen prime property in­ventive Indian real estate company introduced a program to prices soar more than 25% above 2011 prices, while Bali and offer small land parcels with decent infrastructure and with a Jakarta have seen prices increase about 15% – more than price tag of just USD 6,500 each. The examples of successful in London or Vancouver. innovation don't stop there, either. Three years ago, Tata Motors launched the world's cheapest car, priced at just EUR 1,500. The The more people congregate in cities, the more critical it becomes company has now designed the Nano house, a 20 m2 coconut to find ways to control streams of goods and waste. One promising and jute fiber unit that can be erected in just a week and is built to method suggested by research into contemporary urban data last only a few years. Tata's plan is to offer affordable shelter to management is "smart" city designs – that apply innovative IT poor people around the world. It believes that government- applications in building design, city planning and infrastructure. sponsored mass residential developments for slum dwellers and These aren't just drawing board recommendations, either. the homeless will be one of its biggest markets. In developing Singapore has become a model of urban IT prowess. The city the Nano house, Tata consulted local decision-makers, ensuring collates and interlinks data on water and power supplies, traffic that the product met local requirements. The company is now volumes for shipping, aircraft, cars and taxis, temperature and ­analyzing user feedback from a pilot project in rural India. It plans telephony, all in real time. The scope of the IT system is such to price the new home at about USD 700 – roughly what that a subway train driver knows capacity loads, why trains are industrialized world consumers might pay for a new iPad. slowing down and whether it's advisable to wait longer at a particular station. The design of low-cost housing also needs to take climate change into account. A German initiative, ASH (Africa Sustainable House), The modern city dweller will increasingly require a smartphone has developed the world's first low-cost, climate-friendly home to navigate the modern urban data jungle. A "virtuous commercial for Africa and Asia. Delivered in containers, the units are con­ circle" will evolve as more data stimulates greater demand structed on site in a single day. They are fitted with a solar module for multifunctional smart technologies. The potential for highly for lighting and radio reception, and even include air conditioning. individualized distribution and marketing is almost unlimited: Novel building materials can also make housing affordable. some vending machines in Asia even scan a person's face Taiwanese architect Arthur Huang developed a method of creating to customize advertising. construction materials out of plastic waste. The EcoArk, built from 1.5 million plastic bricks, was shown in November 2010 at Taipei's International Garden Festival. Even plastic bottles can be used Study 15

Getting to know CONSUMERS F6 in emerging markets The people behind the profiles – A possible translation of two typical consumer value profiles The pace of change is speeding up. Living standards and the built Chinese consumer value profiles with prototype customers, environment are evolving faster than ever and markets are megacities vs. tier-3 cities increasingly diverse in terms of educational levels, incomes and geographies. Consumer diversity creates a puzzle for marketing. How can companies identify niches for their new products and Susan Gan, single, 35, services? Their first step must be to analyze consumer habits and from Guangzhou, megacity brand values. With this in mind, Roland Berger designed a cus­ Works as a systems administrator tomiz­able tool, the RB Profiler, to measure how consumers for a major Chinese company perceive brands. Using a specially developed questionnaire, the RB Profiler investigates 20 fundamental values that influence Main source of news: Internet all aspects of customer behavior. The RB Profiler analyzes what Newspaper: National daily people's requirements are and how they view brands, generating Credit cards owned: Two a range of consumer profiles. Companies can use these profiles Use of credit card: Several times a week to develop product positioning options and compare the perfor­ Travels for leisure: Twice a year mance of their current products with targets. At the same time, the Clothes shopping: Once a week tool's intuitive format and statistical validation encourages organi­ Preferred grocery shopping: Mall zational buy-in and efficient application in marketing. Accommodation: One bedroom flat near the city center Hours spent on watching TV a day: 1 f6 Here's an example of the tool in action: Between 2000 and 2030, Hours spent on using the Internet a day: 3 China's urban population will nearly double, growing from 36% Likes: Risk-taking, innovative things, trendy features, just-in-time, to 69% of the total population. This new urban population will price-defined buying decisions demonstrate significant differences in terms of tastes and aspirations. A Roland Berger study using the RB Profiler asked Chinese consumers about their brand perceptions and Neil Zheng, married, 43, differentiation, consumption behavior, purchase patterns and one child, from tier-3 city lifestyle. The study showed that consumer preferences vary Runs a small stationery shop significantly according to urban size and geographical location. Looking at the differences in more detail, it appears that smaller tier-3 cities exhibit different values and priorities than Main source of news: TV megacities, reflecting their regional orientation. Typical tier-3 Newspaper: Local daily cities include Tongcheng in Anhui province, with roughly 744,000 Credit cards owned: None inhabitants, and Fengcheng on the Yellow Sea coast, with a Use of credit card: Never population of approximately 630,000. To illustrate how the RB Travels for leisure: Once every three years Profiler works, figure 6 translates the profiles for megacities and Clothes shopping: Twice a year tier-3 cities into two prototype customers, Susan Gan and Neil Preferred grocery shopping: Supermarket and own plot to grow vegetables Zheng. The differences between the two are immediately obvious. Accommodation: Small house in the suburbs Hours spent watching TV a day: 3 Hours spent on the Internet a week: 1 Likes: Fitness, family, elegance Among emerging markets, China has the largest number of valuable brands

Number of brands among the 500 most valuable worldwide, 2012 F7 South Africa Saudi Arabia Chile Malaysia United ArabEmirates Hong Kong Mexico Russia Brazil China 27 10 8 4 3 3 2 1 1 1 Source: Interbrand Roland Berger Strategy Consultants

Brand positioning – Simple but creative successful in emerging markets can often also be sold globally. For instance, Chinese automakers – notably the company behind The "country of origin" effect the Qoros brand – are confident that they can expand into Europe following the example of global Chinese brands in the IT sector, Rising incomes in emerging countries encourage consumers to such as Lenovo. change their brand purchasing behavior. A welcome consequence of this for Western companies is their increasing preference for Brand origination is a matter of considerable importance in established Western brands. Local brands are often left far behind emerging markets. The "country of origin" effect means that in the competition. For example, no local brand features among people associate particular countries with certain product the leading fashion brands in Saudi Arabia, and only one domestic characteristics. Consumers worldwide, for example, frequently brand in India makes it into the top 10 beauty brands. associate German products with quality, reliability and durability. In the past, consumer goods manufacturers such as Coca-Cola f7 Manufacturers in emerging countries own just 12% of the world's transferred their successful national brands, logos and advertising 500 most valuable brands. China leads the pack, with 27 inter­ to their worldwide subsidiaries. But building brand awareness nationally distributed brands, followed by Brazil, with 10 brands. today calls for more imagination. Western companies must In the long term, brands from emerging markets are likely to adapt to local and regional conditions. Often the most innovative become more prominent in Europe as manufacturers shift their marketing technique is the simplest. In several emerging attention from domestic to world markets. Products that are countries, for example, Coca-Cola gives paint in its signature red

F8 Top-selling brands in emerging countries Sales by brand, 2012 (retail value, USD million)

Top-selling fashion brands in Saudi Arabia – No homegrown brands Top-selling beauty brands in India – Dabur is the only Indian brand

Mothercare 231 Fair & Lovely 465

Next 191 Colgate 353

Zara 164 Lux 336

Aldo 159 Lifebuoy 305

Bossini/Sparkle 121 Godrej 257

Marks & Spencer 70 Dettol 244

Clarks Footwear 60 Santoor 208

Bershka 60 Dove 196

Milano 47 Clinic Plus 159

Calvin Klein 47 Dabur 156

Source: Euromonitor Study 19

F9 Emerging countries lead the ranking of global happiness Costa Rica 64.0 Happy Planet Index (index value): The index's top 10 are emerging countries Vietnam 60.4 Colombia 59.8 Belize 59.3 El Salvador top58.9 Jamaica 58.5

Panama 57.8 tenNicaragua 57.1 Guatemala 56.9

Venezuela 56.9

#46 Germany 47.2

Source: Centre for Well-being, new economics foundation #105 US 37.3 Roland Berger Strategy Consultants

color to village residents to decorate the outside of their houses. Ecuador and Bolivia have embarked on a similar path. The Another inexpensive Coca-Cola marketing initiative turns shipping indigenous principle of "sumak kawsay" (meaning "good living") containers, again painted Coca-Cola red, into storehouses or retail was enshrined in the Ecuadorian constitution in 2008 and in the stores. Bolivian constitution a year later.

Hindustan Lever uses other techniques to build brand awareness. f9 We are seeing increasing efforts to measure well-being across the The company frequently employs street performers – magicians, globe. The London-based "Centre for Well-being" compiles a Happy singers, dancers and actors – to promote soap and toothpaste. Planet Index to record life expectancy, experienced well-being Lever and Ogilvy Outreach, a marketing arm of Ogilvy & Mather, and people's satisfaction with the environmental impact of the recruits the local performers, adjusting their scripts in line with goods and services consumed. Costa Rica scores highest, followed local dialects, education levels and religions. A series of such by Vietnam. Most of the other top 10 are emerging countries in performances in northeastern India saw consumer awareness South America. Germany and the United States, with their large of Breeze, a low-cost 2-in-1 soap, rise from 22% to 30%. A similar ecological footprints, rank 46th and 105th respectively. program to promote Rin Shakti, a moderately priced detergent bar and powder brand, boosted recognition from 28% to 36% over f10 According to a recent goodpurpose® study by Edelman, consumers a six-month period. in "rapid growth economies" (RGEs) such as China, India, Indonesia, Malaysia, UAE and Brazil have much higher ex­pec­ Increasing relevance of values and sustainability tations of brands and corporations with regard to social issues. As the middle class grows and acquires more purchasing power, Religious values are important for many consumers. Increasing consumers in RGEs demonstrate a commitment to "social numbers of religious people will drive the market for "values- purpose" across many different activities, such as buying, sharing, oriented" products. By 2030, when the global population is donating and volunteering. This commitment is considerably forecast to exceed 8 billion, approximately a quarter of people will stronger than that found for many consumers in "bear" markets be Muslim. Pakistan will likely overtake Indonesia as the world's such as Western Europe. largest Islamic country, with a predominantly Muslim population expected to exceed 256 million. Christianity will remain the world's dominant religion, however, with the Christian population expected to be 2.2 billion by 2030. Most new Christian converts will live in emerging countries. Together, Islam and Christianity will account for over half the global population (53%) by 2030. The impact on consumer preferences will be significant – Muslim women's fashion and non-pork meat products are two commonly cited examples.

Values in a broader sense – religious, environmental and social – will play a major role in consumers' purchase decisions and brand loyalties. We are already seeing a strong move in some countries to integrate non-economic values into their economic perspective. Bhutan, for example, first formulated a new official measure of living standards, Gross National Happiness (GNH), to measure economic progress as early as 1979. The four pillars of GNH are:

Pursuing equitable and equal socio-economic development Preserving and promoting cultural heritage Conserving the environment Ensuring good governance Study 21

F10 Buying socially responsible goods is growing in importance in emerging markets On average, how often do you buy a brand that supports a good cause?

Every 6 to 12 months At least once a month

Bull markets* 84% At least once a year 22% 62%

Bear markets** 56% At least once a year 19% 37%

*) Consumers in emerging markets are "bullish" on purpose! They have high expectations of brands when it comes to social issues **) Bear markets are industrialized countries. Here, the consumers don't have such high expectations of brands regarding social issues

Source: goodpurpose® Roland Berger Strategy Consultants

Marketing and distribution – Think local but act global

Meeting consumer requirements Study 23

Online shopping and marketing on the rise

The trend toward more sophisticated information networking is of income to this channel of consumption. A recent WorldPay certain to spread to emerging and developing nations. These study finds that Indians spend 36% of their disposable income countries have seen the number of Internet users increase purchasing products and services online. The Chinese spend annually by almost 50%, from 80 million in 2000 to 1.2 billion in slightly less, at 31% of disposable income, and Brazilians 27%.5 2010. Projections anticipate 2.5 billion Internet users in emerging countries by 2020, almost three times as many as in more Some 43% of all consumers in the Arab world buy online, and one advanced nations. in every three Internet users in these regions does so at least once a month. More than 60% of those buying online report that Mobile telephony highlights how emerging country populations they use the Internet to research product features and prices rapidly take to network technologies. In most emerging countries, before deciding what exactly to buy. The top products sold online the majority of people are under 25, meaning that they grew are games, software, electrical goods and clothing, just as in up using cell phones. By 2020, it is anticipated that developing developed countries. nations will have 6.5 billion cell phone users, compared to just 1.2 billion in industrial countries. In less than ten years' time, 84% The range of products and services offered online in developing of the world's population will own a mobile device. countries is broad. In 2010, Iran launched its first online super­ market, Meydoonak.com. The site offers 2,500 grocery and Social networking is also spreading quickly. By mid-2012, there household items at competitive prices. Homegrown Indian start- were more than 43 million Facebook users in Africa, including ups including fashionandyou.com, myntra.com, snapdeal.com, 12 million in Egypt, 5.4 million in South Africa, 5.2 million in dealsandyou.com, yebhi.com and HomeShop 18 are introducing Nigeria, 4.5 million in Morocco, 3.8 million in Algeria, 3.2 million India's growing middle class to Western brands. And the growth of in Tunisia, 1.6 million in Kenya and 1.4 million in Ghana. mobile device use in emerging markets such as China, India and South Africa is driving Estée Lauder's development of m-commerce Internet use in general is on the rise in the developing world. sites, along with mobile- and tablet-friendly versions of its brand Numerous African network providers are currently competing websites. for market share. Newspapers recently reported that one in four Kenyan residents now accesses the Internet at least once How do the consumers themselves view these developments? a week.4 A survey by WorldPay finds that half of all users see mis­ appropriation of data and credit card fraud as the biggest Communication technology can also transform how business is obstacles to online shopping.6 At the same time, websites are done. In Kenya, the "m-pesa" (the "m" stands for mobile and "pesa" emerging where consumers share their information about is Swahili for "money") is a versatile way of paying by text product quality and prices. These websites are also valuable message where there is no Internet access. "m-pesa" gives even sources of information for consumer-savvy companies. By the poorest people access to banking services. Fifteen million analyzing candid consumer opinions, platforms such as the Kenyans make use of the system, which has been copied from Indian www.consumercomplaints.in can help consumer Kabul to California. The World Bank estimates that financial goods manufacturers improve their product and marketing transactions of the m-pesa type currently top USD 7 billion. Mobile strategies. payment systems also allow administrators to track national budget expenditure, such as the funds allocated to districts or towns.

Consumers in emerging markets are looking for greater choice, convenience and informed purchasing. More and more they are finding their needs met by online shopping. Perhaps surprisingly, 4) Germany's Süddeutsche Zeitung (2012) in many emerging markets consumers allocate a high percentage 5) WorldPay (2012) 6) Discover Digital Arabia (2012) Facebook users in Africa

Number of Facebook users in Africa, 2011 F11 4,481,100 Morocco 664,800 Senegal 5,184,620 Nigeria 1,436,380 Ghana 3,826,940 Algeria 516,780 Angola 5,431,280 South Africa 795,300 Congo (Zaire) Tunisia 3,214,880

Egypt 11,658,000

Ethiopia 688,040

Uganda 485,480 Kenya 1,634,940 Tanzania 585,660

Source: Allfacebook.de Roland Berger Strategy Consultants

The advertising landscape is also changing rapidly in emerging F12 countries. Advertisers are figuring out how to deliver relevant, Mobile advertising on the rise measurable advertising to their next billion consumers. Mobile Mobile channels as percentage of total digital advertising budget marketing spend will likely grow sixfold to more than USD 6 billion by 2016 in markets such as China, India and Brazil. By contrast, Europe's mobile marketing projections for 2016 are roughly the same as they were in 2012, at just USD 1 billion. f12 What lies behind this cultural divide? The principal reason is that mobile devices are the primary digital platform in emerging Indian companies countries, while PCs are more common in economically advanced countries. For example, Indian advertisers will be spending approximately 51% of their total digital advertising budgets on mobile channels by 2016, while US companies will spend just 11%.

Over 80% of cell phone users in emerging markets use prepaid phones. Additional cell phone minutes are being offered as a reward for customers completing surveys, receiving adver­ tisements or purchasing products. Customers appear to be happy 51% with this arrangement, too: In Brazil, 74% of prepaid users take a positive attitude toward receiving advertising on their mobile devices in return for free airtime minutes, according to one recent study.

Distribution – Go "glocal"

Products must be delivered not only to emerging middle-class consumers in cities but also to consumers in rural regions. In 2030, the share of the rural population in developing countries will still be 45% (compared to 19% in developed countries). Companies need to adapt their distribution strategies to local conditions. For US companies example, in countries where low-density rural areas predominate, firms should prioritize specific geographical areas and work closely with distribution partners. Often it will be too expensive to supply remote areas directly, especially at the market-entry stage.

Large and less developed markets such as China are best approached city by city, using distributors to provide services such as physical distribution and cash collection. Beiersdorf, for 11% example, serves smaller tier-2 or tier-3 cities through a number of local and regional distributors and sub-distributors in China. Distributors typically work on a non-exclusive basis.

Simple distribution technologies such as ordering products by cell phone can help overcome deficiencies in the rural infrastructure. Source: Digital Capital Advisors Study 27

Direct ordering reduces costs and saves time. On occasion, Coca-Cola has evolved a "hub and spoke" distribution model to companies will find it profitable to invest in novel distribution reach rural markets. Twice a week, the company depot supplies methods that combine different products and services to large distributors who act as hubs for small distributors. Rural reach a particular consumer segment. markets frequently lack electricity and refrigerators, so Coca-Cola also provides low-cost ice boxes – a tin box for new outlets Getting it right – Some examples and a thermocol box for seasonal outlets.

Some companies are most definitely getting it right. Here are some Heineken and Guinness have developed new products for local examples from across the developing world that can serve as an markets in emerging countries. A core part of their strategy is to inspiration to others. master lower-cost production and develop distribution systems linking independent wholesalers, retailers and street vendors. Project Shakti, jointly created by Unilever and an Indian consulting These networks provide products and income to millions of people. company, is an innovative delivery and procurement model. By hiring women from microfinance groups as last-mile distributors Another strategy for many retail brands has been to secure a for Unilever household products, the initiative improves the rural strong local partner to help pave the way for international growth. reach of fast-moving consumer goods. Bank loans are secured J.Crew, a retailer from the United States, has entered into a through microfinance, with Unilever guaranteeing the loans partnership with Hong Kong-based specialty store operator Lane against default. The project currently employs over 45,000 female Crawford to expand into Asia. From the end of 2012, their women's partners in rural areas across 12 different states, and accounts ready-to-wear clothes and shoes, men's apparel, and accessories for 20% of Unilever's total rural sales. collections will be available at certain Lane Crawford stores in Hong Kong and China. On the other side of the world, Avon saleswomen travel the Amazon and its tributaries in ferries, small boats and canoes to Samsonite also uses local distribution partners to supply its serve remote Brazilian mining towns located up to 1,500 kilo­ products to remote areas. Recently the company opened a meters from anything resembling urban civilization. The flagship store at the airport in Urumqi, a tier-3 city in China. saleswomen's persistence in overcoming distribution barriers Similarly, Procter & Gamble uses many local shops and employs has helped propel Avon into a leading position in the Brazilian popular Bollywood actors to endorse its products. Half a year cosmetics market. In South Africa, Avon delivers merchandise to after its release in October 2010, Gillette Guard held 50% of the post offices for sales representatives to pick up. Where no bank is market for razors. available, Avon organizes payment through the post office or a major retailer. Roland Berger Strategy Consultants

Conclusion

Five key actions for success Study 29

In the coming two decades, consumers in emerging countries will Find the right marketing strategy – Simple but creative experience change at rates unparalleled in economic history. The The marketing strategy and message have to speak to local range of goods and services available, the extent of the urban consumer needs. Here, again, companies must strike a balance environment, and for many the size of disposable incomes will between rural and urban customers' preferences. Sometimes grow at a speed surpassing that seen in all previous major simple marketing strategies are the solution. Urban, middle-class economic phases. consumers prefer online shopping and use social media such as Facebook, so targeted mobile marketing strategies can often How should companies respond to these changes? What strategic be effective here. steps must they take to benefit from the opportunities offered by new consumer markets in the developing world? We summarize Adapt your distribution strategy – Go glocal the key actions needed below. Companies face a wide range of challenges when it comes to designing distribution strategies that adequately reflect local conditions. Especially at the market entry stage, it is often simply Analyze trends and market environments – A world of change too expensive to supply remote regions directly. Companies need A prerequisite for understanding consumer behavior is to see how strong partnerships with regional distributors or subcontractors. fundamental megatrends such as population growth, urbanization Import and tax regulations must be clarified. Firms should and globalization are driving the development of emerging re­member that bureaucracy can slow processes down con­sider­ countries. Tools such as scenario planning can help companies ably. Sometimes a strategic alliance with competitors can create develop detailed pictures of the future and identify the main an opportunity to distribute products in new regions or cities. factors influencing consumer behavior. Extended market analyses For the urban middle class, whose purchasing behavior is very add detail to these scenarios. similar to consumers in industrialized markets, innovative technology-intensive strategies may prove the most effective. Understand consumers in emerging markets – Not a closed book Significant differences in consumer behavior will persist both between rural and urban areas and between cities of different sizes. Companies can use tools such as the RB Profiler to derive detailed consumer profiles and identify brand preferences. They should also remember that ethical and religious values in emerging countries will favor more socially oriented, ecological consumerism.

Create the right portfolio – Broad but specialized Bottom-of-the-pyramid consumers prefer cheap products that are simple to use. This may mean offering products in different sizes and packaging formats. The company's familiarity with local and cultural preferences is also crucial. The product portfolio must meet the needs of both poor customers and the growing middle classes. To satisfy the requirements of both groups, companies need critical mass, solid financial resources, a broad product mix and strategic partnerships with local manufacturers. They must also clarify patent issues in emerging markets, as several countries still fail to provide sufficient protection for foreign brands. Roland Berger Strategy Consultants

Author

Bernd Brunke Benno van Dongen Partner and Member of the Partner, Amsterdam Global Executive Committee, Berlin [email protected] [email protected]

William Downey Partner, New York

[email protected]

Co-Authors

Christophe Angoulvant Duce Gotora Partner, Paris Project Manager, London

[email protected] [email protected]

Dr. Wilfried Aulbur Carolin Griese-Michels Partner, Mumbai Principal, Hamburg

[email protected] [email protected]

Andreas Bauer Maren Hauptmann Partner, Munich Partner, Munich

[email protected] [email protected] Study 31

Daniel Himmel Per I. Nilsson Project Manager, Berlin Partner, Stockholm [email protected] [email protected]

Nicklas Holgersson Dr. Verena Reichl Project Manager, London Senior Expert, Munich [email protected] [email protected]

Fabian Huhle Tina Wang Principal, Munich Partner, Beijing [email protected] [email protected]

Dr. Johannes Klein Dr. Tim Zimmermann Principal, Berlin Partner, Munich [email protected] [email protected]

Frank Lateur Dr. Michael Zollenkop Principal, Brussels Principal, Stuttgart [email protected] [email protected] Roland Berger Strategy Consultants

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Credits Special thanks to

Pages 2: Martin Roemers / Panos Our interviewees: Pages 10- 11: Mads Nissen/Panos Siegfried Gänßlen, CEO Hansgrohe AG Page 14 (1): IMAGINE CHINA/GAMMA/laif Manfred Grundke, General Partner Knauf Gips KG Page 14 (2): Julio Etchart/Panos Ruth Schaefer, CEO Ruth Schaefer Intercultural Pages 16 -17: Espen Rasmussen/Panos Pages 24 -25: Leo Erken/Panos Roland Berger Strategy Consultants

Global Topics project description

With our GLOBAL TOPICS initiative, we assess the most pressing issues for leaders in society, business and politics and outline possible solutions. Roland Berger Strategy Consultants

For more information, please visit: www.rolandberger.com/globaltopics

If you have any questions, please contact us at: [email protected]

Roland Berger Strategy Consultants GmbH HighLight Towers, Mies-van-der-Rohe-Str. 6, 80807 Munich, Germany Study 38