Brands should aim for emerging middle class

13 July 2010

NEW YORK: Brand owners stand to gain substantial benefits from targeting the rapidly-expanding middle class in a range of developing economies around the world, a new report has argued. 

According to a study by McKinsey, the consultancy, the inexorable rise of this demographic spans "a dozen emerging nations, not just the fast-growing BRIC countries" of Brazil, Russia, India and China.

This audience, which consists of almost two billion people, spends a total of $6.9tr (€5.4tr; £4.5tr) annually, a figure that will climb to $20tr over the next decade.

McKinsey said shoppers fitting this profile thus "offer an opportunity for early winners to secure lasting advantages, just as companies in Europe and the US did at similar points in their development."

In 17 categories that were assessed in the US, one manufacturer rose to the top of the pile in 1925 or so, and remained either the first or second ranked player for the rest of the 20th century.

These firms included Kraft Foods (Nabisco), which took the lead in biscuits, Del Monte Foods, pre-eminent in canned fruit, and Wrigley, which assumed this role for chewing gum.

Despite having strong brands and established track records, McKinsey stated that all multinationals face the same problem, in the form of challenging and aggressive local competition.

In China, beverage maker Hangzhou Wahaha has built a profitable business against foreign rivals like Coca-Cola and PepsiCo.

The organisation has managed this by focusing on rural areas, as well as "filling product gaps that meet local needs, keeping costs low, and appealing to patriotism."

Given this, McKinsey recommended that global corporations leverage the two major factors that are working in their favour: speed and scale.

"Our experience suggests that one way multinationals can quickly gain the scale they need is to identify clusters of similar consumers across multiple markets."

"That approach allows these companies to build revenue and profit streams that ... justify significant, ongoing capital investments to fuel growth."

A further strategy is to adopt a more localised model, achieving traction in individual regions and sectors by "teaming up with knowledgeable on-the-ground partners".

These allies can help with innovation, distribution and positioning, which are "the crucial final steps to reaching highly local consumer markets."

Elsewhere, McKinsey stressed that customers in countries like the BRICs exhibit certain common traits when measured against their peers in the US and Western Europe.

"In some ways, they resemble those in developed nations: they are aware of and have a fondness for brands and want access to a variety of products at different prices, including products they aspire to but can't currently afford," it argued.

However, many shoppers also have unique tastes, and although they are middle class in relative terms, low levels of discretionary income mean they are still not wealthy enough to make regular purchases.

In China and India, for example, about 40% of average household earnings are spent on food and transportation, compared with 25% in the United States.

As such, a "granular view using product categories" is essential, based on whether specific geographies are fundamentally global or local in their outlook.

The "normal" person's ability to pay for goods and services is another issue which must be taken into account.

"Useful approximations include category penetration and product availability in key developing markets, as well as the willingness of consumers to 'stretch' to buy less-affordable products," McKinsey concluded. 

Data sourced from McKinsey Quarterly; additional content by Warc staff