FMCG brand owners are increasingly targeting growth in emerging markets and, despite the immediate impact of COVID-19, companies that invest in these countries now will be the long-term winners, says new research. However, there are multiple challenges in working in emerging economies, beyond the short-term economic effects of the pandemic, and businesses need to ensure they understand their target consumer, have the right product mix and can address potential infrastructure problems.
Published this month, GlobalData’s ‘Emerging Economies in Consumer‘ thematic research explains that, while there are no strict definitions of what constitutes an emerging market, a recent IMF report listed the following 20 countries: Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Iran, Malaysia, Mexico, the Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey and the United Arab Emirates. The report also touches on Singapore, South Korea and Hong Kong.
“The FMCG market in the developed world is becoming saturated, forcing consumer goods companies to seek growth opportunities in emerging markets,” the report says. “For example, the BRICs (Brazil, Russia, India, China) have been identified as offering major opportunities for expansion, despite the short- to medium-term COVID-19 impact.
“Emerging economies are attractive not only to FMCG companies, but also to big foodservice and retail firms, because of their burgeoning population, education levels, growing household income and an improved ease of doing business.”
The report notes that emerging markets account for 54% of the global population and, excluding the European countries of Hungary, Poland and Russia, are all projected to see population growth to 2025, collectively adding 153m people to the total over that timescale.
One knock-on effect of this is that emerging economies skew to younger demographics. While 44% of India’s population is aged 24 or younger, the share figure drops below 30% in a developed nation such as the UK.
Educational standards in emerging countries are also rising, bringing more young people into tertiary education and, in turn, giving them more opportunities for personal development and increased prosperity. “More educated people mean not only improved labour markets, therefore driving productivity and economic growth, but also an enhanced spending power,” the report says.
Linked to this point is a gradual shift in employment from the agricultural sector to the industrial and service sectors, bringing rising income levels and living standards, as well as creating an emerging middle class with increasing purchasing power and consumption demand.
At the same time, it is becoming gradually more straightforward for international companies to operate in emerging nations, which are improving their positioning in the World Bank’s ‘ease of doing business’ rankings. Countries such as China, Egypt, India, Malaysia, Russia, Saudi Arabia, Turkey, Thailand and the UAE have made “significant progress in simplifying processes for setting up businesses”, the report says.
Nonetheless, it is vital for FMCG businesses to ensure familiarity with a country’s infrastructure before trying to sell products there, as distribution methods used elsewhere may not be suitable in developing economies. The report highlights the example of Latin America, where small and independent stores, along with street markets, usually dominate the retail sector.
“Therefore,” the report continues, “FMCG companies must not disregard small retailers, because selling only in hypermarkets could mean losing a big share of consumers. Furthermore, many emerging economies are characterised by poor infrastructure, which needs to be taken into account when deciding to expand the business.”
Companies should also take a sensible attitude to price rises in emerging markets – a particularly sensitive topic at a time of increasing commodity and energy costs. Price rises that are feasible in mature markets might lead to falling sales in emerging economies, the report says, adding: “Companies that wish to offer higher-priced, premium products in emerging economies must invest in gathering consumer data and understanding if there is a desire for such products in these markets.”
As trading conditions become more competitive in these countries, some companies are turning to localisation to win over consumers and create a point of difference versus their rivals. The report highlights PepsiCo’s launch last year of a flavoured beverage in China that uses osmanthus extracted from a native flowering plant.
GlobalData also focuses on the local trends that are driving particular markets and sectors, noting that the most popular way to expand business in the soft drinks category in Brazil, for example, is via mergers and acquisitions: examples include Heineken’s acquisition of Kirin’s local operations in 2017, and The Edson Queiroz Group buying Nestlé Waters a year later.
Other recent emerging market acquisitions of significance include York Winery buying Sula Vineyards in India; Gallo acquiring RumChata owner Agave Loco in Mexico; Pernod Ricard purchasing La Hechicera rum in Colombia, and Heineken buying Tres Cruces beer in Peru.
The report also notes that sales of packaged water experienced notable growth in Russia in late-2020, driven by health concerns as a result of the pandemic, and analyses the future potential of South Africa’s wine sector, which is expected to record a compound annual growth rate (CAGR) of 5.3% between 2020 and 2025.
The onset of the pandemic over the past 18 months has had a disproportionate impact on emerging economies, the report says, but this should not distract businesses from the longer-term potential of these countries.
“Due to the COVID-19 pandemic, the complexion of emerging economies and all other countries has changed profoundly,” GlobalData says. “The mid- and long-term priority of emerging economies has changed to a short-term focus on survival and recovery from the effects of the pandemic in the established consumer goods markets.
“Nevertheless, attention will turn once again to emerging economies as a way to gain competitive advantage, please investors and cover larger consumer audiences … . Companies that have a strong exposure to and a wider footprint in emerging markets gain competitive advantage, while companies that are not expanding to these nations – which have a lot of growth potential – will lose in the long run.”