As Emerging Markets Slow, Firms Search for “New” BRICs
November 29, 2013 Editor 0
By all measures, emerging markets are having a tough year. The Economist bemoans their “great deceleration” and HBR featured a well-researched study on how multinationals are becoming less global. However, multinationals still expect their emerging market portfolios to deliver robust growth and increasing profits based on the memory of their performance in recent, more bullish years.
In this new operating environment, I find more and more multinationals looking to new frontier markets for growth while demanding profitability from their emerging-market operations. Using our 200+ clients as a proxy for global sentiment, I find the pivot towards profitability to be significant: 37% of MNCs are focused more on profitability than growth in emerging markets, up 16% from just last year.
To accommodate these new market dynamics, executives are adopting a dual strategy of “going deep” in the BRICs while simultaneously and aggressively pursuing the next frontiers. Let’s see how this story is playing out in the different emerging market regions.
Asia offers a good example of this push to frontier markets. I remember a conversation I had with an executive in 2000. I asked which markets he was focused on outside of China and India. He responded, “for us, China and India are Asia.” It’s been awhile since I heard a similar response, as companies are now expanding aggressively into ASEAN (Malaysia, the Philippines, Singapore, Thailand, and especially Indonesia). This is the result of a growing and affluent middle class that supports private consumption and is bolstered by favorable demographics; over 50% of the population is under 29 years old and approximately 52% live in urban areas.
However, there are some risks. For example, on the Indonesian archipelago, supply chain and distribution logistics present serious challenges — with logistics costs at 24% of GDP, compared with the regional average range of 9-11%. Difficulty in distribution is not unique to Asia and reflects a global trend. According to our recent benchmarking survey of more than 100 senior executives, 94% of executives sell at least partially through distributors, accounting for about 50% of their revenue in emerging markets. Additionally, managing corrupt business practices often makes it difficult for MNCs to realize growth potential in the short term.
As executives become more sophisticated in their understanding of these countries, they balance their focus between looking to expand in new markets as the old standbys–namely Brazil and Mexico–have recently slowed to disappointing growth rates. For example, Peru’s rising middle class offers an increasingly attractive choice for consumer goods and retail MNCs looking to diversify their investments beyond established markets.
Quantifying the impressive rise of the middle class, FSG calculates private consumption in Peru is set to grow 54% between 2010 and 2015. Real increases in personal income and access to credit will support growth across all retail categories, but the automotive, consumer electronics, and food and drink sectors will outperform, as consumer taste becomes more sophisticated. The consumer sector has already begun its high-growth phase as over 36 new shopping centers have been built in Peru over the last 10 years. The three main grocery retail chains in Peru grew from 57 stores in 2001 to 155 stores in 2010.
Eastern Europe, Middle East & Africa
Eastern Europe, the Middle East, and Africa follow the same pattern of slowing growth in traditional strongholds, with opportunities in previously untapped frontier markets. In Russia, having made significant investments in the two largest cities, we are seeing companies expanding into regional markets by relying on third-party distributors, similar to the storyline in Indonesia. Growing beyond Moscow and St. Petersburg allows companies to build market share, strengthen their competitive position, drive profitability, and contribute to long-term sustainability in Russia – and it’s worth remembering that 64% of Russia’s GDP sits outside of the these two cities.
Sub-Saharan Africa is in many ways the last great frontier. Here multinationals are reacting to South Africa’s stagnant growth by looking to the hottest frontier markets globally: Nigeria and, to a lesser extent, Angola. The region has piqued executives’ interest, as it benefits from improving business conditions, demand for infrastructure projects, and a strong demographic profile. Nigeria is especially attractive, as it is poised to overtake South Africa as the largest African economy after its GDP grows 40-50% as a result of the government changing the way it measures GDP at the end of the year. Nigeria’s automotive industry is booming, as international car makers are expanding their dealerships and setting up local assembly plants. Case in point: Ford is planning to introduce at least five new models after seeing a 33% increase in sales in the first half of 2013 in Nigeria. Mercedes-Benz and Skoda have recently expanded in the country with new showrooms and models.
In emerging markets, what began primarily as a growth strategy has evolved to a dual mandate of growth and profitability. Executives must act fast to capitalize on the final frontiers, while market share is still there for the taking. Although each region exhibits similar potential, success for multinationals will depend on identifying the most attractive opportunities for their unique businesses and adopting management best practices that account for the local nuances of each market.
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