NEW YORK: Brand owners such as Diageo, UPS and Standard Chartered Bank are taking a nuanced approach to expanding in emerging markets, reflecting the challenges this process presents.
Ernst & Young, the business services firm, and the Economist Intelligence Unit, the research group, polled 759 chief financial officers, supplementing the results with in-depth interviews.
Some 87% of the panel agreed fast-growth economies have a stronger case for investment than their mature counterparts, but 66% argued a lack of data and transparency made creating robust evaluation procedures difficult.
Among the main issues that come with attempts to expand in developing nations are accurate financial modelling, mentioned by 43% of contributors, and balancing short and long term returns, on 40%.
"The challenge in emerging markets is that you don't want to just throw money at everything," Deirdre Mahlan, CFO, Diageo, said. "The returns in rapid-growth markets are often longer because you're effectively building equity in brands, routes to market and, in some cases, teaching the consumer about your category."
Additional problems encountered in areas like Brazil, China and India are the pace of change, on 31%, and managing risk, on 29%. In response, it can prove best to study existing examples.
"Sometimes it's better to be a fast follower than an early mover in these markets," Kurt Kuehn, CFO of UPS, said. "The art lies in deciding which the important markets are and then moving them to the next level without draining resources from your core markets."
Another 64% of the sample thought investors knew that allocating resources to developing nations was a long term choice, and 78% suggested providing a "narrative" to accompany numerical statistics helped convince such stakeholders of this fact.
Richard Meddings, CFO of Standard Chartered Bank, said: "We communicate to our shareholders that we're going to run 'neutral jaws', which means that we will grow the cost base in line with income growth."
However, 63% of chief financial officers also reported it was not always easy to secure in-house support for expansion plans given the lower margins and returns available in the short term.
"It's important to get the business to understand that the strategy for the whole company is more important than the short-term perceived wins and losses," Graham Hetherington, CFO of Shire, the pharma company, said.
Data sourced from Ernst & Young; additional content by Warc staff