Finding the 'developed' segment in 'developing' markets

MULTINATIONAL companies have been echoing the cliché that developing markets are their primary focus for growth. Many report share of business in these markets and the progress made from year to year. Companies say that they have been rejigging product portfolios, pricing models, distribution strategies and sales promotion activities to tap into consumers whom they are getting to know for the first time. These consumers do not always resemble the typical consumer of developed markets and therefore, it is a trendy thought that a paradigm shift in solutions is necessary to conquer these markets.

The more striking insight is the fact that in many emerging markets, there are meaty "developed" segments. These segments do resemble that of established markets and are often the low-hanging opportunity for multinationals. We can cite examples of luxury cars in China; beauty and cosmetics products in Brazil; luxury homes in Indonesia and Thailand; high-end retail in Russia; Internet-based retail in South Korea; and health care in Turkey. These businesses are singled out because these countries are otherwise classified as "developing" or meet the standards of a developed nation on only a few criteria.

The fundamental reasons for the rapid start and maturity of some but not all sectors arise from globally comparable affluence in the top percentile population (these markets boast of an increasing number of millionaires); exposure to western civilisation; ease of targeted marketing; ramped-up investment in enablers such as WiFi etc. Consumer aspiration for western goods and services is only a partial explanation. The trade-off psyche is an interesting phenomenon. The Chinese for instance, will pay for a Mercedes or BMW or Porsche but not necessarily a six-star holiday or even premium higher education. Similarly, elite Russian women spend hours shopping at TsUM departmental store in Moscow yet may not show the same infatuation for renovating their houses. (Real wages in Russia have declined in the past year or so, hence there is justification to "avoid" some expenses but not all.) Thus, headway in the wish list is selective. The Brazilian woman's per capita spending on cosmetics, beauty products and fragrances is next only to the US and Japan. By contrast, only 11 per cent of Brazilian adults have a university degree.

Brand addicts, wannabe millionaires, beauty queens, elites and status seekers are not the only consumers in this category. The young South Koreans spend up to 10 hours a day on the Internet, buying various things. Their Internet camping is almost like going to work, and that is effectively their workspace. This has driven up the market for Internet-based shopping. According to Euromonitor, year-on-year growth in Internet shopping was 27 per cent for the June 2015 year, and 80 per cent in the same period for mobile shopping. These are serious numbers. South Korea's average Internet speed of over 24 Mbps is the best in the world - several notches above the US, which is considered the cradle of technology.

At nearly 900,000 cars, the trio of Mercedes, BMW and Porsche sell a whopping 25 per cent of their annual global sales in China. That number has gone up in 2015 by nearly 20 per cent, in a year of bad news from the Chinese economic stable. That should tell you how much these segments are insulated from the general economy.

FAR FROM SPECTACULAR

As companies exploit these "developed" segments in developing markets more and more, the success of multinationals in the mass and lower mass segments of various product categories is far from spectacular. Beverage giants Coke and Pepsi; fast-moving consumer goods (FMCG) majors Unilever, P&G and Colgate; food companies McDonald's, Starbucks, Pizza Hut etc; retail bankers such as Citi, Bank of America and many others are still dependent on the developed world of the US, Europe, Japan and Australia for their bread and butter and more. If one takes away the revenue that they garner from developed segments in the developing markets, the rest is feeble. Instead of measuring contribution from developing markets, perhaps companies should be candid enough to track and report revenue in "developing" segments in order to make the goal more meaningful and direct efforts better.

Late management guru C K Prahalad of the University of Michigan wrote the seminal book on serving the billions of people at the bottom of the pyramid and called it the "fortune". That was 12 years ago. There is yet little credible evidence that the fortune has been hunted. As long as multinational companies find comfort in the "developed" segments of these markets, the real breakthrough at the pyramid base will remain a mirage. The one exception is the reach of mobile phones everywhere. Phone instruments at all price points and cut-throat competition among telecom companies that keep prices amazingly low have made this sector the only shining example of the Prahalad theory. The opportunity to serve the 2-3 billion at the bottom still beckons.