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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 3 S P E C I A L E D I T I O N: T H E VA L U E I N O R G A N I Z AT I O N

Brand building in emerging markets

Gilberto Duarte de Abreu Filho, Nicola Calicchio, and Fernando Lunardini
Western consumer goods companies entering rapidly expanding emerging markets should imitate the local competition.
European and US consumer goods makers, confronted by slowing growth at home, are turning to the fast-growing countries of Africa, Asia, and Latin America. In 2002 the top 20 consumer goods companies spent more than $10 billion to expand their share of these markets, which now account for nearly 40 percent of all worldwide sales of clothing and grocery products (Exhibit 1). However, many such companies find that their expensive brands and management processes are more a hindrance than a help in reaching the lower-income segments. Our study of global consumer goods makers1 operating in emerging markets revealed a consistent pattern: companies perform best in the vast
EXHIBIT 1

KEVIN CURRY

An emerging opportunity

Emerging markets

Millions of population, 2001

Gross national income, 2001, $ billion

Sales of clothing and grocery products, 2001, $ billion

Low income1

2,512

1,070

212

39% of worldwide sales 1,645

Middle income1

2,667

4,922

High income1

955

25,508

2,951

Total 6,134
1

31,500

4,808

Categories based on 2001 gross national income per capita adjusted to account for exchange-rate fluctuations: low income (with average annual income $745) comprises India, Central Asia, and most of Africa; middle income ($746$9,205), China and most of Latin America and Cental Europe; high income ($9,206), European Union and United States. Source: US Census Bureau; World Bank Group; McKinsey analysis
1

We analyzed the entry of 23 companies, in industries such as packaged foods, beverages, and soaps, into the low-end segment in five emerging markets (Argentina, Brazil, Chile, China, and India), tracked the performance of these companies for several years after their entry, and interviewed 15 of their executives.

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low-income segment by adopting local branding and organizational strategies, which often run counter to established practice in more advanced regions.2 Most of the companies we studied entered an emerging market by acquiring a local competitor; they were essentially buying access to local distribution networks and facilities. Next they brought in brand managers from more developed markets, who typically overhauled manufacturing processes and launched expensive marketing campaigns. In addition, most multinationals sought to integrate their acquisitions into the parent organization by extending their corporate functions to the local companies and allocating a share of those costs. In almost every case, the companies then had to raise prices. That approach can work for products aimed at affluent consumers, who in emerging as in developed markets will pay a premium for brand names. But it usually prices products out of the mass market: local competitors have such an enormous cost advantage that it isnt unusual for multinational companies to lose half of the market share of the brands they acquire. In one emerging market we studied, for instance, the product of the lowest-priced local competitor sold for about 40 percent less than a global companys brand-name soap powder. The local company merely manufactures and distributes its soap; it has no marketing or brand-management expenses and enjoys far lower costs for materials, packaging, and production. The local product thus gives its manufacturer margins quite comparable to those of the global company and provides higher margins for retailers (Exhibit 2), thus increasing their loyalty. Local manufacturers can maintain their profitability even without tax evasion a common charge against them. To compete, the global manufacturers should develop two distinct approaches to emerging markets. For the high-income segment, such companies can build profitable positions by continuing to pursue sophisticated brand-building strategies. But to capture the low-price market, they would do better to emulate their local competitors. First, global companies should retain the best local managers, who, we found, are less likely to change products (or their packaging and promotion) extensively. The manufacturers that didnt make such changes achieved profitable growth two-thirds of the time, while those that did usually failed to do so. The key is to focus on cost reduction, operational efficiency, and simplicity rather than product reformulations or marketing efforts. Companies relying on managers imbued with the branding mind-set of advanced markets tended to focus on the wrong things.
2

For more on how multinational companies can benefit from and help to develop the lowincome segment in emerging markets, see Stuart L. Hart and C. K. Prahalad, Strategies for the Bottom of the Pyramid: Creating Sustainable Development, Fourth Annual Sustainable Enterprise Summit, World Resources Institute, September 2000.

T H E M c K I N S E Y Q U A R T E R LY 2 0 0 3 S P E C I A L E D I T I O N: T H E VA L U E I N O R G A N I Z AT I O N

EXHIBIT 2

Economies of soap
$ per 1-kilogram package of soap powder Multinational companys brandname product1 Retail price Taxes Retailers gross margin Manufacturers price to retailer Manufacturers costs Raw materials and packaging Production Logistics Trade terms Sales force Marketing Brand management Overhead Manufacturers net profit 4.12 0.69 0.94 2.49 Lowest-priced local competitors product1 2.49 0.33 1.01 1.15 Higher gross margin for retailer

1.00 0.50 0.13 0.13 0.06 0.31 0.13 0.13 0.12 (5% of sales)

0.55 0.28 0.09 0.01 0.05 0 0 0.11 0.07 (7% of sales)

Lower costs for manufacturer

Comparable margins for manufacturer

1 Disguised examples; figures do not sum to total, because of rounding. Source: Interviews; McKinsey analysis

Second, successful global entrants in emerging markets further minimized the risks by adhering to local standards of quality and technology; these companies let the consumers define quality and refrained from uprooting local design and production systems. In response to a low-cost competitor in India, Unilever, for example, introduced an inexpensive powder detergent called Wheel and outsourced its production to a local manufacturer. The product was less refined than Unilevers premium Indian brand and sold for about one-third as much, allowing the company to serve a previously neglected low-price market. With only one strong competitor in it, Wheel quickly won 38 percent of the powder-detergent market in India, thereby matching the competitors market share. Finally, companies that acquired local manufacturers but kept their operations separatesharing only a few functions, such as purchasing or logisticsoutperformed those that fully integrated local acquisitions. The parent should act much as a venture capital firm does, by investing in companies that are growing, preserving their autonomy and lower cost structures, and transferring product ideas from one country to another. (After achieving success with Wheel, for instance, Unilever introduced a similar product in South America.) But such successes will remain elu-

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sive unless companies accept a hard lesson: in the low-end segment of emerging markets, homegrown management methods and an awareness of local tastes and incomes will usually work best.

Gilberto Abreu and Fernando Lunardini are consultants in McKinseys So Paolo office, where Nicola Calicchio is a principal.