Developing markets represent the future for many businesses. Brazil, Russia, India, China, and Indonesia make up 60 percent of the world’s population and 40 percent of global GDP growth. But companies cannot treat these markets as fledgling versions of the developed economies that have been their mainstay. They must rethink how they “go to market” in these places, which frequently do not have a state-of-the-art marketing, distribution, or retailing infrastructure. This article is the third in a series on how consumer-facing companies can succeed in developing markets through excellence in consumer insight, channel management, and in-store execution.
The center of gravity for consumer-focused companies is subtly but unmistakably moving toward developing economies, such as Brazil, Russia, India, China, and Indonesia. The middle class in emerging markets will make up 30 percent of the global population by 2020. These customers represent the future.
Meeting their needs can be daunting. Retailing in developing markets is highly fragmented, and going to market requires a different set of strengths and commercial relationships than in developed markets. Consumers have vastly different levels of disposable income and extremely different needs and wants. They are accustomed to a shopping experience that is unlike what consumers in more developed markets are used to. At the same time, consumers in developing markets are less jaded and more trusting of pitches, promotions, and displays inside stores.
Many of the tried-and-true principles of in-store execution are universal. No matter where they live or how much they earn, consumers respond when they are offered the right products, at the right price, and in the right retail environment. But achieving that alluring mix of product, price, and environment is especially challenging in developing markets. Companies that can adapt to the specific challenges of in-store execution in these markets stand to win big.
This is our final piece on achieving a go-to-market advantage in developing economies. Prior articles covered the challenges of understanding what consumers want and moving goods and services to the outer reaches of global-distribution networks in the markets. While these articles are oriented toward consumer goods and retail companies, they are relevant to any organization—such as banks and telecom providers—that serves consumers. We collectively call them brand companies.
Consumers in developing markets are facing a widening array of choices that are at once appealing and confusing. Local companies and multinationals are investing heavily in new products in these markets. But consumers do not yet have access to the same level of information and research as they do in developed economies. The number of product launches is exploding in emerging markets, providing consumers with greater choice than they have historically enjoyed. India, for example, has more than 70 brands and 200 types of soap. Products are often sold in cramped and crowded shops that are not conducive to easy or comparative shopping.
Consumers frequently make their decisions about purchases while in the store and are heavily swayed by displays, floor representatives, and other point-of-sale influencers . (See the exhibit “Appliance Customers in China Respond to In-Store Promotions.”) In surveys of customers shopping for appliances in China, less than 20 percent were sure what brand they would buy, and less than half had narrowed their choice to a short list of models. The rest went into the store with a fairly open mind about brands, models, and features.
Depending on the size of the market, between 35 and 55 percent of consumers in China say elements of in-store execution, such as the recommendations of a sales representative or display material, are helpful in their decision making. More than one-half of consumers in Indonesia don’t decide which mobile phone they will buy until they get inside a store. In India, surveys suggest that more than one-half of purchases of over-the-counter nutritional products are influenced by retailers.
These findings suggest that consumer companies have a great opportunity to reach and influence shoppers inside the store. But it will not be easy. Consumers tend to be dissatisfied with the in-store experience in developing markets. In China, for example, only 30 percent of home appliance shoppers agree that salespeople are knowledgeable enough about their products.
The complex retail landscape in developing markets also makes reaching consumers challenging. Retailing is dominated by traditional trade (mom-and-pop shops) and modern formats—polar-opposite environments that cannot be managed with the same processes and systems. Companies do not face this schizophrenia in developed markets.
Traditional trade accounts for a significant share of retail sales in developing economies. Less than 10 percent of India’s $425 billion in retail sales in 2010 occurred in modern formats. Nearly all grocery shopping takes place in mom-and-pop stores. In China, more than 5 million small shops sell food and beverages. There are nearly 750,000 stores on Indonesia’s nearly 1,000 inhabited islands. The small size and large numbers of these stores have three significant consequences.
First, companies need to manage a galaxy of distributors and other third parties to reach consumers. In Russia, a consumer goods company must work with at least 100 distributors to ensure adequate coverage. In China, companies typically have to have a relationship with at least one distributor in each city—and China has 650 official cities.
Second, companies need to rethink their sales-force strategies. They cannot rely on traditional methods to train and monitor the members of their sales force, many of whom work for third parties.
Third, product display and merchandising—the bread and butter of modern retailing—are difficult to manage. Retailers have limited inventory and selection. The products on the shelf can easily get pushed aside or hidden. A typical store in India will have hundreds of products crammed from floor to ceiling into 500 square feet of dimly lit space. Customers must ask store employees to retrieve most of the products because they are out of reach.
Modern formats, such as department stores, make up a relatively small but rapidly growing percentage of sales—ranging from 20 to 40 percent, depending on the category. Traditional trade still makes up the majority of sales, and companies must stretch themselves to manage both formats. To add to the challenge, modern retailers in rapidly developing economies can be more difficult to work with than their Western counterparts. For example, in China, these retailers tend to be more decentralized than their peers in the West and delegate more responsibility to their suppliers.
Decisions about product assortments and displays are frequently made at the store level, especially in China. Consumer goods and other companies that are accustomed to building relationships with staff at the center of retailers may have to mirror the decentralization of their customers. Local staff will increasingly need the authority to make decisions that may be made by headquarters in other markets.
Retailers frequently operate under the supplier-representative model in which consumer goods and other brand companies are responsible for supplying their own in-store promoters. In China, appliance makers are responsible for building and staffing their own display space within stores. Some retailers even operate under a landlord-tenant relationship with their suppliers.
These arrangements essentially require brand companies to develop in-store capabilities, such as training and managing retail staff, merchandising, and designing displays. To illustrate the significance of this operational shift, a consumer electronics manufacturer in China would need a sales staff of 5,000 just to place two or three representatives in each modern electronics store.
Companies do not need to reinvent the strategies and tactics that have worked in developed markets. They need to reimagine them and apply them in extreme settings. In-store execution rests on three building blocks:
Understand the habits, patterns, and preferences of shoppers.
Design a point-of-sale execution strategy.
Create an effective way to monitor and reward sales and promotional personnel.
Understand the habits, patterns, and preferences of shoppers. It’s not enough to be aware of the types of goods and services that customers desire in various markets. Brand companies also need to understand how and where they shop, who they trust, and what they expect from a store. In developed markets, many brand companies understand the retail environment and the way that various types of consumers shop. They have a segmented and nuanced understanding of the entire shopping process.
Companies need to develop a similar understanding of shoppers in developing markets. These consumers represent the future of global retailing and ought to be understood on their own terms.
Deep insight in these markets, especially in small towns and rural locations, can be costly compared with the disposable income of many consumer segments. Companies will have to be creative, perhaps combining quick research with trial-and-error approaches or educated hunches about what will work. This is especially true in the traditional-trade sector, which will continue to be the largest retail segment in most developing markets for the foreseeable future.
This research should heavily influence product assortment and service strategies at the regional and even the store level. A consumer electronics company in India, for example, appealed to customers by creating 90 planograms—diagrams of product placements and displays within stores—on the basis of income distribution, demographics, and traffic of retail outlets.
A mobile-device manufacturer that wanted to increase sales in India and Southeast Asia segmented stores by type —specialists, electronic chains, mass merchandisers—and size. It then created different offers based on the types of shoppers that frequent each store and the needs of the retailer.
What companies cannot do is make blanket assumptions about the shopping experience in developing markets. Even though modern-trade retail stores in China, for example, are starting to resemble those in the West, consumer behavior inside the stores can be very different. And across China, shoppers in smaller cities and tier 1 cities are not the same.
Design a point-of-sale execution strategy. Armed with this understanding of customer segments, companies can create activities, displays, promotions, product mixes, and staffing arrangements that will help make customers comfortable and lead to higher sales. Brand companies may not have traditionally emphasized point-of-sale activities in many of these markets because of uncertainty over whether the returns would justify the investment, especially in traditional trade. In fact, as the surveys cited earlier show, consumers are receptive to in-store promotional activities. The challenge is in creating compelling shopping experiences in a diverse retail environment.
There are few hard-and-fast rules, so companies need to experiment and adapt to what works. A telecom operator in India, for instance, generated surprisingly successful returns simply by upgrading the quality of its promotional material from cheap paper to laminated posters.
Create an effective way to monitor and reward sales and promotional personnel. Traditional sales-force-effectiveness strategies need to be rethought in developing markets. Brand companies are working through a collection of third-party representatives to reach the traditional-trade segment and will frequently have an unfamiliar retail presence in modern formats.
But despite these differences, companies should insist on a level of rigor, standardization, monitoring, and measuring when going to market. Many of the traditional metrics, such as trade spending as a percentage of revenues, still apply. Ensuring compliance with pricing, inventory, and other standards is also critical. Mystery shoppers—individuals sent by companies to investigate the retail environment—can help provide qualitative insights that brand companies are accustomed to collecting, but they can also generate quantitative metrics in these markets.
A consumer products company developed a program to monitor the retail performance of its product line in Southeast Asia. It sent representatives into stores to track product positioning, compliance with planograms, and inventory levels. High-scoring stores received discounts and free merchandising material. The representatives were equipped with portable electronic devices that allowed them to input scores, take pictures, and upload results.
Multinationals should also study the practices of local companies in developing markets. Many of the most successful food companies in India forego spending on advertising and marketing in favor of ensuring prominent in-store placement of their products. They design bright and colorful packaging, offer incentives to retailers, and provide them with display racks, bins, and other devices.
Going to market in developing markets can be richly rewarding for companies that take the time to understand their shoppers and stores and create tailor-made programs. Three questions will help determine where you stand.
Have you invested in creative, intensive, on-the-ground shopper research to understand the local retail context and shopper and retailer needs in each of your key markets?
Are you actively working with local retailers to create an inviting environment and build credibility in the products?
Have you designed systems to track performance of and reward the people responsible for building share in these markets?
Companies need to approach developing markets confident that they will be able to capture share. While the rules are the same, the playing field is completely different. Fortunately, the game has only just started.