China and India Are Hungry … for Your Products
Now, the two most populous countries also are the fastest-growing; their burgeoning middle classes are developing Western cravings.
By Dave Fusaro, Editor in Chief | 10/05/2011
It's been going on since time immemorial, but more attention seems to be paid these days to the rising economies in the "developing world." And, for food and beverage marketers, a holy grail is the rising middle classes in countries such as China and India.
"Heinz is strategically focused on accelerating our growth in emerging markets like Brazil, China and India because these countries have higher birth rates, increasing numbers of middle-class consumers and growing economies," says Michael Mullen, vice president of corporate & government affairs for H. J. Heinz Co. While it's based in Pittsburgh, Heinz claims to be "the most global U.S. food company." And with nearly two-thirds of its sales coming from outside the U.S., that's no exaggeration.
"Emerging markets have become the primary growth engine for Heinz and are on track to generate more 20 percent of total company sales [about $2.5 billion] this year [fiscal 2012], more than double their contribution in fiscal 2005," he says.
A report from the Wharton School (of business) at the University of Pennsylvania states: "A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers." (Learn more about the report at The New Global Middle Class: Potentially Profitable -- but Also Unpredictable)
"…that tailor products," the report says. That's the key point. For some products and some emerging-markets consumers, a bag of Lay's potato chips or an American-style fried chicken leg is perfect as-is. For other markets, maybe the chips should be namkeen (Indian fried dough strips). And maybe they should carry the Kukure brand rather than Lay's.
The World Bank estimates the global middle class will grow from 430 million in 2000 to 1.15 billion in 2030. In 2000, developing countries were home to 56 percent of the global middle class, according to the Wharton School report, but by 2030 that figure is expected to reach 93 percent. China and India alone will account for two-thirds of the expansion, with China contributing 52 percent of the increase and India 12 percent, according to the World Bank.
The world's middle class has, until recently, been concentrated in Europe, North America and Japan. In the 1970s and 1980s, countries such as South Korea, Brazil, Mexico and Argentina also built sizeable middle-class populations. "Nowadays, it's China and India," says Mauro Guillen, a Wharton management professor.
"The driver is economic growth. As the economy expands, the domestic market starts to become bigger, and it is typically a middle-class market."
As a result, multinationals that so far have viewed developing nations largely as a cheap source of labor are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods. "Countries like India consist of young consumers who are ambitious and save quite a bit, but are also willing to spend on small luxuries like Western brands of consumer packaged goods," says Jagmohan Raju, another Wharton marketing professor.
The Chongqing plant is the first food & beverage plant in China and the first international PepsiCo site to receive LEED gold certification.
China is expected to become the world's third-largest consumer market by 2025, as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute (www.mckinsey.com/mgi), the consulting firm's independent economic research arm, projects China's middle class will increase from 43 percent of the population today to 76 percent by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term," says Diana Farrell, the institute's director. "China has maxed out on the input model."
The institute projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth.
"Clearly this broad expansion of a middle class with discretionary income to buy more than life's necessities presents a remarkable opportunity for multinational corporations," the Wharton report continues. The middle class in any country is at the forefront of consumption and leads important business trends. Marketers must pay close attention to this population to reap the benefits.
At the same time, even though millions of individuals are now reaching middle-class status in their own countries, they still do not have the same levels of income as their counterparts in mature economies. To capture customers in these markets, companies must create new products that take into account price sensitivity.
For example, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets, the Wharton report notes. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor -- a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West. "Coca-Cola customized a product for lower price points so that [those consumers] can have a taste of the product. As the economy grows and more people join the middle class, demand will keep increasing," says John Zhang, another Wharton professor and co-author of the report.