US businesses with key operations beyond the mature markets of North America and Europe are most optimistic about growth. Of those with operations in emerging markets, about three-quarters expect businesses in those regions to expand, according to PwC’s 15th Annual Global CEO Survey. The world is turning to the East, and consumer goods companies—just like other sectors that ultimately depend on purchasing power and attractive demographics—are paying attention.
It’s been 10 years now since Goldman Sachs’ Jim O’Neill first coined the acronym “BRICs” in his November 2001 research paper, “The World Needs Better Economic BRICs.” O’Neill’s forecast of the importance of these markets was prescient. For example, even after their advances over the past decade, China, India, and Russia are predicted to triple spending power by 2018, and Brazil is not far behind, according to a recent report by Business Monitor International.1
While South Africa, by most accounts, has become a fifth member of the BRICS (signified by the capital “S”), these countries no longer sufficiently represent the rise of emerging markets. Global gross domestic product (GDP), factoring in purchasing power parity, now has reached about a 50/50 split between the developed economies and emerging economies. In fact, for the first time since the dawn of the Industrial Age, the global economic engine is being powered by Southern Hemisphere nations.2
Moreover, in the aftermath of the financial crisis and subsequent Great Recession, the emerging markets as a whole—not the world’s debt-ridden developed markets—have been the most resilient in the face of global distress. As Chief Economist and Leader of PwC’s Emerging Markets practice Harry Broadman puts it, “Going through the financial crisis, the most resilient economies—measured by GDP or trade volumes—have been the emerging markets.”
Broadman made this comment at PwC’s annual Global Retail and Consumer Leadership Conference held recently in New York. He moderated the session “A BRIC and Beyond,” which examined the notion that, while the BRICS still serve as a proxy of sorts for any emerging markets discussion, there is much going on beyond the BRICS that business leaders should know about.
Besides Broadman, the panel included Michael Tangney, vice chairman of Colgate-Palmolive; Ricardo Neves, PwC’s retail and consumer leader in Brazil; John Wilkinson, PwC’s retail and consumer leader in South Africa; and Adnan Akan, PwC’s retail and consumer leader in Turkey. In the following, we present highlights of their discussion.
Global Retail and Consumer Leader
Something funny happened to developing markets as they continued to “emerge”: They became the engines of global economic growth. India, China, Brazil, and many other countries are undergoing the kind of economic transformation that South Korea, Japan, and the nations of Europe experienced during the post-World War II boom. Economic progress in emerging markets is happening at an accelerated pace due partly to advances in technology, sound economic policymaking, and reduction in poverty as a result of health, education, and other social reforms.
In fact, from 1996 to 2010, emerging markets countries grew at more than twice the rate of developed countries—about five percent versus two percent annual GDP growth, respectively. Even more impressive is that, recently, income disparity between certain emerging markets and developed markets is declining rapidly.
When we speak of emerging markets, just what countries are we talking about? It depends on whom you ask: The FTSE Group identifies 22 emerging markets, split between “advanced” and “secondary.” Standard & Poor’s, which rates the sovereign debt of 126 different countries, classifies 19 of them as emerging markets. Perhaps not surprisingly, the ubiquitous success of the term BRICS has spawned a whole new set of alphabet-soup-like terms for different groupings of emerging markets. One is the EAGLEs, defined as the 10 emerging and growth-leading economies. (See Figure.) Others are the 12 countries of the Big Emerging Markets (BEM), and the rather unwieldy CIVETS, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa.
No matter how they are sliced and diced, most emerging markets will continue to enjoy growth that dwarfs that of the developed markets. The International Monetary Fund and the World Bank project that, in 2025, the pace of growth in emerging markets still will be double that of developed markets.
What surprises many, though, is the precise nature of this growth. Much of it will result from what’s called South-South commerce3 as opposed to the more familiar North-South commerce, which is advanced countries investing in developing countries to make products cheaply and then exporting predominantly to developed countries. “There is a tremendous amount of commerce that is taking place among emerging markets,” said Broadman. “In 1970, South-South trade was about seven percent of world trade. Today, it is 20 percent of world trade.” That means that the usual suspects looking for market share in emerging markets—multinationals from developed countries—have an additional source of competition in successful emerging markets brands.
This sea change in the structure of the global economy has ushered in a new era of South-South capital investment as well. In the past, the transparency and liquidity of the US capital market proved an enormously strong lure for many global companies, no matter where they were based. While the US still is one of the globe’s largest recipients of foreign direct investment, the growth of South-South foreign direct investment flows has taken off. “If you look at where foreign direct investment out of emerging markets goes—the multinational corporations from these emerging markets—one-third of their foreign direct investment is taking place in other emerging markets,” according to Broadman.
The companies that thrive in emerging markets often tend to be the pioneers. Colgate, for example, can lay claim to a century-long legacy of overseas operations—not to mention customers in 200 countries today.
When Colgate vice chairman Mike Tangney was asked about the company’s long-time success in Latin America and Asia, he explained that when he arrived in Colombia in the late 1970s after time spent at several other international Colgate locations, he found a comparably strong Colgate operation in the city of Cali. Tangney quizzed several “in-the-trenches” managers in Colombia, trying to understand their secret. They all told him the same thing: Virtually the entire management team had been in place for nearly two decades, getting to know the lay of the land. Thus, whenever asked to account for Colgate’s success in perceived risky environments, Tangney always responds: “Consistency of management, a willingness to take the ups and downs, persistence, and long-term vision.”
John Wilkinson cited the Shoprite Group of Companies, Africa’s largest food retailer, as another company bold enough to look to emerging markets ahead of other companies. Today, the company has more than 1,500 stores in 16 countries across Africa. “Shoprite is very interesting because they are seen as pioneers in Africa,” Wilkinson said. “It’s exciting to talk to their management about the challenges and opportunities in Africa.”
But for companies with no presence or just nascent operations in emerging markets, what good is talk of being a corporate pioneer in 2012 when consumers all over the world use mobile devices; more than a billion people can access the Internet; and millions enter the ranks of the middle class every year? The irony is that despite an ever-smaller and more interconnected world, there still are many opportunities to break new ground. Three key C-suite attributes can help ease the transition: a “taste for risk,” in Tangney’s words; a willingness to disregard conventional wisdom about emerging markets; and a commitment to being there for the long haul.
According to Tangney, there is a value proposition paradox at work in some African countries that many companies without experience there can’t appreciate. While some consumer packaged goods companies are reluctant to build businesses in relatively poor countries, assuming that they can sell products only very inexpensively, Tangney said that, on the contrary, some of these consumers are willing to pay a premium.
“Even though consumers may have minimal purchasing power, the value of what Colgate sells to them is greater than the value in developed markets,” Tangney said. “When I go into homes in Soweto, South Africa, I ask the question, ‘Why do you buy what you buy?’ And they say: ‘The health of my family is important. I am not going to buy the cheapest product.’ We can, in fact, command a premium price.” But companies must be prepared for poor quarters, poor years, and just about everything in between. “Over the years, we’ve dealt with chaos, civil insurrection, financial disruption,” Tangney said. “If you’re looking for a sure thing, emerging markets are not the way to go. You need a taste for risk and a tolerance for ambiguity.”
Unilever is another consumer products company embracing the opportunities in emerging markets while being aware of the risks. Shifting much of its business to new markets will mean a lot of changes, as Unilever CEO Paul Polman explained in an interview for PwC’s 14th Annual Global CEO Survey, published last year: “Within 10 years, 70 percent of our business will come from the Far East,” Polman said. “That shift eastward has tremendous implications for our company’s structure and culture. The values at the heart of our company certainly won’t change, but our culture and business model will need to evolve to reflect a changing customer demographic.”
Other consumer goods CEOs clearly share the same view: According to the survey, 57 percent anticipate that they’ll need to make strategic changes to capitalize on the increasing prosperity of consumers in emerging markets. One of these CEOs is Bob McDonald, Chairman of the Board, President and CEO of US-based Procter & Gamble (P&G). He explained to PwC just how committed P&G is to emerging markets, despite the risks. He told us: “We currently have 20 new factories under construction around the world—19 in developing markets and one in a developed market, which is the US.”4
Companies with the DNA to stake a claim today in emerging markets may find large swaths of them still open for penetration. Brazil, for example, is a huge economic success story, but its relative insularity still scares off some foreign companies. “Brazil has been an economy that, in some ways, has been very closed, even when compared with other emerging markets,” said panel member Ricardo Neves. “Historically, we have always been bureaucratic and put a lot of fences around the internal markets.” But those regulations will inevitably loosen, because as Neves said, “There’s a lot of discussion about lower prices and better-controlled inflation if we were more open to competition.” The global consumer goods companies and retailers that are first-movers in Brazil will have an enormous advantage.
According to Adnan Akan, opportunities abound in Turkey as well, particularly for large retailers. About 60 percent of the retail market is classified as “traditional,” compared with just 20 percent for Western Europe. That leaves plenty of consumers hungry for the conveniences of modern retail. And for consumer goods companies, there’s a lesson in what Napoleon Bonaparte once said: “If the world were just one country, Istanbul would be its capital.” Turkey’s straddling of Europe and Asia gives it a major advantage as a production center.
It’s not just a tendency to shy away from risk that leaves plenty of opportunities on the table in emerging markets. Assumptions about how to do business in various emerging markets unnecessarily shackle companies.
For example, for global companies entering Africa, it’s been conventional wisdom that the path to success starts in South Africa, moves north through Namibia, Botswana, and Zambia, and then swerves east to Tanzania or perhaps west to Nigeria and Ghana. According to panel member Wilkinson, however, the days of any one template for investment in Africa are long gone. “South Africa has been in that fortunate position with the most developed economy, infrastructure, and banking system,” he said. “But now you see development all over the continent and investments being made in countries geographically removed from South Africa. There is a lot of interest in Africa now so the various countries are trying to promote themselves.” The ways they are doing that are as varied as the 50 or so different countries of Africa. For example, according to Wilkinson, Mauritius has taken steps to make it much easier for global companies to enter the country.
Another common assumption about many African countries is that corruption and instability will sink any efforts for success. But the reality, according to Wilkinson, is that while foreign investors need to perform detailed analysis of any country they consider, the operating environment is much improved. “Africa is not a country; it’s a continent,” Wilkinson said. “So there are different market sizes, income levels, languages, and cultures. But as a whole, Africa is booming, political risk has lessened, and the operating environment has improved in many countries.”
For Brazil, a number of companies still remember the instability and runaway inflation of the 1990s, dynamics that, back then, were synonymous with the rest of Latin America. But the levels of instability and inflation of the past are nowhere to be found today, and what developed is a burgeoning middle class with tens of millions of young, educated workers moving up the economic food chain. In addition to the high-income Brazilian customers that always have existed for multinational companies, there now are millions of up-and-coming consumers. For companies that are agile and adaptable, this is a huge opportunity to create new market share, as well as to protect the market share they already have.
“The instability and inflation issues we had have been gone now for 12 to 15 years,” explained Neves. “We have built very strong markets from both the perspective of production and consumption. That’s one reason Brazil has been able to ride out the financial crisis and recession and not be as affected by it.”
In Turkey, the events of the Arab Spring introduced a potentially new story line for consumer companies. While Turkey has long been a regional manufacturing powerhouse—it makes more televisions and buses than any other country in Europe and is the fourth-largest manufacturer of automobiles—the potential liberalization of the Middle East could position Turkey as the ideal launching pad for export to these countries. “Turkey as a base for production and exporting to the Middle East, as well as the Balkans, makes a lot of sense,” said Akan. “We have connections with all of these regions and a strong manufacturing and logistics capability.” Akan also pointed out that Turkish entertainment programming is very popular with certain Middle East countries, so companies that target Turkey as a market essentially hit all of the Middle East with their product advertising at no extra cost.
Colgate has been active in emerging markets for decades and maintained its commitment while managing political, operational, and cultural risk. But numerous other companies haven’t met with that success and have retreated. So for the retailer or consumer products company looking to make a long-term play in emerging markets today, what are some of the most critical issues that need to be managed? (For Broadman’s personal point of view, see "Navigating the risks and opportunities in emerging markets.")
First, the good news: Our panel agreed that the demographics in virtually all emerging markets work in any company’s favor. Take Africa, Turkey, and Brazil. Africa contains more than one billion people and some of the fastest-growing countries in the world in terms of GDP, including Ghana, which grew the fastest in 2010 (China was the fourth fastest growing). It is estimated that in 30 years’ time, one in every five children will live in Africa, and the continent will have the largest working-age population. Foreign direct investment overall still is quite low, accounting for less than five percent into emerging markets, so there still are plenty of opportunities. “Africa strikes me as a perfect case of first-mover advantage,” posited Broadman.
Turkey boasts a growing and youthful population. While it has few natural resources to speak of, its manufacturing acumen and geographic position at the crossroads of Asia and Europe make it an ideal platform for production. Its growing Internet usage and relative lack of a modern retail industry make it a ripe growth area for global online retailers. And Brazil? It might have the best demographic profile of any emerging market: a large, young, educated population; abundant natural resources; a multicultural society; and a high percentage of Internet penetration. But challenges remain.
Over the past two decades, China has shown how advancing a country’s infrastructure can help spur economic growth. In the case of Brazil, the country completed many infrastructure projects due to its hosting of the soccer World Cup in 2014 and the Summer Olympic Games in 2016 in Rio de Janeiro.
But as Neves pointed out, strong Internet access can go a long way toward hiding weak spots in infrastructure: “In Brazil, the way that companies are looking to use social media to test products and introduce new products into the marketplace has really overcome part of the infrastructure need.” In fact, any company looking at Brazil as a long-term investment needs to understand this equation: The combination of a youthful, educated populace; an Internet penetration rate of more than 50 percent and growing; and a burgeoning middle class equals a huge potential for online retailing. “We have a very young population and high level of Internet usage—and not just homes with high speed Internet,” Neves said. “Hundreds of thousands of shops offer access where anyone can go in. And they are buying things online as well.”
Infrastructure needs in Turkey and Africa, apart from South Africa, are more daunting. Akan recounted how Turkey still predominantly uses railways built before World War I. Wilkinson pointed out that companies opening multiple factories in Africa often don’t realize the continent’s enormous size—the land masses of China, the US, and India all would fit within Africa’s borders—and distance between the major cities. And the continent’s ports, like Turkey’s railroads, are from another era. Despite the problems these infrastructure gaps present for companies doing business, one silver lining, according to Wilkinson, is that many companies that work on infrastructure projects no doubt will prosper in the coming years.
Each member of the panel addressed corruption and graft—issues likely to come up in any discussion of emerging markets. Interestingly, each saw the problem in terms of the larger questions of advancing an open political system and maintaining the rapid clip of economic growth. The belief is that corruption is less when there is a robust economy and the political system is open. “We are very proud of our democracy in Brazil and the liberty of the press,” Neves said. “The reality is that consumer products companies will face the issue, especially those that sometimes sell through direct channels to government agencies or to some of the local municipalities. But with our democracy, and as we keep improving economically, we will continue to clean that up.”
In Turkey, Akan pointed out that the country has bettered its position on various indices that track corruption. He believes that “things have improved a lot in the last 10 years, and it is mainly attributable to the improvement in economic growth.” Wilkinson noted that companies that don’t stick to strict rules and impeccable business ethics end up regretting it. “Some companies investing in South Africa and the rest of Africa have bent a little to the left or right, and they end up getting burned,” he said. “So they’ve learned their lessons.”
It was fitting that an executive as well-traveled and experienced as Tangney offered the final perspective on the cyclical nature of world business and the need to spot opportunities where they exist: “I can remember when Latin America was weak and dangerous,” he said. “They spoke of the debt crisis. Now it’s the Europeans who have the debt crisis. Today, in our world, Africa has the high potential to do very well. Companies have to act according to their beliefs about what the future holds.”
1 “Emerging Markets Take Centre Stage: A Dramatic Shift in Purchasing Power,” Business Monitor International, February 4, 2010.
2 PwC, Central banks: After the storm, 2010.
3 Commerce among emerging markets.
4 PwC, 14th Annual Global CEO Survey, 2011