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China’s e-tail revolution

Almost overnight, China has become the world’s second-largest e-tail market, with estimates as high as $210 billion for revenues in 2012 and a compound annual growth rate of 120 percent since 2003. The country’s retail sector already is among the most wired anywhere—e-tailing commanded about 5 to 6 percent of total retail sales in 2012, compared with 5 percent in the United States—while it is distinctly different from that of other countries. Only a small portion of Chinese e-tailing takes place directly between consumers and retailers, whether online pure plays or brick-and-mortar businesses on retailers’ own Web sites. Instead, most occurs on digital marketplaces. What’s more, Chinese e-tailing is not just replacing traditional retail transactions but also stimulating consumption that would not otherwise take place. Finally, e-tailing may catalyze a “leapfrog” move by the broader retail sector, putting it on a fast track to a more digital future. These are among the key findings of China’s e-tail revolution: Online shopping as a catalyst for growth, a new report by the McKinsey Global Institute.

Structural differences

Some 90 percent of Chinese electronic retailing occurs on virtual marketplaces—sprawling e-commerce platforms where manufacturers, large and small retailers, and individuals offer products and services to consumers through online storefronts on megasites analogous to eBay or Amazon Marketplace.1 The megasites include PaiPai, Taobao, and Tmall, which in turn are owned by bigger e-commerce groups. A large and growing network of third-party service providers offers sellers marketing and site-design services, payment fulfillment, delivery and logistics, customer service, and IT support.

By contrast, in the United States, Europe, and Japan, the dominant model involves brick-and-mortar retailers (such as Best Buy, Carrefour, Darty, Dixons, and Wal-mart) or pure-play online merchants (such as Amazon), which run their own sites and handle the details of commerce. Developed markets have major specialized retail chains in the e-commerce arena. In China, such independent merchants account for only 10 percent of e-tailing sales. Although still in the early stages of growth, China’s e-tail ecosystem is profitable, logging margins of around 8 to 10 percent of earnings before interest, taxes, and amortization—slightly higher than those of average physical retailers.

Powering consumption

This unique e-tailing engine is enabling China’s shift from an investment-oriented society to one that’s more consumption driven. E-tailing, our research indicates, is not simply a replacement channel for purchases that otherwise would have taken place offline. Instead, it appears to be spurring incremental consumption, particularly in less developed regions. By analyzing consumption patterns in 266 Chinese cities accounting for over 70 percent of online retail sales, we found that a dollar of online consumption replaces roughly 60 cents of sales in offline stores and generates around 40 cents of incremental consumption (Exhibit 1). It’s important to note that the data sets behind this analysis don’t cover the full market. Our approximations do, however, provide a preliminary picture of what’s occurring in China and permit a rough calculation of the extent to which e-tailing may be boosting consumption there. (These estimates suggest that the channel may have added 2 percent of incremental value to private consumption in 2011 and could generate 4 to 7 percent in incremental consumption by 2020.)

Exhibit 1

China e-tailing - Exh1

E-tailing’s impact is more pronounced in China’s underdeveloped small and midsize cities. We found that while incomes in these urban areas are lower, their online shoppers spend almost as much money online as do people in some larger, more prosperous cities—and also spend a larger portion of their disposable income online (Exhibit 2). For these shoppers, the utility of online purchasing may be higher, since they now have access to products and brands previously not available to them, in locations where many retailers have yet to establish beachheads.

Exhibit 2

China e-tailing - Exh2

Further boosting online purchases is the fact that e-tailing has cut consumer prices: depending on the category, they are, on average, 6 to 16 percent lower online than in China’s stores.2 Apparel, household products, and recreation and education are the categories where price discounts are greatest. They are also the three largest online retail segments (Exhibit 3).

Exhibit 3

China e-tailing - Exh3

The leapfrog effect

China’s retailing industry, coming of age in an era of digital disruption, will probably follow a trajectory different from that of retail sectors in other markets. In developed nations, the industry typically followed a three-stage path. It began with the rise of regionally dominant players. This field then consolidated into a smaller number of national leaders. Eventually, online players challenged them, and the industry became multichannel. Some brick-and-mortar players (Tesco and Wal-Mart Stores, for instance) have embraced a multichannel strategy, while others (such as Borders in the United States and Jessops and Woolworths in the United Kingdom) have been driven from the market.

China differs from these developed markets, however, because a crop of national leaders has yet to emerge in traditional retailing. Building stores across China’s considerable geography, with its many smaller cities, takes both time and high levels of investment. As a result, China’s largest brick-and-mortar retailers have captured a smaller share of the country’s overall retail market than have major players in the United States and elsewhere: the top five retailers by category hold less than 20 percent of the market—much lower than US levels of 24 to 60 percent in comparable categories.

In China, the combined effects of the complexities of store expansion and a distinctive model of e-tailing could lead to a different retail dynamic: as e-tailing continues to grow, China’s industry may leapfrog the second (national) stage, passing directly from the regional to the multichannel one. In fact, China’s online ecosystem of marketplaces and agile support services has grown rapidly precisely because it can exploit the inefficiencies and higher costs of China’s existing retail market. Already, the major online companies Alibaba (which owns marketplaces such as Taobao) and 360buy.com (focusing on sales of electronics) have established a prominent national role, ranking among China’s top ten retailers.

Coming next

The view forward may be more impressive. We estimate that by 2020, as 15 to 20 percent annual growth rates (before inflation) continue, e-tailing could generate $420 billion to $650 billion in sales, and China’s market will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today.3Patterns of future change are coming into focus.

Retail modernization

E-tailing will continue to transform the retail sector. As competition among e-tailers has lowered prices, it has also both increased the size of the consumer market and created efficiencies in the important adjacent markets that support e-commerce—logistics, supply chains, IT services, and digital marketing. This efficiency edge should force brick-and-mortar retailers to modernize and pave the way to a more efficient coordination of supply and demand across the Chinese economy.

One cloud hanging over the e-tailing scene is a growing talent shortage resulting from heady growth. Eventually, it could raise labor costs and hamper expansion plans unless e-tailers significantly improve their labor productivity, which at best matches that of physical retailers. The good news is that if the online ecosystem learns from developed markets, e-tailing’s productivity should rise as high as two to four times that of offline retailers.

Meanwhile, China’s store-based retailers, and the manufacturers that supply them, will need to place some new bets—soon. Many have yet to fully embrace multichannel strategies, focusing instead on the sizable growth and consolidation opportunities still available in their brick-and-mortar businesses. They’ll have to decide whether to join existing e-tail marketplaces or establish their own online storefronts and whether to own parts of the value chain (such as distribution and IT) or use third-party suppliers.

To what extent will e-tailers bypass virtual marketplaces?

As the e-tail ecosystem diversifies and matures, merchants that today use digital marketplaces may find it tempting to pursue growth by operating independently. To do so, these companies must go beyond current strategies, which depend chiefly on products and prices, where competition already is fierce. Instead, to build a strong online brand, e-tailers will need to dedicate management resources and investments to creating an attractive package of value propositions—superior customer service, fast and reliable delivery, a better shopping experience, or more targeted marketing. That will require a new level of capabilities and, perhaps, partnerships with experienced players outside China.

Consumer companies: Threats and opportunities

Since marketplaces hold the leading share of China’s e-tailing market, they are a natural place for consumer-products manufacturers to focus when they enter China—or grow outside its leading cities. Marketplace ecosystems provide a business infrastructure to reach customers at a reasonable cost. That infrastructure is particularly valuable for new entrants, which may find it an economical way of testing a market’s temperature. Uniqlo, for one, used a combination of marketplaces and service providers when it started its online apparel business in China in 2009.

At the same time, however, e-tailing innovation is creating more competition. New entrants have sprung up on the major e-tail marketplaces (known as Taobrands on the Taobao marketplace) to sell lines such as apparel and cosmetics directly to consumers. With products sourced straight from workshops and OEM factories, and sales stimulated by targeted marketing campaigns, these immensely popular companies offer good quality and attractive prices.

Meanwhile, China’s model and innovations are spilling beyond its borders. Other emerging economies are developing e-tailing markets that could follow China’s business model—and potentially achieve similar growth rates. China’s new marketplace sellers are expanding internationally, leveraging their direct access to Chinese workshops and OEM factories. Global consumer-goods players should be ready to face competition from Chinese small and midsize enterprises and microbusinesses selling directly through marketplaces in emerging economies.

China may have largely sat out the 19th-century Industrial Revolution, but as the explosion of its new consuming class continues to reshape 21st-century economic life, e-tailing and the Internet revolution have important roles to play. E-tailing is boosting the Chinese consumer’s propensity to spend. The distinctive course charted by the country’s e-tailers is having an impact on merchants, consumer-product companies, and value-chain partners. And it’s widening the field of opportunities for players both in and outside China. With continued robust growth, changes in industry business patterns that are already under way will only grow in importance.

Download Executive Summary 

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Printed with permission from McKinsey Global.

Learning from Japan’s early electric-vehicle buyers

About one-third of early buyers in Japan say their next car may not be an electric vehicle. Companies should heed their complaints.

If electric vehicles (EVs) are to develop from a niche into a mass market, car makers should learn from early adopters who say they may not buy one again. Our recent research on such consumers in Japan finds that about one-third of them fall into this category. These buyers said they were “seduced” by low energy costs, attractive subsidies, and a good test drive. But they were less well informed about EVs than were environmentally conscious “green enthusiasts” (who love EV technology for its low energy costs and comfortable driving experience) and became less enthusiastic about their purchase when they faced issues such as higher electric bills and locating places to charge their cars. To lock in the reluctant buyers, EV makers should adopt retention and education programs to avoid negative market feedback that could “poison the well” for new buyers. We also found that although early adopters weren’t concerned about price, nonbuyers were. Until prices drop to the point where the level of mass-market uptake stimulates infrastructure development, manufacturers must learn how to build customer loyalty to broaden the market for EVs.

Additional Findings:

  1. Approximately one-third of early adopters in Japan may not buy an electric vehicle next time.
  2. 58% of electric-vehicle buyers with 58% satisfaction rating said they would not choose an electric vehicle for their next car purchase.

Adopted from McKinsey Quarterly.

Understanding Asia’s conglomerates

Asia’s conglomerates

Asia’s conglomerates

Conglomerates are shaping the competitive landscape in Asia. Would-be rivals must understand them to compete with them.

Conglomerates may be out of favor in much of the developed world, but don’t tell that to senior executives who contend with fast-growing conglomerates in major Asian markets, where this business model remains a competitive force.

McKinsey research finds that over the past decade, the largest conglomerates in China and India expanded their revenues by more than 20 percent a year, while conglomerates in South Korea exceeded 10 percent annual revenue growth (see sidebar, “About the research”). These companies diversified at a blistering pace, making an average of one new business entry every 18 months. The nature of those moves was striking: nearly half of the companies favored businesses that were completely unrelated to the parent companies’ operations.

Of course, only time will tell if Asian conglomerates’ “step out” approach to diversification will endure as the region’s economies mature. Nor is it clear how much shareholder value will be created—and sustained—by these companies’ growth. Nonetheless, a closer look at its characteristics and at the aggressive, M&A-fueled strategies that sustain it offers insights for senior executives seeking growth in Asian markets and gives potential entrants a useful glimpse into the evolving nature of competition there.

Big and growing

Over the past decade, conglomerates in South Korea accounted for about 80 percent of the largest 50 companies by revenues. In India, the figure is a whopping 90 percent. Meanwhile, China’s conglomerates (excluding state-owned enterprises) represented about 40 percent of its largest 50 companies in 2010, up from less than 20 percent a decade before. All these companies generated strong topline growth: an average of 23 percent a year over the past decade for conglomerates in China and India, and 11 percent for those in South Korea. Such growth is remarkable considering the large size of the companies involved—an average of $3 billion in revenues a decade ago and $12 billion in 2011.

Stepping out

When we looked more closely to determine the sources of this revenue growth, we found a strong connection with new business entry. The average rate of revenue growth for companies that entered at least one new business over the period we studied was 25 percent a year—more than two times higher than the revenue growth of companies that didn’t.

Also notable were the strategic motivations behind the new business entries. Fully 49 percent were step-out moves into businesses completely unrelated to the parent companies’ existing activities—for example, a South Korean chemical company acquiring a life insurer or a Chinese mining group’s expansion into the media industry. The remaining half were about equally split between two kinds of moves: category expansions into adjacent businesses and value-chain expansions that positioned the parent company up- or downstream from its existing business.

Large returns, large risks

Although step-out moves were the most common form of new business entry we observed, they were far from the most successful. Just 22 percent of those we studied had a beneficial impact on revenue growth, profits, and market share relative to those of competitors. In fact, our findings almost certainly understate the difficulties involved in diversifying into entirely new businesses, since companies rarely publicize the full financial and organizational implications of unsuccessful moves. Nonetheless, when step-out moves were successful, they delivered strong results—$3.8 billion in additional revenues, on average.

Regardless of how related the new business was to the existing one, the most common paths to success were M&A, joint ventures, and technology partnerships. Together, these accounted for three-quarters of the successful moves we studied.

Outlook and implications

Given the rapidly changing business climate in much of Asia, we believe senior executives in other regions should approach these findings judiciously. Certainly, not all Asian companies will follow the path of the conglomerates we examined. For example, state-owned companies and companies in markets with strong traditions of board governance (such as Malaysia) might find it difficult to convince skeptical boards of the need for bold step-out moves. Furthermore, if governance structures in Asia continue to evolve toward the shareholder-driven models prevalent in Europe and the United States—away from family-ownership or -control models that can introduce major shareholders’ personal interests into the equation—the growth patterns will probably change.

Nonetheless, there are equally valid reasons to believe that Asian conglomerates’ push for growth through aggressive diversification could continue for some time. For starters, many Asian conglomerates have ready access to capital, as well as aggressive growth ambitions that cause them to view strong local reputations and relationships as platforms for stretching into new areas. They seem to be particularly attracted to nascent industries, such as green energy, where dominant global leaders have yet to emerge. Local market dynamics also play a role. Ambitious conglomerates in smaller Asian economies, for example, may seek growth in new geographies given the relatively limited opportunities at home.

High growth aspirations intersect with a singular feature of emerging Asian economic life: the extraordinary need for infrastructure, since conglomerates are often involved with it. Finally, they can offer up-and-coming managers broader career-development opportunities, boosting their attractiveness to local talent in a region characterized by tight talent markets. Potential competitors will be well served by developing a better understanding of these and other sources of the conglomerates’ advantage.

The bottom line: business leaders in Asia are building large, fast-growing companies around the conglomerate business model. Understanding the drivers of that growth may give competitors and emulators alike a firmer footing in a volatile business environment.

Growing your market share in the European Union

EU countries,Growing market share

Whatever your political views might be, we’re sure you will like the idea of an enhanced Transatlantic Trade and Investment Partnership with the European Union to help you increase your global Growing market share and export even more of your products or services.

The Transatlantic Trade and Investment Partnership is envisioned as an ambitious, high-standard trade and investment agreement that would provide significant benefit in terms of promoting U.S. international competitiveness, jobs, and growth.” According to the fact sheet released by the White House, a successfully negotiated Transatlantic Trade and Investment Partnership will aim to add to the over 13 million American and European jobs already supported by the transatlantic trade and investment. Specifically, this Partnership would aim to:

• Further open markets to grow the $459 billion in U.S. goods and services exports to the EU, the largest export market, which already supports an estimated 2.4 million well-paying American jobs.

• Strengthen rules-based investment to grow the world’s largest investment relationship. The United States and the EU already maintain a total of nearly $4 trillion in investment in each other’s economies, supporting nearly 7 million jobs.

• Tackle costly “behind the border” non-tariff barriers that impede the flow of goods and services trade.

• Seek to significantly cut the cost of differences in regulation and standards by promoting greater compatibility, transparency, and cooperation.

• Enhance cooperation on the development of rules and principles on issues of global concern, including on market-based disciplines for State-Owned Enterprises, Growing market share ,combating discriminatory localization barriers to trade, and promoting the global competitiveness of small- and medium-sized enterprises.

Behind these bullet points are great opportunities for your company to strengthen the bottom line and increase global market share.

But did you know that there are 23 official EU working languages? They are: Bulgarian, Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Irish, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Romanian, Slovak, Slovene, Spanish and Swedish.

Having a successful translation/localization strategy in place before you start your export and expansion process can save you a great deal of a headache, heartache, and money.

Talk to EPIC Translations today to see how we can help you set up a successful translation strategy.

The importance of creating your own brand

Montreal’s M0851 leather goods stores uses its own cultivated identity to sell its ‘slow fashions’

Frédéric Mamarbachi, founder and creator of the brand M0851, is as excited as a kid in an ice cream store when he looks at three-dimensional renderings for his next leather-goods store on a computer screen. With a glass façade, black walls and floors covered with carpets with a traditional Asian design, the location of this store will be Beijing.

“If it works, we will open four to five stores per year there,” says Mamarbachi, who personally designs all the shops and the furniture they need. Founded 25 years ago, M0851 works outside the mainstream. Although he first distributed his products through shoe chains Aldo, Pegabo and Browns he now sells his goods in his own stores.

While some retailers work in so-called “fast fashion,” offering the latest fashion trends, M0851 could rightly claim to be in slow fashion. Much like the slow-food movement, slow fashion favours quality, durable products that transcend trendiness. According to Monique Abitbol, director of international markets for M0851, Mamarbachi  has embraced a discreet branding, which depends on word-of-mouth and close relationships with customers. “Our brand is timeless,” she says.

Mamarbachi says, “We live parallel to the fashion industry. We encourage timeless styles that our customers can take a long time and they can identify with.” As proof he wears a three-quarter-length leather coat that the chain has been selling for a quarter-century.

Headquarters is in Montreal’s Mile End quarter, where 50 employees including designers are at work and leather cutters still work by hand on pattern tables. “There are maybe five people in Montreal who know how to cut leather and we have three of them here,” says Mamarbachi. Some of the employees have worked with him since the beginning.

It all began in 1987 when Mamarbachi founded Rugby North America to make bags and leather coats for men. Ten years later, he changed the name to his initials (MO), followed by his date of birth, 0851 (August 1951). The company later diversified into handbags for women, leather clothing and accessories.

Since then M0851 has undertaken an international expansion, which has accelerated over the past five years. “We opened a shop in New York City before we had one in Montreal,” says Abitol. Now the company has shops in Paris, Tokyo, Toronto, Vancouver, Calgary, Hong Kong, and others for a total of 20 stores worldwide. Six new stores will open by early 2013.

To locate the best places to open a store, company employees will walk the streets, sit in cafes and settle in hotel lobbies to watch the passers-by, their clothes, what they eat and how they live. “Every store is different and must be integrated into the local community, we are certainly not cut and paste,” says Abitbol.

The formula also changes depending on the market. In some countries, there are franchised stores, while in others the shops are corporate-owned. “In the more distant markets, where it would be more difficult to react quickly or to ask us where to deploy resources, we prefer to choose partners who share our values. ” In China, the company decided to go with its own stores, that was not the case in Japan, for example.

Why Beijing rather than Shanghai? “We are not a luxury brand, but a brand that is distinguished by individual identity. Beijing is the cultural capital of China and, increasingly, a fashion capital where new talent is emerging. This co-incides with our corporate culture,” says Abitbol, who is currently studying Mandarin.

M0851 recently acquired huge machine knives from Italy, controlled by computer, which can replace the craftsmen who cut the leather. Is this the end of the craft production? “We will continue with the two methods side by side but it is increasingly difficult to find competitive craftsmen,” says Mamarbachi.

Meanwhile, M0851 plans to open a dozen other stores in the United States, including ones in Boston, Chicago, Washington and San Francisco as well as another store in New York. Then there are plans for more European cities: Vienna, Berlin, Copenhagen and London.

This article was originally published by Business without Borders.

The US employment challenge: Perspectives from Carl Camden and Michael Spence

The CEO of a global staffing firm and a Nobel laureate economist discuss the changing face of US employment and the obstacles to job creation.

The US economy has lost seven million jobs since 2007 and remains in the grip of a weak and largely jobless recovery that could take five more years to restore prerecession levels of employment, McKinsey research indicates.

In this video, two experts examine the jobs issue from two different vantage points. Carl Camden, CEO of Kelly Services, a global staffing company that manages external workforces for corporations around the world, describes fundamental changes that have occurred in the nature of work. In response to globalization and fast-changing technology, entire categories of jobs can now disappear with breathtaking rapidity. That has led to a big expansion worldwide in the number of people who work under new forms of employment: part-time, temporary, contract, even fractional workers who put in their hours where and when they can. But while the US workplace has changed, Camden argues that tax and benefit policies have failed to keep up.

Michael Spence, recipient of the 2001 Nobel Prize in Economics and author of The Next Convergence: The Future of Economic Growth in a Multispeed World (Farrar, Straus and Giroux, May 2011), sees structural changes in the economy that present major challenges to job creation. A loss of middle-class jobs in the tradable sector—mostly manufacturing—was offset largely by jobs in the non-tradable or service sector during the housing bubble, thanks to debt-fueled consumer spending. When that binge ended, many of those service jobs disappeared as well. Filling the void will be neither easy nor quick.

Hear what these two experts have to say about jobs in America.

You can download a PDF of the transcript.

 

Private equity’s new Asian strength

A rebound signals opportunity—and a need for flexibility as the market evolves.

While the private-equity business remains in the doldrums in much of the world, the Asia–Pacific region stands out as an exception. A recent McKinsey report, Private equity Asia–Pacific: Is the boom back?, shows that in 2011, Asia was the world’s only major region where these firms’ total investment values returned to 2006 levels—a total of some $65 billion (exhibit). At 21 percent of global deal values, Asia’s share of the private-equity business is now close to matching Asia’s share of global GDP: 28 percent. Yet the gap between the two figures leaves substantial room for growth: on average, the ratio of private-equity investment to GDP among Asian countries is less than half that of the United States or the United Kingdom.

Taking advantage of the opportunity will mean confronting rapid changes. Among the most notable is a sharp increase in deal volumes, which are growing faster than total deal values almost everywhere in Asia. Across the region, volumes more than doubled, while values have risen by only 40 percent. The size of the average deal is therefore falling.

Consequently, investors feel new pressure for strategic innovation, especially in light of a steady (if slow) recovery in fund-raising. More money chasing smaller deals may strain some players’ current business models. Partly as a result, partnerships with strategic acquirers are becoming increasingly common, reflecting Asia’s newfound prominence as a source of outbound M&A. The number of “cornerstone” deals, in which a fund takes part in an initial public offering (IPO) by agreeing to hold its shares for a certain period of time, has also continued to increase, despite a weak IPO market in much of the region. And investors are pushing into countries, including Vietnam and Indonesia, that previously attracted little attention.

Change also marks the exit stage of investments, both for general partners and limited partners. For the former, volatile public-equity markets meant that, on the whole, exits were down by almost 40 percent in 2011—especially via IPOs (notwithstanding a few notable exceptions), which fell almost 60 percent. But for the latter, the news is more encouraging: a maturing market for “secondary” funds (which invest in limited partners’ interests in existing funds) has increased the liquidity and flexibility of limited partners’ investments.

The report then provides an in-depth look at the six diverse markets that together account for virtually all private-equity investments in the region: Australia/New Zealand, Greater China, India, Japan, South Korea, and Southeast Asia. Among the highlights:

  • China alone accounted for almost 45 percent of Asia’s 2011 activity, but slowing economic growth has raised concerns about that trajectory’s sustainability.
  • In India, by contrast, the private-equity business’s growth has rested almost entirely on small deals. Combined with rising dry-powder levels, greater local competition, and persistent regulatory uncertainty, the emerging picture is that of a traditional operating model under greater pressure than ever.
  • Southeast Asia saw a number of high-profile deals, with Indonesia and Vietnam generating particular excitement, along with Myanmar, whose attempts to emerge from decades of sanction-enforced isolation have caught many observers by surprise.
  • Among Asia’s mature markets—Australia/New Zealand, Japan, and South Korea—Japan saw the most significant changes in 2011. For investors locking in currency gains, the rising yen made exits especially attractive: exits doubled in number over 2010 and more than quadrupled in value.

Download the full report, Private equity Asia–Pacific: Is the boom back? (PDF 576 KB).

How helping women helps business

Companies whose social investments focus on women in developing economies help not only the recipients but also themselves.

Few companies make social investments specifically aimed at empowering women in developing economies, but we believe that supporting this goal is good business and good practice for all companies. In the course of our work, we’ve uncovered a startlingly wide range of ways in which private-sector companies can offer sizable economic benefits not only to women and their societies but also to the companies themselves. The benefits to businesses come from enlarging their markets, improving the quality or size of their current and potential workforce (for instance, by attracting talent globally), and maintaining or improving their reputations.

Women in developing economies are hampered by many of the same concerns that face women in other countries, but they also deal with a number of additional barriers to economic security. In some cases, these problems are straightforward—girls getting less food and education than boys, for example. In others, they are as complicated as the difficulty women in many countries have in keeping control over money they may earn (because of regulations or long-standing cultural traditions that prevent them from having secure access to bank accounts), owning property, or acquiring loans.

Women’s unfulfilled potential significantly hinders economic growth. One recent study, for example, estimates that lower education and employment rates for women and girls are responsible for as much as a 1.6 percentage point difference in annual GDP growth between South Asia and East Asia. On the other hand, educated, income-earning women are especially powerful catalysts for development because they tend to invest more of their money in their families’ health, education, and well-being than men do.

Nevertheless, only 19 percent of the respondents to a recent McKinsey Quarterly survey said that their companies had invested in economic-development activities specifically aimed at women in developing markets. Yet 83 percent said that economic growth there was at least somewhat important to their companies’ success over the next ten years. (Read more in the accompanying survey results, “Rethinking how companies address social issues: McKinsey Global Survey results.”)

Companies whose social investments do focus on women in developing economies, the survey and our other research show, benefit not only women and their societies but also themselves. Among survey respondents, 34 percent say that such investments have already improved profits, and a further 38 percent expect them to do so.

Even more notably, our research shows that private-sector companies can create such benefits with a much broader range of measures than most executives believe. Promoting literacy, for example, offers a straightforward link to improved workforce productivity—but, it turns out, so does providing antiretroviral drugs to workers’ families. Anglo American, a mining company, extends HIV antiretroviral benefits to dependents (mostly women and children) of its employees in Africa. It has benefited from increased worker loyalty—retention rates are up—and from fewer missed workdays by employees who would otherwise need to care for sick family members. Furthermore, the communities Anglo American is serving now see lower infant mortality rates and healthier children.

Hindustan Lever’s Shakti program, meanwhile, tapped into the significant potential of empowering women to reach markets the company couldn’t otherwise. Launched in 2000, the program offers microcredit grants that enable rural women to become direct-to-home distributors of Hindustan Lever products. This new sales force has significantly boosted sales of the company’s products in rural villages, a market that is otherwise dauntingly expensive to reach. By the end of 2008, the Shakti network had grown to include more than 45,000 saleswomen covering more than 100,000 villages and more than three million homes in India.

Private-sector programs can also give companies longer-term or more intangible rewards, such as maintaining a positive brand image or creating a more educated workforce or wealthier consumers. In India, Standard Chartered recently partnered with the International Federation of Netball Associations to build a program designed to use the sport to develop the life skills and self-esteem of girls between 14 and 16 years of age from families earning less than $2 a day. Piloted in Mumbai and Delhi, and currently being significantly expanded, the program includes an additional direct economic-empowerment component: a loan fund to help girls achieve their professional goals.

Private-sector companies, we’ve found, can make development investments in programs that help girls and women throughout their lives—from infancy through education, preparation for work, support in the workplace, and ensuring financial security. For each stage of women’s lives, we’ve distilled a set of high-impact actions, which range from offering prenatal care and infant vaccinations to providing onsite bank accounts ensuring that female employees control their income and retirement savings. Companies don’t have to go it alone: successful ones, we’ve seen, design and implement their investments collaboratively with the women they’re trying to help, nongovernmental organizations with relevant experience, and other companies with similar interests. They can create real benefits for everyone by creatively combining an interest in empowering women in developing markets with a strategic assessment of where doing so can help meet corporate goals.

We invite you to share your experiences. Has your company acted to empower women economically? Are you the beneficiary of an economic-empowerment program? What results have you seen?

Printed with permission from McKinsey Quarterly

From oxcart to Wal-Mart: Four keys to reaching emerging-market consumers

To get products to customers in emerging markets, global manufacturers need strategies for navigating both the traditional and the modern retail landscapes.

In emerging markets the world over, multinationals struggling to get their products to consumers confront a bewildering kaleidoscope of strategic and operational challenges. At one extreme, they must grapple with traditional retailers: the chaotic array of shops, kiosks, street vendors, and other small proprietors who seem to offer neighborhood customers a little of everything, whether it be groceries or branded goods, such as beverages, small electronic devices, and personal-care products. At the other, multinationals must deal with modern retailers—global giants, including Carrefour, Tesco, and Wal-Mart, as well as local leaders, such as CR Vanguard, in China, or Grupo Pão de Açúcar, in Brazil—that have become a powerful force in the emerging world’s fast-growing cities.

This duality has become more pronounced since we last wrote about reaching consumers in emerging markets, five years ago; our emphasis then was largely on the ubiquitous mom-and-pop shop. Today, retail landscapes in emerging markets can be divided into three broad categories (see exhibit, which focuses on grocery sales):

  • predominantly traditional markets, such as India, Nigeria, and Indonesia, where small proprietors account for 98 percent, 97 percent, and 85 percent of the market, respectively
  • predominantly modern markets, such as China, Mexico, and South Africa, where modern trade already accounts for more than half of sales
  • transitional markets, where small proprietors currently prevail but are being rapidly elbowed aside by modern retailers; in Turkey, for example, their share of sales has shot up to 46 percent in 2011, from 26 percent in 2005

As multinational manufacturers look beyond countries as their unit of strategic planning, they will discover stark variations within regions, cities, and neighborhoods. (For more on city-based strategy setting, see “Unlocking the potential of emerging-market cities.”) In Malad, a western suburb of Mumbai, the most important outlets for grocery sales are mom-and-pop stores, known as kirana, and the suburb’s giant fruit and vegetable mandi, or outdoor market. But as business-processing centers and new residences spring up in the district, modern retailers are muscling in. Malad now boasts ten supermarkets and three large hypermarts.

Even in predominantly modern retailing markets, such as China, where modern outlets account for nearly two-thirds of sales nationwide, traditional and modern stores live cheek by jowl. China’s ten largest grocery retailers, though growing fast, account for only 11 percent of total sales—far less than the ten largest US players, which account for 51 percent of sales in that market. China’s biggest retailer, China Resources Enterprise, commands a market share of 2.3 percent of total grocery retailing and 3.8 percent of modern grocery retailing. In a host of leading Chinese cities—among them Chengdu, Chongqing, Dailian, Shenyang, and Wuhan—modern retail outlets account for only about 50 percent of sales. By contrast, modern retailing represents more than 75 percent of sales in Beijing and Guangzhou, 80 percent in Shenzhen, and 77 percent in Shanghai, where residents can choose to buy their groceries at more than 100 hypermarkets.

Across the emerging world, in short, the retail terrain is diverse and unfamiliar. This article offers four road rules for companies to follow as they navigate it.

1. Embrace the duality of emerging markets

The starting point for any successful strategy is a recognition that manufacturers must engage effectively with traditional and modern trade outlets—and be prepared to live with that reality for the foreseeable future. In some emerging markets, notably India, regulations against big-box competitors explicitly protect small proprietors. Cultural preferences, poor infrastructure, and the geographic dispersal of emerging-market populations also assure a significant role for traditional outlets.

In our experience, companies that craft nuanced strategies embracing the traditional retailer can raise their revenues from emerging markets by 5 to 15 percent and their profits by as much as 10 to 20 percent. That’s because for all the appeal that large-format retailers hold for global manufacturers—big chains are familiar, easy to deal with, and can free manufacturers to focus on issues like strategy, product development, or recruiting—these retailers can command high listing fees and big discounts, as well as impose many conditions small proprietors cannot. They also are quick to weed out products that don’t sell briskly.

Some manufacturers have opted to focus on large retail chains to build a position of strength and then gradually developed the capacity to work with traditional outlets. Prantalay Marketing, a Thai seafood processor, increased sales of its ready-to-eat meals, launched in 2004, to more than $30 million within six years, in part by concentrating on Thailand’s large retail chains, including Siam Makro, Big C, and Tesco Lotus. The focus on modern retailing made sense because Prantalay’s prepared meals were frozen and required a reliable cold chain. Now the company is turning its attention to traditional channels and expanding its product lineup to include offerings, such as instant noodles, that do not require freezing.

Similarly, South Africa’s Tiger Brands worked through large retailers to consolidate its position in its home market. A consumer product giant whose brand portfolio includes everything from Purity baby food to Doom insecticide, Tiger accounts for close to 15 percent of sales at every major South African retailer. But as the company looks for future growth, it has begun acquiring businesses in other African markets. Given the greater importance of small proprietors in those economies, Tiger’s emergence as a regional player will force it to develop new capabilities for working through traditional retailers.

Other manufacturers have moved in the opposite direction, securing market position through traditional retail outlets, then turning to larger establishments in the quest to expand. Consider the case of Wanglaoji, a 184-year-old herbal tea transformed by JDB Group, a Hong Kong soft drink marketer, into China’s best-selling beverage. Until 1995, when JDB acquired the rights to the Wanglaoji trademark from state-owned Guangzhou Pharmaceutical, the drink was primarily seen as an herbal elixir for cooling “overheated” internal organs.

JDB launched a rebranding effort whose masterstroke was a decision to market the drink through restaurants specializing in spicy Sichuanese cuisine. JDB pitched Wanglaoji as a healthy and refreshing antidote to Sichuan’s famously fiery hot-pot dishes, forged partnerships with select restaurants, and gave “Wanglaoji-trusted outlets” lavish incentives, including product discounts, free promotional materials, and generous contributions to holiday marketing campaigns. The results of the repositioning were dramatic: between 2002 and 2008, sales soared from less than $30 million to more than $1.5 billion. With consumers clamoring for the drink in shops as well as restaurants, JDB found modern retailers eager to carry its red cans. Today, the brand boasts sales of roughly $3 billion in China, topping sales of that other popular red-can beverage, Coke. It is widely available in a variety of hypermarkets, minimarts, and convenience stores, as well as in hot-pot restaurants.

2. Segment and conquer

Because multinationals can’t be everywhere at once, it is essential for manufacturers to pick their shots by segmenting and prioritizing sales outlets carefully. Sophisticated segmentation strategies are especially crucial in targeting traditional trade channels, for a single country may have millions of outlets. (China, for example, has anywhere from 3 million to 8 million sales outlets, depending on what kind are counted, while India has 8 million to 15 million.) In mapping routes to market in emerging economies, we urge manufacturers to focus on a geographic region or cluster of cities and to achieve complete coverage at outlets with significant potential before going on to the next market. (For more on the advantages of creating a stronghold in one area before moving to the next, see “Building brands in emerging markets.”)

To navigate these markets effectively, manufacturers should look beyond the current sales of priority outlets. Sales data for traditional stores in emerging markets are notoriously unreliable; even when accurate, they often reflect little more than how much effort the manufacturer has expended to date in supporting the store in question. It’s far better to estimate potential sales by using forward-looking parameters, such as store size, proximity to workplaces or schools, traffic volumes, neighborhood wealth, or shelf space.

One leading global food company used census and publicly available transportation data to classify sales outlets in the Middle East according to outlet size (six segments, ranging from more than 130 square meters to 30 square meters or less) and a mix between traffic volumes (high, medium, and low) and incomes of surrounding households (high, medium, and low). The result was a grid with 36 cells, which were then aggregated into six distinct segments, enabling managers to make strategic choices about which outlets merited greater investment and which should get only basic maintenance.

The next step is to specify precisely the combination of service, support, and incentives each outlet segment merits. Coca-Cola refers to this process as defining the “picture of success.” What should a store look like? How should Coca-Cola products be displayed, stored, priced, and promoted? Big stores in rich, high-traffic areas will get more attention than small shops in poor, low-traffic areas—but there are numerous variations in between. For each segment, managers tailor a specific set of value propositions. Should the company supply coolers and, if so, how many? What kind of signage and other promotional materials should it provide? Which Coca-Cola products should be supplied and in how many variations of packaging? How frequently should sales staff visit?

In emerging markets, manufacturers must go to great lengths to craft a combination of retailer incentives ensuring that the picture of success comes out right. Big chains, of course, care most about discounts and fatter profit margins, together with better merchandising, more expensive displays, more frequent deliveries, and more frequent visits by salespeople. Some traditional retailers may value these things too. Smaller retailers, however, may prefer free equipment, brand promotions, flashier displays, and outside signage to help them stand out from the crowd. In many cases, manufacturers can win the loyalty of small proprietors by paying electricity bills or providing health insurance for the owner, employees, and members of their families. In some cities in Mexico and India, where shopkeepers take special pride in their establishments’ appearance, offering to pay for a new paint job every six months may be the lowest-cost way to secure a partnership.

Manufacturers must calibrate their concessions carefully. All “gives” to retailers should be compensated by “gets”—for example, requirements that retailers guarantee certain sales volumes or provide superior shelf space. One leading multicategory food company in Mexico offers to install high-end shelves and displays in smaller stores in exchange for a retailer’s commitment to display its products prominently. The degree to which retailers actually deliver these “gets” provides valuable information to manufacturers as they periodically reevaluate the potential of outlets.

3. Balance cost and control in your route to market

Even the most sophisticated segmentation strategy can be undone by flawed models for transporting goods and serving retailers. Direct delivery with a manufacturer’s own trucks and trained employees is the preferred option for modern trade. But such costly support must be confined to outlets that really matter. Often, “basic availability”—with products delivered, say, by wholesalers—will suffice.

In Indonesia, Unilever, for example, services supermarkets and hypermarkets with its own vehicle fleet. But because the archipelago has thousands of islands, Unilever reaches minimarts through a network of distributors who work solely for the company in the categories it carries and serves independent small retailers and chains through another network. For ice cream vendors, who sell from freezer-equipped tricycles, Unilever relies on ice cream concessionaires. In India, Unilever has used a similar multiple-channel approach to gain access to more than half of the country’s population—all urban centers and 85,000 villages, which in some cases it serves with bullock carts and tractors.

Coca-Cola prefers direct delivery wherever possible. But in Kenya, where rural and urban roads alike are often too rough for Coca-Cola delivery trucks, the company delivers on bicycles and pushcarts to microdistributors, which in turn can reach retail outlets covering 90 percent of the country’s population. This vast network of small vendors has not only generated enormous goodwill for Coca-Cola but has also been cited by the International Finance Corporation as a model of how global companies can foster local entrepreneurs.

In many of these markets, companies must deal with thousands of distributors and wholesalers, which often struggle to realize the manufacturer’s brand goals or strategies for influencing the behavior of retailers. Executives at many leading global consumer companies argue that segmenting and prioritizing distributors is as important as segmenting and prioritizing sales outlets. The goal is to build the skills of reliable, high-priority distributors so they can help manufacturers achieve their strategic goals for different kinds of outlets—which sometimes means consolidating distribution networks.

In India, for example, Hindustan Unilever consolidated its distributors for the Mumbai market from 21 firms to just four megadistributors. Similarly, more than a decade ago Procter & Gamble shrank the number of its distributors in China. Acquisitions can be an excellent opportunity to reevaluate distributors; over three years, a leading fast-moving consumer goods company in Russia did exactly that, transforming a tangle of 300 overlapping players of widely varying capabilities into a core of 100 focused, high-performance stars.

4. Arm the front line with skills and technology

The many moving pieces in these sales and distribution networks demand a relentless focus on frontline execution. Xian-Janssen OTC, Johnson & Johnson’s consumer health care arm in China, requires its sales personnel to undergo five formal training modules over five years to master professional skills, such as salesmanship and team management. The company also coaches employees informally (with sales visit “shadowing”) and conducts weekly “education meetings” where difficult sales situations encountered during the week are reenacted and analyzed. What’s more, high-performing companies recognize that “what gets measured gets done,” so they set targets and offer incentives aimed not just at raising sales volumes but also at promoting proper retail execution, such as the quality of in-store product displays.

At the same time, companies are well advised to recognize the varying capabilities of their emerging-market sales forces and to find simple ways of standardizing the quality of sales visits as far as possible. For instance, Kang Shi Fu, a successful Chinese manufacturer of beverages and noodles, provides its salespeople with checklists that are tailored for each outlet segment and must be completed during every visit. Guidelines for Pepsi salespeople cover a host of specific duties, from greeting the retailer to checking inventory levels. Checklists and standardized approaches are useful both when manufacturers hire and manage their own sales forces and when they rely on (and closely supervise) those of distributors. “Shadow management” of this sort has proved effective for several leading global companies in China. Often, sales managers are “embedded” with distributors to train staff and offer advice on how to execute different strategies for different store types. Embedded managers also join visits with distributors’ sales teams to monitor performance and provide on-site coaching.

Technology is an increasingly important tool, with handheld devices for salespeople proving especially useful. A snack company in the Middle East uses satellite-linked devices, so their geo-coordinates can be tracked. If outlets aren’t visited in the right order, the devices are disabled, preventing the salespeople from completing their tasks. A central team can also periodically monitor the location of individual salespeople, to ensure that they truly are on sales visits and not engaged in side jobs. These handhelds come preloaded with detailed instructions on each outlet the salespeople are about to visit— for instance, its outlet segment, historical sales information, specific products to sell, and key action steps to complete from the last sales visit. Not long ago, such functions involved a specialized mobile device and high hardware costs. Today, an app on a low-cost smartphone can perform many of these tasks.

Eventually, mom-and-pop stores may go the way of buggy whips, and the descendants of today’s village children in countries such as China and India may scoff at the idea of buying products and services anywhere but in climate-controlled malls or online sites. For now, though, manufacturers staking their futures on these booming economies must forge lasting relationships with a diverse set of retailers—before competitors do.

The rise of the African consumer

The single-largest business opportunity in Africa will be its rising consumer market. A McKinsey report, one of the first of its kind, offers a detailed profile of African consumers, including their demographics, behavior, and needs.

By now, most investors and businesses know about the tremendous potential of Africa—the world’s second-fastest-growing region, topped only by emerging Asia. But it may come as a surprise that Africa’s growth is fueled not by resources but rather by a rising consumer market.

The continent’s consumer-facing industries are expected to grow by $400 billion, representing its single-largest business opportunity, by 2020. But many companies don’t know how to translate this potential into action, because of a dearth of market research. That, however, is changing. In one of the first studies of its kind, McKinsey’s Africa Consumer Insights Center surveyed 13,000 consumers in ten African countries, with a focus on the largest cities. Five categories of consumption were covered: apparel, financial services, groceries, the Internet, and telecommunications.

Several factors are shaping this new consuming class. Africa’s population, the fastest growing and youngest in the world, is concentrated in urban areas. This new class of consumer has a smaller family, is better educated and higher earning, and is digitally savvy. Africans are exceptionally optimistic about their economic future: 84 percent say they will be better off in two years.

These new African consumers resemble their urban counterparts anywhere in the world: they are both brand and quality conscious, seek out the latest trends but watch the budget, and want a modern and attractive shopping environment.

But Africa is a complex, nuanced market of 53 countries and more than 2,000 dialects. Consumers in the north have preferences and needs very different from those in the sub-Saharan countries. The McKinsey study attempts to provide companies, whether new to the continent or expanding an existing footprint, with the insights they need to formulate a winning business model to reach this new consuming class. Here are some highlights from the research.

Focus where it matters. Cities offer the best opportunity: urban Africa is forecast to contribute nearly 40 percent of GDP growth. But companies may be wise to bypass high-profile megacities, such as Cairo, Johannesburg, and Lagos, for midtier cities, like Abidjan and Rabat, which are more accessible, have less competition, and offer better profit margins.

Develop locally relevant, quality products. Companies can better tailor products to local markets if they understand what quality means for African customers and know their preferences, lifestyles, and daily needs.

Hit the right price point. Since affordability is critical, companies may have to reengineer products to hit a specific price point. The necessary moves may include offering lower-cost versions, smaller sizes, or alternative payment models.

Download the full report, The rise of the African consumer (PDF−1.06 MB).

 

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