Few people familiar with Unilever’s household brands would associate the Anglo-Dutch consumer goods multinational with low-cost sachet products. Indeed, consumers accustomed to brands such as TRESemmé hair care, Radox bath and shower gels and Dove personal care might be surprised to learn that most of Unilever’s best-performing products are sold by the sachet to individuals across the southern hemisphere with little access to hot water.

Two-thirds of the world's population has an annual income of less than $1500, and Unilever has spotted an opportunity in this market. The company, which had an annual turnover of £42bn ($65.8bn) in 2012, saw its strongest sales growth occurring in Asia and Africa. And in these new markets, a series of different trends emerged. In India, the company's Ala brand of detergent proved popular among customers who washed their laundry in river water, while in Indonesia, the firm found that one-third of its revenue came from purchases costing less than $0.20.


Unilever's experience highlights a greater shift that has taken place in the global consumer products industry, with rising household incomes in emerging markets leading companies to increasingly look east and south for growth. “For the global retailing industry, emerging markets are a better place to focus on than the developed markets, as they are likely to grow faster,” says Ira Kalish, director of global economics at Deloitte Research.

Shifting demand

While the core operations of most Western retailers will remain focused on their domestic markets in Europe and North America, several companies have started expanding into emerging markets. US-based retailer Walmart acquired 51% of South Africa’s local retail chain Massmart in mid-2011. A few months later, in November 2012, UK-based clothing company Arcadia Group also established a presence in the country, opening a flagship Topshop store in Johannesburg.

While large emerging markets such as South Africa, China and Brazil have captured the imagination of investors, companies including French supermarket chain Carrefour and German retailer Metro Group have also established operations in more remote locations such as Lahore in Pakistan and Yekaterinburg in Russia.

“There is a huge shift in demand towards the east and south as consumer spending in mature markets never really recovered after 2008,” says Andrew Cosgrove, consumer products global lead analyst at professional services firm Ernst & Young. “The demand is growing and emerging markets will offer consumer products companies huge opportunities.”

HSBC predicts that annual consumption growth in developed economies will be less than 2% over the next four decades, and that emerging markets will represent 50% of all global consumption by 2025. The emerging class of consumers from the developing world have powered global retailers’ rising interest in the emerging markets. And, according to David McCorquodale, the UK head of retail at professional services firm KPMG, it would be a mistake to assume growth will only be centred around consumers at the lower end of the price-point scale.

Pointing to the success of high-end fashion brands such as Burberry and Mulberry in China, Mr McCorquodale says: “The middle classes in China have started to get money and they want to spend it on things that they think look cool and affluent, so brands such as Burberry and Mulberry are doing well, if you look at the luxury end of the market. Brazil, Russia, India and China are growing much more quickly than the UK, and therefore companies will find their economies attractive.”

Growing numbers

Despite starting from a low base, adult population growth across several emerging economies has fuelled the pace of urbanisation. As a result, several cities have become significant centres of wealth and the population boom, particularly in south-east Asia, sub-Saharan Africa and Latin America, will become concentrated in large cities. The burgeoning populations of Jakarta in Indonesia, Lagos in Nigeria and Bogotá in Colombia, which host 28 million, 15 million and 10 million people, respectively, were identified by Deloitte as significant hotspots that are set to attract global retailers in coming years.

While companies initially focused on targeting the middle classes, opportunities will also be driven by these regions' poorer consumers. With the poor representing as much as 82% of the urban populations of countries such as Indonesia, Nirgunan Tiruchelvam, director for Asia consumer markets at Standard Chartered, says that consumer product companies that adjust their business models to cater to this market could tap into lucrative opportunities. “In Indonesia, for example, the consumption of people with a daily income of less than $4 [will increase at] a compound annual growth of 6.4% over the next decade,” he says.

Nonetheless, Tesco’s travails in China show that despite presenting seemingly positive growth on paper, an ill-timed investment in developing markets can come at a great cost. After initially announcing its decision to scale up its presence in China in 2010 by establishing 200 hypermarkets across the country, the UK-based retailer had to close down some of its Chinese outlets at the end of 2012. This move reveals the complex realities that local consumer needs present to foreign businesses.

A lack of in-depth knowledge of local markets has frequently led to instances where a global brand has lost its market share to a local company. “The global retail landscape is littered with the remains of retailers that thought they had an advantage, simply because they had more cash,” says Mr Kalish at Deloitte Research.

“In the 1990s, Walmart went into Indonesia and established stores that looked the same as their US stores. From the Indonesian perspective, they looked expensive. There was a local chain called Mega-M which had dust on the floor and the merchandise piled in an unkempt manner. From an Indonesian perspective, that looked like what they were used to, and Mega-M did much better than Walmart.”

Being in their very nature 'developing', another significant characteristic is that many of these countries lack the requisite infrastructure that most Western companies are accustomed to. As a result, companies have experienced significant setbacks in managing the complexity associated with operating in developing countries.

“The big challenge for many consumer product companies is that when they push into emerging markets, the traditional distribution channels are not there,” says Guy Blissett, global lead for wholesale distribution at IBM. “There is not a Tesco in every town, or convenience stores on every corner. So when it comes to distribution, companies will have to work hard to leverage existing pieces of infrastructure.”

Profitability challenge

Although the consumer goods sectors of developed countries are becoming saturated, the promise of emerging markets, particularly in Africa, will not fully materialise for some years. Growing from a low economic base means the return on investments that retailers can expect to receive from countries such as India and Nigeria can only be tapped into in years to come. Boris Planer, the chief economist at retail intelligence firm Planet Retail, estimates that while China will remain the dominant retail story for investors, returns in places such as India and Africa will only become evident in another 20 years or more.

Although the epicentre of the global consumer market is shifting towards the developing world, consumer product companies that can establish a balance between incrementally scaling up operations in emerging markets, while maintaining a core presence in the developed economies, will be best placed to cope with the sector’s evolving demands.

For Mr Planer, the companies that can adjust their model accordingly will have much to gain. But, he cautions, given the challenging market conditions, investments in emerging markets will continue to lag in terms of profitability. “Companies need to be careful about where they invest, and put investments in the most promising markets with the best returns,” he says. “For now retailers will invest in China, as well as Brazil. Africa is too small for any big investment stories in the near future, and it will [remain so] for several years.”