P&G’s Nausea

This week FMCG giant P&G announced that it anticipated sluggish earnings and sales growth due to what it sees as an overall uncertain economic picture in both developed and emerging markets. The company has been under pressure to grow its top-line and to cut costs, two objectives that might run at cross-purposes with one another in the short-term.

Bloomberg quoted P&G’s CEO Bob McDonald, ” there has been ‘slow-to-no’ growth in gross domestic product in developed markets like North America and western Europe, and significant unemployment. In the U.S., about 25 percent of households have at least one person looking for a job.” Emerging markets, once the panacea to P&G’s domestic difficulties, are not looking very good either. Bloomberg noted, “Emerging markets pose their own challenges. McDonald said foreign exchange, or the exchange of one currency into another, had been expected to add 2 or 3 percentage points to revenue growth. In fact it has hurt revenue by $3 billion. P&G is also dealing with government-mandated price reductions in Venezuela and import restrictions in Argentina.”

Here’s what put a cherry on the top: McDonald noted that, “We’ve seen sequential deterioration in the rates of market growth in both the U.S. and Europe, and there has been a slowdown in the rate of market growth in China.” What to take away from this? If P&G is experiencing nausea the economies in both developed and emerging countries are slowing that is very disconcerting to us all. Navigating uncertain waters like those that likely are ahead of us is going to require a willingness to let market research and core innovation advance. The future will belong to those companies who continue to invest in better understanding their export markets, and who believe that the greatest upside potential exists in selling new products to consumers in emerging economies.

In Case You Needed a Reminder …

Of why so many otherwise rational and grounded economists and businesspeople are so excited about the opportunities within emerging economies, viewing this graph should be helpful. From Michael Cembalest, the Global Head of Investment Strategy at JP Morgan, the below graph illustrates the share of global GDP each country has represented since Year 1. A couple of points to draw out of this.

First, as Derek Thompson of The Atlantic points out, the relationship between population and GDP needs to be understood: the Industrial Revolution changed how these two were related to one another. Prior to this, economic output was directly tied to population; after, economic output could outpace population growth. One question this brings to mind is what happens when the most populous countries in the world catch up to the level of industrial modernization more developed countries possess. The downside risks are those environmentalists and analysts focused on raw-material constraints are most concerned with; geopolitical issues related to similar levels of industrialization but widely divergent populations could easily set in motion the sort of “fear of inevitable superiority” that led Germany to attack France and Russia in World War I, except this time predicated on extreme economic insecurities felt by Western Europe and the United States towards a country like China.

The upside potential to this graph is the one every businessperson needs to understand: developed economies are not going to be in the global economy’s driving seat much longer. The share of world GDP that countries like China and India will likely ultimately come to account for are likely to, absent global war or encountering a new economic paradigm like a Chinese or Indian version of the Mexican middle income trap, return to historical norms. This means that it is more important than ever to have a strategy in play for accessing these markets. The historical narrative is clear and compelling, the question is how best to access these markets as they make their transition from emerging to semi-developed economies.

It’s About Relationships As Much As Anything

Yesterday I had an interesting conversation with a VP of International Sales for a SME in the Midwest. A bit of background is helpful: founded in the early 1900s, but subsequently sold to a couple of investors, the company is now in its second-generation as a family business (the third is just coming into the wings). Their markets have traditionally been all domestic (less than 10% of their sales were international); but, over the course of the last seven years, their international sales have grown by a factor of 5, resulting in the company’s sales almost tripling.

What caused this change? As this VP shared with me, the entrance of the emerging economies into the world’s economy. This company was gradually pulled into this: initially, their efforts were focused on Canada and Mexico. Then, as they became more comfortable internally navigating new cultures, they started to work their way down Central and South America. Now, they do business all across the Asia-Pacific region, Africa and the Middle East. The process of becoming comfortable with this all was not overnight; but what unified their efforts was one pivotal insight.

As he put it to me, “no matter where you’re doing business, it’s about relationships as much as anything.” Yes, dealing with customs and a country’s particular approval process for a unique piece of equipment all matter, but what his company had to get comfortable with more than anything was that they could relate to people of any culture on an individual basis. Treating someone who comes from a vastly different culture is part of what makes international business exhilarating, but it can be easy to forget that what will ultimately bind you to them – and them to you for that matter – is focusing on getting to know them and relating to them and their needs on an individual basis. It’s a seemingly small step, but one that promises to provide magnificent rewards.

Bag of Links

For our readers’ pleasure, some relevant reading and video on the topic of what is happening in emerging economies in early 2012 follows:

From The China Observer, How Diageo is differentiating its brand of whiskey in China.

Over at the Financial Times’ superb Beyond BRICs Blog, a review of Unilever’s results from Brazil and Russia, with a note of caution from the company about what they see as headwinds in emerging economies in general.

From the same FT blog, what the British firm Burton’s Foods needs to do in order to successful launch its Wagon Wheel food line in Russia. Hint: localization will always matter, finding the right partners even more.

US e-Tailer Amazon.Com announces its plans for entering India via Junglee.com, suggesting on-line retailers might have another advantage over brick and mortar companies in India. Does this mean a multi-brand e-Tailer can be 100% foreign owned in India, but a multi-brand traditional retailer cannot?

Pepsi’s earnings make note of double-digit growth in a variety of emerging economies, while today the company announces job cuts in what the CEO calls a “transition year” for the company.

Everyone gulps over China’s most recent rate of inflation, hoping this is explainable by the CNY celebrations.

Pay attention to Nigeria as one of the pivotal African states where multinationals are eager to see the country further stabilize, successfully deal with Islamist terrorism in Ibadan and Kano. Watch as YUM! Brands further expands into the country.

Another Important Economic Idea Gets Tested in 2012

In today’s Asia Times I have a column on the question of whether emerging and developed economies are truly de-coupled from one another. The bottom line is that I remain suspicious that the American and Chinese economies are genuinely de-coupled from one another and that the events post-2008 show that, if anything, the economies of China and other emerging economies are very coupled to one-another. My assertion on these two fronts is largely because China continues to be very reliant on exports to the American economy and, as I point out in my column, they are increasingly dependent on exports to other BRIC countries and other regional developing nations. However, advocates of de-coupling are right to point out that China’s economy has continued to put forward impressive GDP growth numbers since the 2008 financial crisis, something which does suggest the country is building its own base of domestic demand, a critical validation of the de-coupling concept.

As both SMEs and multi-nationals look forward into 2012 and beyond, the question of what is happening in emerging economies is increasingly important. Industries ranging from FMCG, pharma, and clean-tech are more and more reliant on healthy emerging economies in order for these businesses to hit their revenue growth and profitability targets. What I believe this means for companies is that no longer can you afford to assume that growth in emerging economies is a given. I have spoken with many businesses who are honest when they talk about why their business is growing in China or India: it’s because they are there, not necessarily because they have crafted a great strategy for winning over the customers here. That calculus isn’t going to work as the economies in these areas softens. It will take more highly calibrated strategies and better execution to continue operating successfully in these countries.

Why American and European Retailers Need Emerging Economies

2011 was marked by two notable American retailers who both chose to exit the Chinese retail market: Best Buy and Home Depot. Given previous comments by the executives from both companies about the relative importance of selling to the growing Chinese middle class, these exits were as surprising as they were unsettling. Surprising because access to China’s consumers has long been the holy grail that multinationals have been pursuing in China specifically, and in emerging markets more generally. Unsettling because the inability of two competent channel-leaders in their respective market segments to sell to middle income Chinese (Home Depot for the DIY consumer, and Best Buy for the electronics consumer) begs the question of what each company missed in terms of developing a successful strategy to accomplish their goals.

The reasons these companies exited China has been batted around by a number of journalists and market researchers. In the case of Home Depot, not taking into account that a DIY culture simply does not exist in China like it does in the United States was certainly one fatal flaw unique to their business model. Home Depot either overlooked, undervalued, or believed it could change the Chinese consumer’s preference for how the traditional empty apartment was finished and furnished in such a way as to create demand for a DIY culture. For Best Buy, issues with brand recognition in comparison to established Chinese retailers like Gome, as well as the problem of similar (note this does not mean equivalent) products being sold at cheaper prices by other Chinese retailers than what Best Buy could offer proved to be terminal issues. Best Buy’s higher quality was, surprisingly, not so much misunderstood by Chinese consumers as it was not valued enough to make up for the higher cost.

Regardless of whether pundits believe that better market research or a more highly tuned strategy might have allowed either company to be successful, the bottom line is it takes guts to try and transplant your business model into a foreign country and consumer culture, especially one as dynamic and evolving as China. What did these two companies do wrong? That is an important question to ask and answer, and one to which we will turn our attention to in a subsequent post here at the blog, but before we do, it is important to give them a shout out for having had the courage to fail in what is one of the most important business challenges of the 21^st Century. What Home Depot and Best Buy tried and failed at is the same question almost every company in North America and Europe needs to ask and answer: how am I going to develop a strategy for selling to new middle class consumers in emerging economies?

In many ways, these two North American retailers understood three factors that shaped the world of the last twenty years were going to go away and that something new would need to be developed to replace their impact on the retailers’ financial performance. These three factors benefited everyone in the business world and in their absence, businesses of every size need to find new compelling ideas that will drive their companies forward absent the influence of three trends whose influence is waning. These three are first, the impact of the “China Price” on their P&L which drove significant gross margin improvements, second the over-expansion of the suburbs in North America related to a combination of government policy and mortgage rates, and lastly the broad availability of inexpensive credit for consumers to use at their discretion. The alignment of these three factors was a once-in-a-lifetime event. Politicians in Washington want to figure out how to re-create some (or all) of these factors (not likely), but businesses want to figure out how to re-create the impact these factors had on both their top and bottom lines. Right now the best opportunity does not appear to be selling more to tapped out North American and European consumers; no, it is figuring out how to develop products for, market to, and sell through emerging markets.

Retailers felt the pinch first when these factors were attacked post the 2008 financial crisis, and it was more than a little foresight in advance of that event which took both Best Buy and Home Depot into emerging markets to try and pre-emptively find the next great story that would push their business’ growth and profitability forward. Yes, they failed in their efforts. But failure is going to be a prerequisite for success and, perhaps what is most important to keep in mind for both B2B and B2C companies is that failure at building a strategy for selling into emerging economies really is not an option. Whether you are an industrial company selling controllers to the power distribution system, a healthcare provider, or a consumer goods company, figuring out how to navigate emerging markets is one of the most important strategic issues your business must navigate. Don’t let the setbacks of these two retailers convince you otherwise; in fact, view their failures as short-term, survivable and necessary to success.

Thinking About Indonesia

The November/December 2011 Foreign Affairs has a very good article by Karen Brooks, Adjunct Senior Fellow for Asia at the Council on Foreign Relations, titled “Is Indonesia Bound for the BRICs?” Brooks does a very good job presenting three things about Indonesia: the size of the opportunity, where the country is coming from, and what remains to be done in order for it to become a legitimate entrant to BRIC-like status.

Indonesia is the fourth largest country in the world (200 million people), but its highly fragmented geography coupled to its dilapidated infrastructure present the country with major problems in terms of developing a manufacturing base and ensuring efficient distribution of raw materials and foodstuffs. As Brooks writes, “In some regions, the price of basic commodities is up to three times as high as on the main island of Java.” For a country composed of some 17,000 islands, poor transportation infrastructure may be one of the most important evolutions the country’s leadership needs to make to ensure its GDP growth continues (growth that, according to Brooks has been “at an average rate of more than five percent per year, including 4.5 percent in 2009, when GDPs in much of the rest of the world shrank”).

Catherine Eddy, Managing Director of Neilson Indonesia wrote the following about the evolving status of the Indonesian consumer:

In the midst of the global financial crisis in 2008, consumer spending in Indonesia flourished, almost seemingly as if the word “crisis” was not a part of the vocabulary in the country. Sales of FMCG products increased 21 percent in 2008, car sales were up 39 percent and cellphone penetration reached 48 percent in Indonesia’s big cities. Consumers spent even more in 2010, with sales of FMCG products rising 12 percent from 2009 levels and car sales blazing a trail with a whopping 58 percent increase.

What prevents Indonesia from being perceived as more of an opportunity by American and European multinationals? The country’s 1998 political revolution that saw Suharto fall from power coupled to the country’s past problems with militant separatists and terrorism undoubtedly has played a role. Similarly, because the country is the largest Muslim country in the world, many American companies in particular have struggled to effectively leverage their brand as a Western (American) aspirational or reputational brand with the Indonesian consumer.

Given the world’s population of Muslims stands over 1.7 billion, Western companies must learn how to comfortably navigate selling to this market. If they do not, emerging economies in Africa, the Middle East and South East Asia that are predominantly Muslim will develop affinities for Chinese brands, something that would set back American companies as they look to increasingly rely on the world’s emerging middle class. These are all surmountable problems if American brands take what they have learned from selling into other emerging economies and make sure the products and services they offer take into account the unique cultural and context of the Indonesian consumer.

Emerging Markets & China

Today’s headline from the always humorous (although not intentionally) China Daily says it all: “Emerging Markets Pad Fall in Chinese Export Orders.” Tracking one of the most historically important trade show in China, and one of the more critical in terms of order-taking for Chinese SMEs, the 110th China Import and Export Fair (aka the Canton Fair) saw a 19% decline from EU buyers, and a 24% decline from US buyers; however, the paper noted a 9% overall increase in orders from emerging markets. I’ll go on record as saying that while this is positive, it remains to be seen whether the 9% increase in emerging market orders can offset double-digit declines from developed economies.

Regardless, this all reminds me of what Tom Barnett has said about the ease with which the Chinese can sell into and work within other emerging economies versus the difficulties – historic, political, cultural and contextual – that American firms face. Emerging markets are too important for Americans and Europeans to pass up and simply let the Chinese dominate. The question is which emerging markets should you prioritize, and how do you build a strategy for selling into the markets in question.

What Do You Think When I Say Pakistan?

This week, while attending the Invest Korea event in Seoul, I had the pleasure of meeting and spending some time with Walled Al Falahy, the CEO of Dubai Consultancy, an investment advisory company in Dubai. While explaining the sort of investments his firm is looking for, he leaned over to me and said “what do you think when I say ‘Pakistan’?” Trying to be as political as possible I ended up swallowing my tongue and sputtering out something indecipherable. He cut me off and said, “I know you westerners, you think ‘terrorists’.” OK, he had me on that one. Having just recently finished Pamela Constable’s book Playing with Fire: Pakistan at War with Itself, you would have thought I could have come up with something more insightful, but he was right: my mind immediately went to exactly where he knew it would.

Al Falahy went on to share that as he and his company saw it, this was a perfectly fine response from westerners because it meant smart money from Dubai could continue to have the Pakistani market to themselves. Specifically, what does that mean for his company? As just one example, Dubai Consultancy has invested in a large agriculture feed stock program which allows them to bring into the UAE animal feed from Pakistan in bulk at prices well below what they could from other regional providers, or what they could purchase these inputs at on the global commodity markets.

The business they have ownership in negotiates a fixed price they will pay Pakistani farmers for growing a particular sort of animal feed. This price includes everything from water, to seed, to fertilizer, to transportation to the Pakistani port. The model accommodates a highly fragmented Pakistani agricultural market, with few large farmers but many small subsistence-level producers. His point in explaining this all to me was that as an investment firm, his clients know he can find opportunities where western capital is not willing to go largely because of perceived (versus actual) risk. This creates a lot of room for a firm like his to maneuver in the emerging economies where American and European money is not willing to participate.

Rubicon is certainly not advocating you rush out and buy the first ticket you can to Islamabad. But the larger point bears repeating: some of the most interesting markets are those where western firms are least likely to pursue because they are extremely uncomfortable with the risk/reward relationship. Where this risk is real (Iraq, Sudan, etc.) there is a compelling reason to stay away; but where this risk has been blown somewhat out of proportion (Philippines, Indonesia, Kenya, etc.), think about how to stay engaged and work smart. It’s equally important to ask yourself if the issue is risk versus an underlying lack of confidence in your ability to understand what it will take to navigate around the market in question. If you don’t figure these things out, you’re ceding important ground to your competitors, and at some point they are going to have the critical mass to challenge you not only in these emerging economies, but in your stable export markets of today as well.

Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

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