New Ruling Class
Emerging-market consumers will
overwhelm our industry in 15 years unless we are prepped, are
flexible and have boots on the ground.
In just 15 years, half the world’s population will have
the discretionary income to consume beyond the basic
necessities of life. That growth will push annual consumption
in emerging markets to $30 trillion, according to a McKinsey
& Co. report, Winning the $30
Trillion Decathlon: Going for Gold in Emerging Markets.
It took Britain 150 years and the United States 50 years to
double their per-person economic output after
industrialization. In contrast, it took China only 12 years and
India only 16 to double their GDP per capita.
The insurance industry has been trying to figure out how to
capitalize on this phenomenal growth. The complaint I often
hear from brokers and insurers is how difficult it is to gain
market share in an emerging economy. Many believe if they build
it, the consumers will come. Unfortunately, that is not
necessarily so. As McKinsey found, many CEOs of multinationals
are “vexed” over how to turn the opportunity into
market share. “Many acknowledge that despite greater
size, larger capital bases, superior product technology and
more sophisticated marketing tools, many are struggling to hold
their own against local upstarts,” the report says.
In fact, the developed world’s 100 largest companies
derived only 17% of their total revenue from emerging markets
in 2010, while those same markets contributed 36% to global
GDP. McKinsey predicts that emerging markets will contribute
more than 70% by 2025.
Breaking into these markets doesn’t happen overnight.
McKinsey likens the process to a decathlon, where winning
depends on all-around performance. In this case, companies have
to master three strategic issues: targeting urban cluster
areas; seizing opportunities; and staying in for the long
The report lists 10 disciplines for winning.
Target urban growth clusters:
Too often multinationals take a countrywide approach to
emerging markets, ignoring the “diversity of consumer
preferences, purchasing power, and market conditions”
offered by mid-sized cities with growth potential. To
illustrate, the population in emerging-market cities grows by
“65 million people a year—the equivalent of seven
cities the size of Chicago.” A strategy based on a
“cluster approach” that targets these second-tier
cities is more likely to succeed than one blanketing the entire
Anticipate explosive growth:
Timing is everything. Pay close attention to the three phases
of the S curve of product demand: the “warm-up
zone” where demand gathers steam and incomes begin to
rise; the “hot zone” where consumers have the money
to buy; and the “chill-out zone” where demand
flattens or drops off. The S curve will vary by product or
service. Insurance and other services often take off when
income is higher.
Devise segmented strategies for local
relevance: Tap into the middle class. Global companies
often divide consumers into two groups: the rich with money to
burn and the poor looking for the lowest prices. Ignoring the
growing middle class in emerging markets is a mistake.
According to the McKinsey report, “more than half of all
Chinese urban households…will be solidly middle class by
Radically redeploy resources for the
long term: Winners in emerging markets will have to take
big risks and react quickly to change to compete with more
agile local competitors. Local companies often grow faster and
are far better at adapting to changing local consumer needs
than their developed-market competitors.
Innovate to deliver value across the
price spectrum: One size doesn’t fit all.
Multinationals have to be willing to innovate and tweak
products to meet local demand. For example, in India LG
improved the speaker quality on its TVs because consumers liked
to listen to music on the TV.
Build brands that resonate and
inspire trust: Emerging-market consumers are younger and
more optimistic than their developed-nation counterparts, but
they are new to consumerism and their patterns are in flux. To
compete with other products, brands have to build trust and tap
into these consumers’ new lifestyle.
Control the route to market:
The in-store experience matters more to consumers in emerging
markets than to consumers, say, in the United States.
Multinationals will have to focus more time and energy in
emerging markets on in-house sales and the consumer