In 2011, the worldwide economic phenomenon that is known as the global middle class included between 700-900 million people, all of whom had the purchasing power to become consumers of manufactured goods and services.
There is one common denominator across each country in which this demographic can be found: they are all recovering from the global recession with an increasingly urbanized lifestyle.
The value chain of companies that provide this population with goods, services and infrastructure is becoming known as the global middle market. Competing for their share are three different types of company - the local upstarts who are migrating into the domestic middle market as their customers become more prosperous; the global aspirants, who have already developed products for their domestic middle market, and who are looking to expand into the global equivalent, and the multinational incumbents intent on adapting their existing product lines to capture the attractive growth opportunities in emerging middle markets.
“An intelligent approach will allow local upstarts and global aspirants to move up in the corporate chain. Transitional moves, such as joint ventures and regional expansion, aid their advancement by proffering the experience required to compete on a larger scale,” commented Ronald Haddock, a former partner at industry management consultancy, Booz & Company.
No matter which of the three categories they fall into, companies looking to tap into the lucrative global middle market can draw inspiration from Alfred P. Sloan Jr’s reorganisation of General Motors Company in the 1920s; by targeting the consumers in the middle finance-zone (those who were unable to afford luxury vehicles but wanted an option other than the ‘any colour so long as it’s black’ Model T Ford), he propelled GM past the competition to take the leadership spot among carmakers and held that position for the rest of the century.
Recognising the pace of development in the target markets is the first step towards claiming a stake and taking that all-important step up onto the leadership ladder. All industrialising countries follow an ‘arc of growth’, an evolutionary path of economic change that takes them from nascent to mature, with a critical stage of urbanisation and economic momentum in between.
Countries in the ‘momentum phase’ have large, relatively young populations and high economic growth rates, making them the seedbed of the emerging middle-class markets.
“The buying power, needs and desires of the middle class varies dependent upon nation and region, so obtaining a full understanding of the local requirements in desired territories will prove highly beneficial to anyone wishing to successfully harness capital in that specific market,” said Edward Tse, senior partner with Booz & Company and the firm’s chairman for Greater China.
“Identifying the attributes that the targeted consumers value and adapting the product to meet them – or culling undesirable traits from the existing merchandise – is essential to winning customers.”
Considering the huge, indispensible source of sales volume presented by the global middle market, it’s no surprise that competition is already intense. Despite the number of active companies competing for consumer spending, several would-be contenders are being put off by myths that throw a negative light on the situation.
“There’s talk that it’s too early to enter the middle market in emerging economies, when the reality is that it may already be too late as some industries are already becoming saturated with competitive rivals,” explained Bill Russo, a senior advisor with Booz & Company, based in Beijing.
“Other companies claim that they can’t make money from emerging economies, but they have to consider that while prices are up to 40 percent lower than in developed nations, sales volume is potentially up to three times greater than in mature markets.”
This explains the motivation of Adidas to develop training shoes under the Reebok brand to sell for as little as 1 dollar across rural India, said Karl Nader, Principal at Booz & Company.
This is the case in the GCC, where multinationals that have been late in the game, face stiff competition from local brands as well as from established international competitors deeply rooted in the local market. These multinationals either fold or resort to inorganic growth options to bridge this gap.
This is evidenced, by Carrefour’s challenges to compete effectively against Panda and Al Othaim in Saudi Arabia, and Coca Cola’s recent acquisition of a 50% stake in Aujan, a significant investment to bridge the gap with PepsiCo, added Nader.
Russo goes on to explain that the attitude of assuming that success will come from the education of consumers, rather than the adaptation of products, will not bear fruit. No matter how valued or desirable the merchandize is, most newly-minted middle-class customers will not be able to afford them.
The final myth laid to rest is that entering the global middle market will be too disruptive to operations, to which he simply says that companies need to develop a business model that is suited to the task in order to succeed.
It may be that an alteration in the mind set of more conventional multinational corporation executives is required, in order for them to compete for the position of industry leader by cashing in on the benefits of the middle-class market. The opportunities in the global middle market may require additional effort in order to successfully reap the rewards on offer, but they’re most certainly worth it at the end of the day.
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Booz & Company is a leading global management consulting firm, helping the world’s top businesses, government ministries, and organisations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 60 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage.