In their search for growth in emerging markets, most multinational companies have followed a well-worn path—one leading straight to a chosen subset of countries and megacities. The next phase of growth will take place on a different stage: cities with populations of 5 million or less that are spread across the developing world. To make the most of this opportunity, companies are beginning to look beyond tier 1 and tier 2 cities. Starbucks, for example, has announced plans to triple the number of stores in China, with smaller cities playing a pivotal role in the expansion.
Simon Targett, BCG’s editor-in-chief, spoke with David Michael—the leader of the firm’s Global Advantage practice—about the unique challenges and opportunities of the next chapter in emerging-market growth.
Can you tell us about emerging-market cities and the growth opportunity they present?
The high-growth emerging markets of the world are building new cities where residents, companies, universities, and opportunities for prosperity are creating attractive new markets that are unfamiliar to many companies. The number of cities that are arising in emerging markets is staggering. Today there are nearly 700 emerging-market cities with populations of more than half a million—and there are only 240 such cities in the West. In the next 20 years, there will be more new cities created in emerging markets than exist today in the West. Every week, 1.2 million people move to these cities. That’s 1.4 billion in the next 20 years. These cities are for real. And it’s an amazing set of complexities for companies to navigate.
What types of approaches can companies take to leverage opportunities in these cities?
We worked with one company that wanted to take advantage of the specific growth opportunities in Africa, so we helped the organization build and integrate a plan for how and where it could win. The plan was based on five key cities in Africa that would serve as “hubs,” along with a growth strategy built out from those cities. We looked at all aspects of where the market opportunity was, where the company would be best-off selling, how to build the right organization, and how to build a go-to-market plan.
By the time the project was finished, the client realized that the Africa opportunity was five times larger than it had originally estimated. So doing this work led to a complete rethinking of the opportunity and a strategy based on those key cities.
In Indonesia, one of highest-growth areas is the island of Sumatra. Working with one company there, we designed and executed a strategy specifically to grow in the cities of Sumatra. This covered all areas of the offer and the organization, along with marketing and sales. With the focus on these cities, the company nearly tripled its market share. And there was also a value creation impact of $4 billion in market cap, just because of the ability to win the Indonesian consumer in the city markets.
Along with the opportunities, what are some of the challenges specific to emerging-market cities?
Already today, we are seeing incredibly rapid growth of the middle class. About 125 million households in emerging-market cities will enter the middle class from 2010 to 2015—an increase of 70 percent. At the same time, the geographic distribution of this group is widening, which creates a need for companies to explore markets that they may never have considered before.
Even companies that have the most up-to-date global models will find those models out of date in the next few years and will need to develop new models and strategies. Specifically, these markets require their own approaches to market entry, go-to-market strategy, organization design, people management, and partnering with government agencies.
Executives recognize the complexity that faces them in this area. According to our research, 73 percent of executives say growth in the emerging markets is a top priority; but when we ask if they are actually prepared for this growth, only 13 percent say they are.
How important is localization, in particular?
There are a handful of companies that can take their products to developing markets without worrying that something—their brand or value proposition, say—might get lost in translation. Companies like Apple, for example, don’t have to go back to the drawing board. But most companies face the possibility of having to revamp their products, as well as their approach to sales and marketing, in order to build a viable presence.
To this end, it’s important for companies to give their local units a fair amount of leeway to improvise. They can’t simply impose a plan that’s been developed by a team sitting halfway around the world—that plan is going to miss the mark.
But local autonomy does not mean that anything goes. Companies mustn’t lose sight of the value of overall strategic guidance, global standards, and cost synergies and controls. One of the big challenges for multinationals is to strike a balance between entrepreneurial drive at the local level and global integration and consistency.
What else can companies do to make localization a reality?
Consumer insight is the key to making a connection between unmet needs and your own products and services. In developing markets, unfortunately, it’s often hard to find quality data. Even the most basic demographic information can be spotty. If companies cannot buy the research they need, they need to invest in market research teams on the ground. This can end up being a decisive factor in their success. Given how hard it is to generate consumer insight in these countries, companies that do it well will gain an edge.
Companies also need to understand the nuances of distribution, particularly as they move beyond their footholds in major cities. Mom-and-pop shops still make up between 40 and 90 percent of retail sales, depending on the country, but modern retail formats are growing annually by 20 percent in the BRICI nations—Brazil, Russia, India, China, and Indonesia. For the foreseeable future, companies will need to operate in this hybrid environment.