A review of the growth and impact of emerging markets and its impact upon brand strategy and thinking

1. Perceptual asset managers Emerging markets: the re-emergence of brand eminence 8 June 2010

2. What is an emerging market? In the 2008 Emerging Economy Report “emerging markets” is defined as: “Regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization." It appears that emerging markets lie at the intersection of non-traditional user behavior, the rise of new user groups and community adoption of products and services, and innovations in product technologies and platforms. The term was first used in the 1980s by then World Bank economist Antoine van Agtmael.

3. INDICATORS

4. The majority: one in every six people in the world is Indian and one in five is Chinese. Developing economies make up 84% of the world’s population. Source: Vital Wave Consulting.

5. Growing economic power: as developing countries evolve from natural resources and agriculture-based economies to manufacturing and service-based economies, their share of global wealth is increasing. In China, the middle class will constitute 40% of the population by 2020. Real GDP in emerging economies is growing at more than twice the rate of developed countries. From 1998-2012, inflation-adjusted GDP is expected to grow 5.7% in developing countries compared to 2.5% in developed countries.

6. These countries all have a large informal economy: up to 60% of the population in emerging markets works in the informal economy. Small businesses are predominant: in emerging markets, an estimated 69% of people who are employed work in small to medium-sized companies.

7. They are mainly rural and agrarian: 56% of emerging-market populations live in rural areas and the vast majority of rural residents work in agriculture.

8. They are diverse and varied: emerging countries vary radically by size, population, religion, cultures, social class (i.e. India) and economic measures. These populations are generally very family oriented, more religious and more socially oriented, than consumers from the developed world. Within these countries, regions display dramatic differences.

9. They have large migrant populations: there is an estimated 200 million internal migrants within China. Both India and Mexico also have significant percentages of the population working outside the country. Remittances sent back home can really impact a national economy: migrants in India and Mexico annually send over $20 billion in remittances back home. This is a well known fact in Africa, where many economies to the North depend upon South Africa for a large portion of their GDP.

10. Social services – and often infrastructure - lag far behind: emerging economies still have enormous challenges in the areas of education, health care and social services. Education rates are still low, poverty widespread and health care often non-existent. 1.2 billion people across these countries still live on less than $1 a day.

11. They are young! These areas are predominantly aged under 40

12. They adopt alternative technology fast: with very weak infrastructures (transport, services) in many emerging markets, new technologies are being adopted at a fast rate, because they compensate for such deficiencies. In many respects, emerging economies are leapfrogging the developed economies in their access to technology. It actually becomes a “lifeline” for business, friends and families. With talk about Google satellites being launched, access to new technology will dramatically expand in the next years. It will also be affordable.

13. A very large portion of people in emerging markets study. In places like China: People are prepared to work for less money if they can learn. Parents often sacrifice a lot for the education of their children. People are prepared to work long hours – they are very driven. The Chinese nation is very aspirational and use the phrase: “Aspire to Infinity!”. The Chinese only have five working days leave a year, outside of public holidays.

14. India has 2.3 million students completing college annually. India has outperformed the US, Europe and Japan in the number of students graduating in mathematics and science. India has the second largest pool of scientists and engineers in the world today. Source: Ernst and Young and the Associated Chambers of Commerce and Industry.

15. Comparative daily labour rates (in US dollars) US…………30.56 Argentina......7.98 Brazil.............7.13 Canada........31.91 Austria……..43.17 Czech ………9.67 France.........37.68 Germany......50.73 Hungary.......10.49 Mexico.............3.91 Japan............23.95 Philippines.......1.37 Singapore…...15.43 Taiwan.............8.15 Norway...........55.03 Poland..............7.69 Switzerland.....38.34 However, do not be fooled by this: serous innovation is developing in emerging markets! Source: US LabourStatistics.

16. The US still dominates intellectual capital,but the emerging economies are catching up Of the 13 Nobel Prize winners in 2009, nine were American. Although the US has only 5% of the global population, it won 70% of the awards. In 2006, 13,9% of all pharmaceutical patent applications cited either an Indian or Chinese scientist as part of the team. This is a 400% increase from 1995 (Source: Kauffman Foundation). During the 1990’s, US research and development spend dropped by 40%. And whilst it has increased slightly since then, it is at an all time low. In 1976 California spent 18% of its budget on education, today it is around ten percent. Source: Newsweek, 23 November 2009 2009

17. Frank Modruson, Chief Information Officer, Accenture “Emerging markets are already re-shaping global organizations such as Accenture — for instance, India will soon surpass the United States in having the largest number of Accenture employees.”

18. Americans who believe that the US is fallingbehind in innovation, blames maths and science education

19. What skills do parents believe their children need? Unlike Japan, it seems that China is able to bring more creative variables into business! This makes them a more serious long term competitor to the US than Japan. Not surprisingly, the Chinese art market is more experimental than the Japanese art market. Source: Newsweek-Intel Global Innovation Survey - 2009

20. If you compare the 50 companies listed as the most prominent companies of the future (Van Agtmael) Most have a serious competitive advantage in product superiority or a unique technology (he excluded “first mover” brands entering emerging markets). These are companies like: Sasol (the largest global manufacturer of synthetic fuels), Samsung (the world's largest conglomerate by revenue), Hon Hai&Yue Yuen (anonymous Taiwanese makers of computers, cell phones, etc. who produce brands for many of the largest global players), Hyundai, Cemex (Mexican - the world's largest building materials supplier and third largest cement producer), Embraer (the Brazilian aircraft manufacturer) , Infosys, Ranbaxy (latter two Indian software and generics companies), Televisa (Mexican multimedia multinational, the largest in the Spanish speaking world), Tenaris (seamless pipes that can be used very deep under the sea in Arctic conditions).

21. BRIC and Africa: a powerful sinergy BRIC-Africa trade as a proportion of Africa-world trade grew from 4.6% in 1993 to over 19% in 2008. China, India and Brazil rank as Africa’s 2nd, 6th and 10th largest trade partners, respectively. BRIC-Africa trade has increased from USD22.3 bn in 2000 to USD166 bn in 2008. China- Africa trade increased from USD3.5 bn in 1990 to over USD100 bn in 2008. Cultural and historical affiliations weigh prominently in the success of the BRICs in Africa. In total, 90 mn of Brazil’s 198 mn population claim direct African ancestry. Africa’s 53 states have growing clout on the global stage, abundant natural resources and promising consumer markets, which provide the BRICs with footholds in countries with far higher growth rates than developed markets. Source: Standard Bank, Economics: Africa, BRIC and Africa, 15 October 2009.

22. What does all this mean for brands?

23. 1. There are massive growth opportunitiesin these markets The single most important impact of emerging markets, is the GROWTH it offers. This growth lies in two areas: For existing products, services and brands, prevalent in developed markets today. This is the largest short to medium term market. For new products, services and brands - specifically developed for poorer - but far larger - markets where few multinational brands have to date been successful. This is by far the largest medium to long term market. These products and services will often be “under-engineered” relative to global standards and brands.

24. 2. Try to be the first brand in your category Being a FIRST MOVER, remains the most powerful marketing tool we have. A first mover sets the scene, establishes the ground rules and mostly retains its superiority for a long time. Being a first mover comes at a price: you need to spend on the brand to make an impact, it will not happen by default. But it does create a serious barrier-to-entry for successive brands. Often education is important in this phase – telling people the “what” and the “how” about brands. Also, if competing against local rivals, why the new entrant is better.

25. 3. There are strong local brands in these markets! Within most of these markets, there are STRONG LOCAL BRANDS. Slowly, some of these brands are globalising, like BhartiAirtel, who just bought the African network of cellphone operator Zain, or Tata – who is present in many markets, or MTN, who is present in 21 markets.

26. There are strong local brands in these markets! According to the 2010 Brandz Top 100 Most Valuable Global Brands by Millward Brown, 13 of the world's leading 100 brands are from emerging countries, compared with just one four years ago. China Mobile is in the 8th position with a brand value of US$ 52,6 billion.

27. 4. Emerging markets require a different competence Today, much of THE DEVELOPED WORLD UNDER-APPRECIATES the emerging markets and sees them as too risky. The competence required is different: A different tolerance for risk. An appreciation for local issues and circumstances. Willing to break the rules - or set new ones if required. An appreciation for local cultures and customs. A willingness to adapt (i.e. MTN running base stations with generators and security guards). Often companies entering emerging markets acquire local companies, thereby buying access to local knowledge, distribution networks and facilities. As a new entrant, learn from local marketers and work with them.

28. A view from IBM

29. Emerging markets require a different competence (cont.) According to the Mc Kinsey quarterly review, June 2003, global manufacturers can compete in two ways in emerging markets: For the high-income segment companies can pursue sophisticated brand-building strategies. For the low-price market, they should emulate local competitors.

30. Emerging markets require a different competence (cont.) Furthermore: Successful global entrants minimise their risks by adhering to local standards of quality and technology - the consumers define quality so they retain local design and production systems. In response to a low-cost competitor in India, Unilever introduced an inexpensive detergent - Wheel - and outsourced its production locally. The product was less refined than Unilever’s premium Indian brand and sold for about one-third as much, allowing the company to serve a previously neglected low-price market. In the low-end segment of emerging markets, homegrown management methods and an awareness of local tastes and incomes will usually work best. Source: McKinsey Quarterly Review, June 2003.

31. A typical costs and price breakdown for detergent – comparing a global and a local brand

32. How are local companies in emerging countries able tocompete with global multinationals? To quote Harvard Business Review, October 2006: “…when multinational companies from the developed world explore business opportunities in emerging markets, they must confront the same institutional voids that local companies face. However, executives from multinational companies are used to operating in economies with well-developed institutional infrastructures and are therefore ill equipped to deal with such voids. Western organizations, for instance, rely on data from market research firms to tailor their products and marketing strategies to compete in different markets. They also count on supply chain partners to make and deliver products to customers inexpensively. When these companies attempt to move into countries that don’t have sophisticated market researchers or reliable supply chain partners, they find it difficult to deploy their business models. By contrast, the managers at local companies know how to work around institutional voids because they’ve had years of experience doing so. Their familiarity with the local context allows them to identify and meet customers’ needs effectively. Source: HBR: Emerging Giants: Building World-Class Companies in Developing Countries.

33. 5. A different retail scenario Sheer availability is key and will generate sales. So distribution itself is probably the most important marketing imperative – gaining it fast. Distribution options are endless. It will be far less formal than informal, although aspiration will mean having formal outlets (also) is important as that creates brand stature. In sheer time, mature market consumers still spend more time shopping than emerging market consumers, but probably only because they cannot afford to shop that much (Millward Brown). New technology and informal retail live side-by-side. In many instances, the same consumers are comfortable with both. Naturally, this will vary according to locality: more so in the cities, less so in rural areas. More so amongst the educated, employed and the youth, less so amongst the illiterate, unemployed and those over 40.

34. Other interesting comparisons…

35. 6. Control of the brand is difficult! Brand management itself is far more complex – the brand is distributed widely, in different locations, often the marketing material or even the logo is produced by the trader himself/ herself. To manage brand image consistency, current merchandising material and marketing campaigns, are complex. The control of the brand in these markets is already with the consumer! Production qualities for marketing material - and available suppliers - are problematic. Control and policing of signage and other brand elements difficult.

36. The trade may render your brand the way they decide to

37. Policing and maintenance is difficult

38. 7. These consumers are sophisticated These consumers are in no way inferior, less intelligent or less demanding than their peers in developed countries. They are as up- to-date as their developed market counterparts. Obviously there are poor relatives in rural areas that are less exposed, but this is changing fast. Traditional media is problematic or even non-existent in many of these societies – meaning the impact of new technologies and social media transcend traditional media. This is exaggerated by the strong social bonds within these communities – and the desire to be part of the new world (they want to be on Facebook, twitter, Linkedin everyday!).

39. 8. Brands are worn! Brands are big!

40. Strong, fashion and luxury brands define consumers Luxury! Wear it and show you have it. Never “down-sell”, always “up-sell”. Although many are poor, inferior brands will have a short life span, ultimately quality will prevail – they will only buy inferior products until they can afford better.

41. Collective consciousness – rather than individualism - drive many of them It is not (only) that I want a Rolex, it is that others know what a Rolex costs that defines me as a person! The collective consciousness of society about the brands that are aspirational, creates the yardstick by which people are judged. Being expensive becomes very much part of what people buy into – BUT, it still has to perform its function. You would rather NOT travel if you do not have a Louis Vuitton bag!

42. 9. The consumer mindset Positive and hopeful. Young. Trendy. In touch. Aware of trends. Adopt new technology fast. The role of brands and technology symbolic in themselves. Searching for opportunities. They see their nations as being the future. A drive towards connectedness. Wants to be part of the world. Consumption-driven. Often impatient – want to attain wealth and prosperity fast. Quality is extremely important in these economies. If they can afford it, consumers will buy the best.

43. Looking at China and India in particular Both nations are very aspirational. People are ambitious, they want to learn and get ahead in life. They are prepared to study and work hard. They are also very proud of their own cultures and achievements, yet are starting to have a more balanced view of life. They do not aspire to the West at all costs. Although they love American and European brands, the Chinese in particular, see themselves as a major centre of power, equal to the US. Source: Smollan China, India and JWT China.

44. Looking at China and India (cont.) The Chinese tend to be pragmatic and are very organised. There is more of a Chinese nation, than an Indian nation – India differs more when it comes to cultural, class and ethnic variations. China tends to “underplay” these. Both nations are proud of their heritage and what they have achieved. Both like conspicuous consumption. They display their wealth. Quality is important to both. Brands are used to gain social acceptance, to re-assure and be an indicator of progress in life. Source: Smollan China, India and JWT, China.

45. 10. The society and significant others are important Social context is important, although people are individuals in displaying what they have and being aspirational, the family and social circle drives society. The educated and more successful, will retain strong relationships with their families far away. Communities and significant others are important. Within these communities, there are far greater consciousness of the family and friends than in many developed nations. Most emerging economies probably emulate the Southern European nations (i.e. Italy, Spain, Greece, Portugal) when it comes to the importance of the family unit. Be careful of diversity – culture, religion, regional differences and even social class in some societies, are important.

46. 11. Emerging markets have confidence –they are up to the challenges facing them Beijing hosted one of the best Olympics ever. Whereas Manhattan was constructed to its current size in over 100 years, Dubai did it in less than ten. Abu Dhabi may do it in five. As tall buildings became one of the visible symbols of American prosperity (in the eighties it had the top five), it now does that for emerging nations. Compare the four tallest buildings today:

47. These buildings are built fast! The Beijing airport expansion was the largest expansion of an airport ever, and it was built faster than any airport to date! (It is larger than all the five terminals of Heathrow put together.) The Dubai metro rail link took two years to build – from start to finish. If these countries do not have the skills, they simply “buy” the best skills they can get to achieve their goals. In these countries, it is no longer about “copying” only! In 2003 a SUV by Mahindra & Mahindra, called Scorpio, won the Car of the Year awarded by CNBC India and the BBC World’s Wheels program. In these cultures, it is about CAN.

48. Imagination rules in many of these countries!

49. 12. Companies - and brands - take on greater significance These communities welcome investment, brands and new opportunities. Do not underestimate the importance of being present – it is far more emotional than in developed nations where brands and business are taken for granted (and easily criticized). These communities offer opportunities to engage with the communities in a far more sustainable and mutually beneficial way than companies are used to being engaged in developed nations. The relationship of the brand with society, is vitally important and a great competitive opportunity. This means corporate brands will also be more important (who owns the brand).

50. There are suggestions that emerging markets are more volatile in terms of consumer sentiment. This is probably because consumers talk more and therefore word-of-mouth is more powerful – bad experiences travel fast. But it is also because the stature of brands in emerging markets are more prominent. They simply are more visible, important to people than they are in developed markets. In consumer involvement terms, it means people are more involved in brands. This also means consumers are more willing to listen to arguments and benefits offered by their own and other brands. So, theoretically at least, consumers are more likely to “switch” out of one brand into the next (the sheer “dis-interest” in developed economies make this difficult). This makes brand education important. 13. The importance of word-of-mouth communication

51. 14. The legal protection of brands The legal protection of brands constitutes a major challenge when operating in many of these markets as no universal regulatory framework gets adhered to. Be aware of this!

52. To conclude - our challenge Emerging markets offer the biggest single opportunity for most companies today. Getting there first, has to be a major opportunity. For us, coming from a background with a unique mix of developed and emerging market traits, the opportunities in emerging markets are huge. This being the only growth opportunity for global multinationals, the opportunities for the export of brand insight and expertise is great. So our centre of gravity should no longer be London or New York, but Mumbai, Lagos, Sao Paulo and Shanghai!

53. Thank you and questions?