Editor’s note: Sarah Boumphrey is head of strategic, economic and consumer insight at London-based market research firm Euromonitor International.
Successfully launching a product or service is not a simple task. While there are various interrelated factors, a systematic and logical approach to choosing and analyzing the characteristics which inform market selection is a good starting point. This article will discuss a four-pillar market selection framework research teams can use when looking to enter an emerging market.
Assessing the market
The first pillar, market, is perhaps the most fundamental. It incorporates macroeconomic stability, the middle class, openness, the consumer market size and growth. These elements are concerns of any emerging market strategy: Is the country sizeable and stable enough to do business in? Are consumers able to buy my products and services? Are the potential growth rates of the market attractive enough to offset any risk? Are the conditions for foreign businesses right? Are consumers open to new ideas? Is foreign investment welcome?
A large and vibrant middle class is often the chief target for many multinationals because a middle-class income is an indicator of sufficient spending power to consume non-essential goods. In emerging markets, some of those entering the middle class will be able to purchase non-essentials for the first time, creating significant opportunities for consumer goods companies. Gaining first-mover advantage in emerging markets and building a loyal consumer base can be a winning long-term strategy. But what constitutes a middle-class income varies dramatically even within a region. For example, looking at Figure 1, we can see that in 2014, a middle-income household in Bolivia earned just $4,000, compared to $10,000 in Peru and over $20,000 in Uruguay.
Spending priorities also vary dramatically as a result of different tastes, motivations and aspirations, as well as different budgets. Developing a thorough understanding of the middle class is essential. For example, middle-income households in Colombia and Peru have virtually identical annual disposable incomes, yet spending priorities differ markedly (Figure 2).
Population size, the second pillar, determines how many potential consumers are out there. Many decisions should be shaped by the demographic realities on the ground. Understanding and harnessing population trends enables new market entrants to maximize their profitability by targeting the right people, in the right place and at the right time. Marketers and strategic planners should be posing questions such as: Where do my target consumers live? Is my target audience growing and will it continue to do so? Is it geographically dispersed or concentrated?
In terms of scale, 42.5 percent of the emerging and developing market population lives in just two countries – China and India. India is set to add 247 million to its population by 2030, accounting for 21 percent of the population growth in emerging and developing markets as a whole. China is growing much more slowly. Between 2014 and 2030 it will add fewer than 50 million inhabitants, less than much smaller countries such as Nigeria and Pakistan. Growth dynamics are both a direct result and the root of differences in the structure of the population of China and India. The average age in China in 2014 was 40.8 years, compared to just 26.3 years in India. Twelve percent of the Chinese population was age 65 or older last year, compared to just 5 percent in India. In 2014, 26.8 million babies were born in India – 10 million more than were born in China – accounting for one-in-five of babies born globally.
The third pillar, access, concerns the practicalities of market entry. This is considered in terms of infrastructure, Internet access, partners and the retail landscape: Will it be difficult to get your products to market? Are consumers easily accessible for direct sales, marketing and promotional activities? Will a local partner facilitate market entry? Is the retail landscape modern or traditional?
The retail landscape can vary significantly from country to country. For instance, in Thailand the top five retailing operations account for 28 percent of retail sales but in Vietnam the figure is far lower at 7 percent. Serving the retail landscape in Vietnam is likely more complex. It’s not easy supplying hundreds of thousands of mom-and-pop stores that require frequent but small deliveries, and store owners may have limited access to credit. To meet these distribution challenges, many successful companies employ innovative distribution methods. For instance, micro-distributors or “village entrepreneurs” are being used by multinationals across Asia, Africa and Latin America.
In Brazil only 13.5 percent of roads are paved and the country has 29,879 kilometers of publically operated railway – a comparable figure to Mexico, which has only one-quarter of Brazil's land area. Inadequate infrastructures such as this complicate business in many emerging markets. Urbanization, an increasing middle class and economic growth have all put a strain on electricity infrastructure in India. According to the World Bank, 24.7 percent of the Indian population went without electricity in 2011, which equates to 299 million people – more than three times the population of Germany. This impacts manufacturing and everyday business, along with sales of many consumer goods. Yet it also provides opportunities for companies able to innovate to create new products or services, overcoming this issue.
The friendliness of the business environment is also a crucial factor and forms the fourth pillar. The practicalities of doing business, the regulatory environment, corruption levels and the skills available in the workforce can all make or break a business. Business can thrive in countries where these factors are not favorable but strategy is a must: Is there a level playing field between domestic and foreign investors? Is the rule of law sufficient? How can a business beat corruption? How can a business recruit and retain talent?
Both finding and keeping talent can be a huge challenge in emerging markets. Recruiting local talent can really help in building a successful brand. Local managers will have a deep understanding of cultural norms, which is crucial to success. However, skill shortages can be a problem and churn is often high. The pool of educated professionals can also be smaller, as shown in Figure 4. These factors all combine to push up wages. The days when emerging markets were seen as a source of cheap labor are now over in many countries. Wages-per-hour increased by just 1.9 percent in real terms across developed economies between 2009 and 2014. In comparison, China saw an increase of 42.3 percent and Brazil saw a 23.6 percent increase.
But beyond any of the factors, a willingness to take risks is vital. A long-term strategy is necessary, one which may not bring overnight gains. It is also costly. For these reasons alone it is imperative to choose wisely and have a solid methodology in place. The factors I have outlined are a useful starting point but the importance assigned to each factor will differ according to industry sector and company profile. For some, human capital may be the primary concern, whereas others may focus on the middle class. In addition, company-specific factors will be added to the mix: access to finance may be crucial or the lack of specialist suppliers could be a deal-breaker.
This kind of research should not be seen as a one-off task. Success in emerging markets should be based on a constant review of the underlying factors driving the market. Trends and attitudes change, as do government policies, economic stability and patterns of income and expenditure. In a nutshell, (constantly renewed) knowledge is crucial for ensuring triumph over adversity in market expansion.