Emerging Markets Beckon; but, Get it Right or Go Home

Stephen DeAngelis

April 6, 2011

Alexander Gordin, co-founder of Broad Street Capital Group, claims that “emerging markets offer vast opportunities for American manufacturers — both in exports and direct foreign investment.” [“Growth in Emerging Economies Spells Opportunities,” Industry Week, 19 January 2011] He insists that, “despite competition from China, Germany and now Brazil’s rapid emergence as a world-class manufacturing power, the opportunities are so vast, and U.S. industry is still sufficiently competitive so that firms here can successfully enter foreign markets and grow their manufacturing business.” It is not just manufacturers that have dreams of making it big in emerging markets; retailers and service providers are also hoping to get a foothold in those lucrative markets. As I noted in post entitled The Emerging Global Middle Class, emerging markets countries are producing millions of new consumers — especially in Asia. Companies with desires to expand globally see these new consumers as the source of growth over the next several decades.

 

However, in their eagerness to gain market share in these countries, some large companies have stumbled badly. For example, Mattel just closed the doors to its flagship store “in Shanghai just two years after opening [it] … in China’s most populous city.” [“Barbie shuts up shop in Shanghai,” by Jamil Anderlini, Financial Times, 7 March 2011] Anderlini reports:

“Mattel … said the bright pink, six-story store had served its purpose of building brand awareness in the new market. But analysts say the investment was a failure because it did not adjust to the local market.”

Frankly, claiming that the failed venture “had served it purpose” is lame. There’s nothing wrong with failure if you learn from it — but it doesn’t sound like Mattel learned much. In a post entitled Luring Customers in the Information Age, I discussed an article by Dan Brutto, president of UPS’s international division entitled “How to Grow Your Business Globally.” [Bloomberg BusinessWeek, 24 August 2010] Brutto provided some recommendations for companies looking to sell their products globally. He indicated that the better a company understands the environment and/or the culture it is trying to expand into the better its chances of success. He recommends, among things, “Get help—and read business cards.” His article goes on to discuss nine other recommendations that any company looking to expand overseas would do well to read. Brutto’s recommendations are echoed in an article by Emma Jacobs [“Navigating cultural difference, Financial Times, 20 July 2010], which I also discuss in that post. Jacobs suggests that the old recommended business strategy was “think global, act local.” She says that thinking has now been turned on its head and successful companies use the strategy “think local, then act global.” Anderlini reports that Mattel is not alone in the struggle to succeed overseas. He continues:

“[Mattel’s] withdrawal comes on the heels of store closures in China by US retailers Home Depot and Best Buy, which have both struggled to crack the local market. The failure of the US brands to prosper come despite efforts by the Chinese government to make boosting domestic consumption a top policy priority. Retail sales grew at more than 18 per cent in 2010 from a year earlier. ‘None of the three companies – Best Buy, Home Depot or Barbie – have catered to local consumer preferences and habits enough,’ said Shaun Rein, managing director of China Market Research Group. … Analysts said Barbie, Best Buy and Home Depot were all seen by consumers as expensive in a price-sensitive market where Chinese competitors operate on razor-thin margins.”

Not all Western companies stumble. Jacobs points to MacDonald’s as one company that has done well at localizing its offerings. Anderlini names a few others that “have successfully localized in China and become hugely profitable there” (e.g., Nike, LVMH, Carrefour and Wal-Mart). In a companion article to Aderlini’s, Andrew Hill provides his thoughts on why companies go wrong in China [“Why do so many get it so wrong in China?Financial Times, 7 March 2011]. He writes:

“My first reaction to Best Buy’s closure of its nine branded stores in China was: not again. Another retailer had leapt into the Chinese market – and fallen on its face. Best Buy’s stores – familiar to North Americans and Europeans – are arranged by category of gadget and are big on service. But most Chinese are used to buying electrical goods more cheaply from makers’ agents, working in stores owned by established Chinese competitors such as Suning and Gome, or from smaller, local shops. Home Depot, the US DIY group, recently closed stores in mainland China, having misread the local market. … Mattel shuttered its six-story flagship Barbie store in Shanghai, in the face of waning enthusiasm for a doll ubiquitous in its established markets. All plainly failed to meet Peter Drucker’s requirement for ‘true marketing’, which starts ‘with the customer, his demographics, his realities, his needs, his values. It does not ask, What do we want to sell? It asks, What does the customer want to buy? It does not say, This is what our product or service does. It says, These are the satisfactions the customer looks for, values and needs’.”

Hill agrees with Brutto and Jacobs that getting to know the culture and tastes of those you trying to sell to is critical for success. Once you’re established you may be able to help foster new tastes in your customers, but that is not where you start. Hill asks and answers, “What lessons should those who follow in Best Buy’s footsteps learn?” He continues with his answers:

“● Use local knowledge and relevant prior experience. Non-Chinese brewers failed to push the local consumer up to premium beers, while SABMiller, drawing on its knowledge of another emerging market – South Africa – read the local conditions better.

“● Start small. [Kal Patel, Best Buy’s Asia president] says that if Best Buy were launching a Chinese strategy now, it would try out ‘fast, quick, cheap’ ideas. The total bill for restructuring in China, the closure of two more branded stores in Turkey and a revamp of the US supply chain came to $225m-$245m. Even if only part of that bill was attributable to the China experiment, that is a costly laboratory.

“● Work on several fronts. Best Buy – which now owns all of Five Star – will expand its locally branded stores in China. But it will also incubate ideas via the internet, work with local partners and explore other options, such as stores within stores.

“● Be different. The success of Apple stores in China, which provide the only reliable outlet for its products, contrasts with Best Buy’s experience.

“● Stay humble. Non-Chinese groups still seem prone to arrogance about the applicability of their business models that would have embarrassed 16th-century Portuguese traders. By contrast, Chinese groups investing abroad are using a different tone. Wang Zongnan, chairman of Bright Food, told the Financial Times he would keep Yoplait’s existing management if his bid for the French yoghurt maker succeeded, ‘because Bright has insufficient knowledge of international markets’. This could be rhetoric, or politics, or a mixture of both. But foreign investors that fail to recognize what they do not know will be condemned to an endless and costly round of trial and error. And error. And error.”

It’s likely that different strategies will have to be used for different countries. For example, Vijay Govindarajan, a Professor of International Business at the Tuck School of Business at Dartmouth, and Lew McCreary, a writer and editor whose focus is business innovation strategies, insist that in India “Western outfits looking to sell products should forget ‘glocalization’ and embrace reverse innovation [“How U.S. Businesses Can Really Win in India,” Bloomberg BusinessWeek, 16 November 2010]. They write:

“It’s certainly true that, for many U.S. businesses, emerging nations present rich growth opportunities. In China, India, and elsewhere in the developing world, rising prosperity is expanding the market for consumer goods from high-tech razors to high-tech cars. But the traditional way of serving those markets suffers from flaws that eventually limit the growth potential. Typically, multinational companies create stripped-down versions of products developed for Western consumers. They then offer these products in the developing world at a reduced price. To do this requires removing certain premium features or bells and whistles, and perhaps substituting lower-cost materials. Even so, the prices such products command are often unaffordable by all but a small percentage of people at the top of the local markets’ income pyramid. In this model, innovation flows in only one direction: downhill, from the headquarters of the multinational corporation out into the world. The same basic products made for the developed world are modified for poor-world consumption, mainly through de-featuring and substitution.”

Obviously, the authors are establishing a base case which they can attack. In this case, the straw man is a strategy they call “glocalization.” They continue:

“While the word ‘local’ is embedded in the name, in truth there is very little locally relevant insight reflected in the design of glocalized products. Thus, after an initial flurry of sales made largely on the cachet of the multinational’s global brand, the approach fizzles. As one Indian executive told us: ‘Emerging nations used to aspire to have rich-world products. Now they want rich-world quality in their own products.’ In the end, businesses that practice only glocalization will fail to exploit the full emerging-market opportunity—to the detriment of their bottom lines and the economy as a whole. What works far better, we have learned, is reverse innovation. Instead of conducting innovation in one direction only, reverse innovation harnesses the inventive power of local insight—people who understand life at street level. How can you create successful products if you don’t know how your customers live? That is why we believe products meant for emerging markets are best developed in local regions, by local people who have the surest grasp of market needs and customer behavior.”

Govindarajan and McCreary appear to agree with Jacobs’ recommended strategy: “think local, then act global.” They conclude, “As vital as it is for U.S. firms to sell their products in emerging economies, we believe the greatest potential in those markets is to discover and empower the hidden knowledge and creativity of local talent. That is where the full opportunity of reverse innovation lies.” To learn more about reverse innovation, read my post entitled Innovation in (and from) BRIC Countries. Knowing the right way to expand into emerging markets could be critical. According to Ian Bremmer, “Emerging markets could propel a global boom comparable to the industrialization of the United States.” [“Get Ready for a Growth Supercycle,” Wall Street Journal, 2 March 2011] If Bremmer is correct, a “growth supercycle” could generate a flow of money that smart companies will try and get in front of.