Emerging markets: How to reach the new middle class

Analysis

Emerging markets: How to reach the new middle-class

The past two decades have seen a growth in wealth and prosperity for huge numbers of previously very low-income consumers in Asia, Latin America, and Africa. Serving the next billion is a tantalizing prospect, but reaching them profitably is anything but straightforward. Companies need new approaches and new ways of thinking about categories, cultures, and commonalities. Reaching the newly minted middle-class will require new methods and innovation.

A billion more people will be born between now and 2025, with almost all global population growth occurring in emerging markets. Combined with faster than average GDP growth in these emerging economies, the explosion in population will result in 3.2 billion “middle-class” individuals in 2020, up from 1.8 billion in 2009. These newly-minted middle-class consumers will constitute the single biggest opportunity for almost all global companies.

However, as businesses turn their attention to these new consumers, they’re also finding that the past strategies of exporting affordable, scaled-down versions of successful products or services often do not work. The new middle-class consumers are overall poorer, live in different conditions, are less familiar to global companies, and may need different products and services than their middle-class counterparts in other nations.

The playing field will also increasingly shift away from the largest and richest megacities such as Shanghai and Mumbai. Companies will need to compete in smaller cities, towns, and even rural areas where the absolute numbers of emerging middle-class consumers will make achieving economies of scale difficult. Customizing for every local market is both impractical and expensive.

New approaches for emerging markets of global middle-class

When Deloitte surveyed developed-market executives of global firms for a 2014 study, the most commonly reported actions for operating in emerging markets were employing local vendors, conducting market research locally, and transferring managers to local markets.

Our research and client experience suggest four more approaches these global executives should consider. These approaches reframe the challenges of emerging markets and provide new ways to address them.

1. Fully understand and shape how consumer categories evolve: Many firms will need to relearn—or learn for the first time—how to compete in unfamiliar emergent categories. Western managers too often regard emerging-market consumers as merely “late adopters” of products and trends that have largely played out, neglecting in many cases to invest sufficiently in market development. In contrast, Nestlé developed a new, customized seasonings brand fortified with micronutrients missing in many emerging economies’ diets (iron, vitamin A, iodine, and zinc), and promoted it with 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. Sony introduced smaller versions of its BRAVIA® TVs to tier II and tier III markets in India to provide affordable entry offers for middle-class consumers who lack the purchasing power of their counterparts in Mumbai and Delhi.

2. Segment consumers with global consistency, but local relevance: Companies have attempted to use the segmentations developed in their home markets to think about consumers, opportunities, and go-to-market strategies globally. These segmentations usually don’t travel well. 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 an actionable segment for many consumer products companies.

3. Find meaningful—and predictive—cultural similarities and differences: The next billion consumers often live in territories woven from many cultural threads. Their heterogeneity will require companies to look beyond surface-level commonalities, such as language and income levels, to find the deeper cultural drivers of consumer behaviors. Recognizing common cultural drivers across markets that appear very different on the surface will allow companies to limit complexity and achieve some of the benefits of global scale.

4. Modify organizational structures: What is required to win in a megacity like Lagos is much more similar to what is required to win in Mumbai than in smaller Nigerian cities such as Kaduna. While organizational structures will likely continue 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 and best practices.

Adopting these strategies positions a company to win in these emerging markets and successfully navigate the next wave of globalization generated by the next billion middle-class.

For a more in-depth look on the topic of emerging markets, read the Another Billion chapter in Deloitte’s Business Trends report.

Published on October 5, 2015.

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