REPRINTED FROM: HARVARD BUSINESS REVIEW

LET EMERGING MARKET CUSTOMERS BE YOUR TEACHERS

DECEMBER 2010

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Let Emerging Market Customers Be Your Teachers

by Guillermo D’Andrea, David Marcotte,

and Gwen Dixon Morrison

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You can learn a lot about

consumer marketing in the

developing world by looking

at how retailers engage with

shoppers.

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Let Emerging Market Customers Be Your Teachers

by Guillermo D’Andrea, David Marcotte,

and Gwen Dixon Morrison

harvard business review • december 2010 page 1

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You can learn a lot about consumer marketing in the developing world

by looking at how retailers engage with shoppers.

Sure, you’ve crafted detailed marketing plansfor your products in those fast-growing emerg-ing economies, but do you know how consum-ers will respond in the store aisles? If youdon’t, you’re vulnerable to competitors, partic-ularly local ones, who know how emergingmarket shoppers think, what they need, whatthey crave, and how they buy.

Multinationals have been slow to under-stand consumers outside Europe and NorthAmerica: Baseball bats were met with amuse-ment in soccer-loving Argentina; gardeningtools flopped in Latin America’s yardless neigh-borhoods. Unilever, having established its Alapowder detergent as a leader in southern Bra-zil, was unable to build a strong position in thenortheastern part of the country, wherewomen wash laundry in streams and preferbar soap for the task. Procter & Gamble’s Al-ways feminine hygiene line, which had donewell in the United States, hit a wall in Mexico,where women did not like the product.

Local retail chains, by contrast, have beenquick to understand their customers and de-

velop offerings and approaches that work forthem. As a result, a new generation of retailershave steadily captured market share fromsavvy street vendors and mom-and-pop opera-tions. They’ve also kept most multinational re-tailers at bay.

In developing economies, the retail aisle iswhere the marketing action is—it’s where cus-tomers make purchasing decisions. McKinseystudies show that in China, for example, asmany as 45% of consumers make those deci-sions inside stores, compared with 24% in theUnited States.

To understand how the top local chains havebeen so successful, we conducted a study in2009 of large retailers in six countries. Wechose homegrown leaders representing a vari-ety of ownership models, formats, and organi-zational types—from family owned to public,from supermarkets to consumer electronicsstores, and from hierarchical to flat. They in-clude Beijing Hualian Group (China),Biedronka (a Polish firm owned by Portugueseretailer Jerónimo Martins), BIM (Turkey),

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Magazine Luiza (Brazil), Pick n Pay (South Af-rica), and Supermercados Peruanos (Peru).

In this article, we’ll explain the challengesthese retailers have encountered in catering tothe emerging market consumer and show thatthe solutions they’ve come up with offer im-portant lessons to multinationals. By tappinginto the wisdom of these market leaders, youcan put yourself a big step ahead of your com-petitors, both local and global.

The Lay of the Land

In extensive interviews with shoppers, storemanagers, department heads, and corporateexecutives, we discovered that despite signifi-cant differences among markets and popula-tions, there are some problems that all thecompanies we studied have faced. Most ofthese challenges are unfamiliar to retailers ac-customed to functioning only in developedeconomies.

Where’s the demographic middle?

In devel-oped countries, income groups form a more orless classic pyramid. So you can create a massmarket for a sophisticated new product (thinkMP3 players) by first winning the approval ofearly adopters in the upper segments of thepyramid and then simplifying the offering andreducing the price until the product is ac-cepted by the much larger segments at thebottom.

In emerging markets, that strategy doesn’twork. The number of affluent consumers whocould adopt and champion your product re-mains small, and they tend to gravitate towardspecific luxury stores, many of them overseas.Most important, incomes don’t form a smoothcontinuum. The distribution looks less like apyramid than like a small stone (the wealthy)perched on a thin column (the upper middleclass) that stands on a vast base (the middleand lower classes).

Customers buy the cheapest or the best.

Whether the economy is strong or weak, devel-oped market consumers tend to buy across theprice spectrum. They might show up at the reg-ister with a high-end digital camera, medium-quality linens, and cheap sunglasses. Emergingmarket consumers focus on essentials, favoringthe lowest-priced items that offer acceptablequality, even when it comes to luxuries. Theytend to know the exact price of everything theywant and refuse to pay more. They also refuseto buy in greater quantities than they need,

even if that means they must purchase an indi-vidual piece or two from an opened package ina traditional outdoor market.

At the same time, shoppers typically save upto indulge in more-aspirational categories suchas sport shoes, cosmetics, and plasma TVs.Thus they purchase a lot of the cheapest and alittle of the best, often omitting the middle en-tirely. Multinationals, enamored of the middleand the high end, often miss that fact.

Product knowledge may be lacking.

In de-veloped countries, consumers in all incomesegments are sophisticated and knowledge-able about retail offerings. So are employees,many of whom grew up using complex prod-ucts and have some higher education. But con-sumers who are moving into the formal econ-omy tend to lack knowledge about such thingsas what products can do, why various servicesmight improve their lives, and how to accesscompanies’ offerings. Nor do they fully under-stand what the consumer society is and how itworks. As a result, they may be baffled byproducts and packaging that developed worldconsumers would comprehend instantly. Storeemployees in emerging economies suffer fromthe same lack of knowledge, posing an obsta-cle for retailers’ efforts to educate shoppers.

Consumers care about quality, not status.

In developed economies, many companiessuccessfully position their brands as statussymbols. But in areas with low incomes, thatstrategy often falls flat. The allure of statusisn’t enough to induce consumers to buy. In-stead, shoppers care most about quality.

Multinationals may feel they’ve got thequality issue covered, but it’s not always thatsimple. Modern packaging, for example, is acrucial element of high quality in developedcountries, but it can put an offering at a dis-tinct disadvantage in an emerging economy,conveying artificiality or lack of freshness toconsumers accustomed to shopping in tradi-tional markets. Western retailers learned thehard way that their packaging often discour-aged shoppers in China, who are used to han-dling food products before buying them.

Markets are changing at breakneck speed.

Finally, unlike most developed world retailers,those in emerging economies face the daunt-ing task of keeping up with rapid market ex-pansion and demographic change. The con-sumer base is growing constantly, and, despiterecent setbacks due to the global downturn,

Guillermo D’Andrea

(gdandrea@iae.edu.ar) is a professor of manage-ment at IAE Business School in Buenos Aires and the research director of the Coca-Cola Retailing Research Council, Latin America.

David Marcotte

(david.marcotte@kantarretail.com) is the se-nior vice president of retail insights at Kantar Retail, part of the WPP Group.

Gwen Dixon Morrison

(gmorrison@wpp.com) is CEO for the Americas and Australia of WPP’s The Store.

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average incomes have been rising steadily.Consumers, once mainly rural, are now largelyurban—75% of Brazil’s and 47% of China’s citi-zens live in cities. Consequently, they havenew needs and, in many cases, greater finan-cial resources. In addition, some countries aremaking it easier for consumers to get and usecredit. Brazil, for example, now issues IDs thatare like credit cards, greatly increasing shop-pers’ purchasing power.

Rapid growth may sound great, but emerg-ing market retailers face enormous challengesin keeping customers and facilities safe, arrang-ing credit, and getting people to and fromstores. In many areas, the transportation infra-structure is weak or nonexistent: There wasstill no nearby bus terminal when the WongGroup built a shopping center in the low-in-come North Cone area of Lima.

Marketing Solutions

Each retailer we studied deals with these prob-lems in its own way, adapting its solutions tothe needs of target customers. But the solu-tions share certain broad features, which havefar-reaching implications for multinationals’marketing strategies.

Aim low.

Forget multinationals’ cherishedmyth that the high end is the most lucrativesegment in emerging markets. Leave the richto their shopping trips abroad, and forget

about using the demographic pyramid to cre-ate a mass market for your gadget. Even ifthere were a sizable affluent segment to getthe product started, there’s little elasticity ofdemand in the lower segments. To make yourproduct affordable for the masses, you’d haveto trim off so many bells and whistles that itwould become unrecognizable. Instead, aimyour products at the low-income segmentsfrom the very beginning.

The telecommunications company Tigo atfirst hesitated to lower the minimum rechargeon its phone cards in Paraguay (you can’t makemuch of a call for a centavo, company manag-ers reasoned), but the company tripled its saleswhen it allowed users to recharge for tinyamounts. It wasn’t that customers planned tomake very short calls; they were using thecards as savings vehicles, adding a few centavosto them whenever they could. Moreover, thosecustomers tended to make calls at night, whenrates were lower, increasing utilization duringoff-peak hours.

Adapt to consumers’ habits.

Cater to thedemand for the cheapest and the best by pro-viding decent quality at the low end and aspi-rational choices at the high end. Rather thanposition its packaged barley breakfast as an al-ternative to Quaker Oats’ high-end offering,the Peruvian company Malteria Lima (part ofPeru’s leading brewer, Grupo Backus) mar-keted it as a less-expensive purchase for thelower end. The product provides the break-fasts that customers are used to, with a fewpluses: It comes in one-meal servings, it offersgood nutritional value, its chocolate flavoringimproves the taste, and it carries an endorse-ment from Peru’s heart association.

Don’t just sell—educate.

Successful retail-ers figured out long ago that in an emergingmarket, a store must be much more than asource of basic necessities and a target for aspi-rations; it must be a center of knowledge andlearning. For example, many retailers, includ-ing South Africa’s Pick n Pay, make a con-certed effort to connect with the very lowestearners, who visit stores mainly out of curios-ity and for entertainment. To entice them andeducate them about products, retailers oftendisplay the broadest possible range of items,even if that means stocking limited quantitiesof each. And they devote extensive resourcesto on-the-job training, turning salespeopleinto frontline educators.

Winning Trust

Nowhere is it more important for com-panies to demonstrate that they care about their customers than in emerging markets, where many shoppers start with a mistrust of multinationals, large corporations, and chain stores. Show your concern for consumers and their values, and you will be rewarded with enduring loyalty and affection.

During a hyperinflationary period in Turkey, BIM, a discount grocer with more than 2,500 stores that target the urban and rural poor, froze prices on 100 impor-tant items for three months while other retailers were raising prices daily. The tactic yielded significant gains in con-sumer trust as well as market share. That trust benefits BIM’s private label, which

now accounts for about 75% of the stores’ total assortment.

BIM’s organizational structure was one of the reasons the company was able to implement and afford this action: Initi-atives flow down from headquarters and are executed according to companywide standards, resulting in efficient, low-cost operations.

Another Turkish grocer, Tansas, posted what it called the Incredible Consumer Rights declaration, guaranteeing satisfac-tion, allowing returns of partially con-sumed items, and vowing that out-of-stock items would be replaced with simi-lar or better products at the same price. This daring move resulted in a 44% in-crease in sales.

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At Magazine Luiza, one of Brazil’s largest ap-pliance and home electronics retailers, newemployees receive a month of training prior todeployment, and the company continues toemphasize knowledge development even afteremployees have achieved high levels of exper-tise. These salespeople then transfer theirknowledge to customers, who also receive in-formation from presentations on TV screensthroughout the stores, on such topics as cook-ing, housekeeping, health, navigating the in-ternet, and learning English.

Focus your brands appropriately.

The mostsuccessful brands are those that stand for qual-ity and reliability. Biedronka, Poland’s largestretail chain, offers a limited assortment ofhigh-quality foods at more than 1,400 loca-tions. Because of long-standing supply-chainproblems in Poland, food safety is a customerpriority, so the chain advertises that every day200 of its items are tested by an independentlaboratory. The policy has strengthened cus-tomer loyalty. In places where consumers ob-ject to packaging on food, additional informa-tion helps allay concerns about lack offreshness. In China’s big cities, customers ofthe grocer BHG can learn where a product

originated and how it got to market (in refrig-erated trucks, for example) just by passing itunder a scanner in a special kiosk.

Develop quick reflexes.

Emerging marketretailers have a great deal to teach multina-tionals about flexibility, rapid adaptation, andexpecting the unexpected—qualities thathave helped the chains stay competitive. Mag-azine Luiza is nimble and adaptable in its de-ployment of no-inventory stores: 300 loca-tions where customers can find salespeopleand online catalogs but no physical items forsale. These stores allow Magazine Luiza—atechnology-focused company founded a half-century ago—to keep pace with Brazil’sbooming middle class without building andmaintaining expensive, large-footprint facili-ties. They also limit the need for transportinginventory along poor roads amid heavy traffic.Salespeople assist customers with the onlinecatalog, provide product knowledge, establishcredit terms, close the sale, and arrange forhome delivery.

Multinationals need to learn to be just asflexible, quick, and alert to the unexpected asemerging market retailers, taking the time tounderstand local markets and adjusting tochanges in consumers’ attitudes and innova-tions in selling.

The lessons of emerging market retailers derivefrom the companies’ experience of vying forconsumers’ affections against scrappy competi-tors amid the economic shocks and disruptionsthat are endemic to the developing world. Per-haps no lesson from these retailers is more im-portant than the value of nimbleness. In fact,the best way to approach an emerging marketis with openness and a sense of discovery. Cus-tomers are on a journey toward greater afflu-ence, and your job as a marketer is to under-stand the realities of that journey.

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Keeping Customers Safe

Emerging market consumers respond well to companies that watch out for their comfort, security, and dignity. Those factors are critical to the success of Pick n Pay, an innovative family-owned retailer with nearly 900 company and franchise stores in South Africa and other countries.

To make customers feel valued and at ease in what might otherwise be an in-timidating environment, stores use text messaging (shoppers voluntarily provide phone numbers) and display cashiers’ names at checkouts. When a store card is

scanned, the register responds with a greeting identifying the shopper by name and adding a brief, customized sales message.

Given South Africa’s security issues, Pick n Pay works hard to make its stores places where people can feel safe. Surveil-lance systems monitor the aisles, and the company maintains a security force. But safeguarding shoppers’ dignity is para-mount in a country where many have vivid memories of their treatment by former regimes. So guards are trained to adopt a helpful, nonthreatening attitude.