Winning over emerging consumers: walk the tightrope

It is fascinating how I increasingly start to see Emerging Market (EM) challengers outmaneuvering incumbent global Consumer Products (CP) firms. Disruptive innovators who combine a grassroots touch of the local consumer with entrepreneurial agility and digital savvy are storming ahead, notwithstanding the limitations of scale and infrastructure they face.

In China, for instance, domestic brands have been registering strong double-digit growth and gaining market share at the expense of foreign brands year after year across several consumer categories. And increasingly, such companies – and their counterparts across South and Southeast Asia – are not limiting themselves to smaller towns or to lower price points.

This challenge is clearly felt by the top global CP companies. In a recent EY survey of 300 senior CP and retail executives, 84% agree that it has become harder to sustain or grow operating margins in EMs – an increasingly sterner test than in Developed Markets (DMs) where 75% are also facing the same challenge.

The issue is, in fact, much broader than mere margin pressure: a massive 81% of respondents agree that traditional methods of value creation are being disrupted in EMs, and 58% believe that they are too focused on cost-cutting at the expense of delivering growth.

Some executives are trying to drive change, but they are finding it a challenge: 53% say they have attempted to adapt in response to disruptive change, but their actions have not yet been effective – and again the survey shows, this strain is being felt a lot more in EMs than in DMs.

To keep your balance, keep your eye on the consumer

After talking to many leaders who are managing CP companies in EMs today, I get the clear sense that the best metaphor they would use to describe their jobs would be: “walking a tightrope”. To overcome the challenges so acutely reflected in the survey, companies need to smartly balance strategic choices. Growth and margin; risk and reward; and efficiency and flexibility are not all or nothing decisions that should be taken in isolation.

A good place to start in achieving the right balance is to place the EM consumer at the heart of the business and decision-making process. After all, whether consumers are in Shanghai, Sicily, Seoul or Sóc Trăng, today they want authenticity, customization and speed. Instead, too many companies are pursuing cost efficiency measures to improve near-term value instead of rejigging their operating models to deliver the desired consumer experience.

While targeted efficiency measures can bring real improvement if activated correctly, this approach is not a long-term solution to capture the growth potential in EMs. Instead, executives need to drive forward innovation, tapping into the emerging purchasing power and soaring aspirations of consumers in these markets. A greater focus on R&D and analytics that bring the business closer to the consumer would be the smarter move, as it would help drive intelligent investment in product or service innovation or in operating model innovation like flexible storage and supply chains coupled with demand sensing that can better enable omni-channel shopping.

EM consumers, like consumers everywhere, don’t want to be one of a million, they want to be one in a million; they want brands they can trust, which reflect their own values. And increasingly, they are happy to pay for aspirational brands that fit their lifestyles. Yet few companies truly build their businesses around the needs of EM consumers.

In fact, our survey finds that only 19% of companies based in EMs say they are confident in their ability to innovate in response to changes in consumer wants and needs.

If you are leading a CP business in emerging markets today, it is time for you to start with a blank sheet of paper and design your product and service offering, your organization and your operating model around the EM consumer, so you have the framework to effectively meet their changing demands.

To be clear, the short-term pressures on currencies and costs will not go away, nor will the margin pressures from customers and competitors magically disappear. Winning companies will need to manage these AND find the resources to invest in building the businesses of the future in EMs, bearing in mind that as much as 80% of the industry growth till 2025 will come from emerging markets. In short, winners in the CP game in EMs will need to master the art of walking a tightrope.