Winning in Emerging Markets Final

8/6/2019 Winning in Emerging Markets Final

1/12

Winning in Emerging Markets

The Quest for High Performance in

China, India and Vietnam in the ConsumerPackaged Goods and Retail Industries


2/12

2


3/12

3

A significant marketopportunityWith fast-growing economies and robustGDP growth projections over the nextfew years, the emerging triumvirateof China, India and Vietnam is set to

provide a significant market opportunityfor consumer packaged goods andretail companies. Accentures HighPerformance Business research has shownthat emerging markets will be the keybattleground for companies; the ability tobe in the right place at the right time anddominate these markets will distinguishthe industrys high performers.

The growth story across China and Indiahas numerous similarities. Each marketis characterized by a large population.While the majority of people reside in

rural areas, there is rapid urbanization.The booming economy is producing arising middle class with greater disposableincomes and increased propensity tospend. The burgeoning middle class isexpected to form the largest consumersegment in each of these markets. InIndia, for instance, the middle-class isexpected to form 75 percent of the urbanpopulation by 2020.15

Furthermore, India and Vietnam benefitfrom favorable demographics, with close

to 50 percent of the population under25 years.3 In comparison, China is facedwith the challenge of a rapidly ageingpopulation-30 percent of the populationis expected to be above the age of 60 by2050.6

Consumer packagedgoods industrygrowing at a rapid

paceThis vast market opportunity is set totranslate into projected industry growthrates of nearly 9 percent1 in these threemarkets. However, the growth trajectoriesvary across the countries. China, witha consumer packaged goods market of$470 billion (the largest amongst thethree), is set to grow at 9 percent1 from2006-10, while the Indian consumerpackaged goods market (valued at $140billion in 2006) will grow at 6 percent1over the same period. Meanwhile, Vietnam($7.2 billion in 2006) is at a growthinflexion point and is expected to registera high growth rate of more than 16percent1 from 2006-10.

The packaged food segment dominatesthese markets with a 47 percent1,2 shareof the consumer packaged goods categoryin 2006. Though this segment remainsfragmented, companies are beginningto consolidate their market share. InChina for example, local companieshave increased their market share from

14 percent in 2001 to 26 percent in2005. The player mix varies across thesemarkets: Multinational corporations(MNCs) have traditionally enjoyed astrong presence in India, while China andVietnam continue to see higher marketfragmentation and domination by localplayers.

However, the fast-growing fashionand alcoholic beverages segments areexpected to lead future growth in thisregion, with growth rates over the period2006-10 of 10 percent to 19 percent and

10 percent respectively.1

Three factors stand out as drivers offuture growth:

Evolving consumer needs of health,convenience and indulgence as themiddle class grows16

New category entrants, such as workingwomen and youth as demographics andlifestyles change17

Rapidly rising penetration of organizedretail9,12

Key trends andimplications forconsumer packagedgoods manufacturersThe emergence of a world characterizedby multiple centers of economic powerand activitya concept Accenture callsthe multi-polar worldis driven by three

powerful, mutually reinforcing trends:technology, economic openness andmultinational strategies. There are fivekey dimensions of the multi-polar world:winning talent, the flow of capital, thebattle for resources, emerging consumersand the new map of innovation. Thoughthese dimensions are applicable to theemerging cluster of China, India andVietnam, the unique characteristics ofthis block requires one to consider anadditional dimension of Unique ValueChain from the perspective of both the

manufacturers and retailers.

1. Winning talentChina, India and Vietnam have a largepotential talent pool with the first twocountries accounting for more than60 percent of the total global workforce.11Although many MNCs are boosting theirglobal operations, Accentures research

indicates that most are still failing todevelop the operational readiness ornurture the talent excellence to supporthigh performance on a truly global scale.Talent development, particularly by MNCs,remains chequered across these markets.While India shows a traditionally strongemphasis by MNCs to develop talent,China and Vietnam lag behind in thisaspect. A survey of companies in Chinashowed that many joint ventures faileddue to inadequate transfer of control ordevelopment of local managerial talent.23

Escalating wages and rising attrition levelsare proving a challenge to consumerpackaged goods companies due to thelack of people with the right skills and anincreased global demand for local talent,especially in India and China. Further,demand from other growth sectors suchas IT in India, is causing a shortage inindustries like consumer packaged goods.Vietnam in particular lacks in sufficientlocal managerial expertise, but thegovernment is now investing in educationand training.

Business implications

Continued investment required in

managerial talent

Due to high demand in the labor market,recruiting and retaining managerial talentrequires continued investment. Newentrants especially need to invest early inpeople.

Empower local talent

Consumer packaged goods companiesshould invest in building predominantly

local management.

Understand the culture

Understanding culture-specific issuesremains key, especially in China.

Be ready to deal with rising wages

Since supply is unable to meet demandin China and India, companies need tobe prepared to deal with rising wageinflation coupled with a global talentshortage. The local workforce is beinglured into other sectors, such as IT andbusiness process outsourcing. In addition,

there is a global demand for Indian andChinese talent due to a shrinking labormarket and changing demographics in theUnited States and Europe.


4/12

4


5/12

5

2. The flow of capitalIncreased government liberalizationhas led to a sharp rise in foreign directinvestment. The increased foreign directinvestment has in turn spurred a risein cross-border acquisitions in Chinaand India. Vietnam continues to see an

increase in investments by multinationalcompanies and regional players(particularly Taiwanese companies), withnearly 80 percent of new foreign projectsbeing green-field ventures.7

A key development has been the accessionof China to the World Trade Organization(WTO) in 2001 and of Vietnam in 2007. Thishas led to a steady decline in trade barriersbesides opening these markets for theimport of foreign goods. As a result, thenumber of MNCs has grown in Vietnam,where the consumer packaged goods

sector has been traditionally dominated bylocal firms. India, however, has increasedits global investment, with the consumerpackaged goods sector witnessing big-ticket acquisitions in the beverages space.


Evaluate multiple entry options

Firms now have multiple options forentering these marketsincluding jointventures, mergers & acquisitions, andgreen-field investments based onthe capabilities required. However, itsimperative for new entrants to assess themerits and demerits of partnering withlocal companies.

Ensure strong management controls in

case of joint venture

Though joint ventures remain a favoriteentry route among new entrants, pastexperience shows that not all have beensuccessful. In a survey of companies inChina who used the joint ventures toenter the market, 56 percent did not meetprofit targets due to non-alignment of

partner strategies and weak managementcontrol.23

Challenge for domestic players

Domestic players in these marketswill face competition from increasedforeign brand penetration. In Vietnam,domestic players are likely to faceincreased challenges from the rising costcompetitiveness of MNCs combined withfalling import tariff barriers.

3. The battle for resources

China and India are faced with thechallenge of balancing the large growingenergy demand of the regions hugepopulation with the relative shortage of

domestic resources which has resulted inthe increase in energy prices significantly.The oil prices in these countries haveincreased by 50 percent to 70 percentover the last five years.

The degree of impact of energy demandversus price on the consumer packagedgoods industry has been different across

various categories. However, mostsegments in this industry have beenadversely impacted due to shortages andrising prices of raw material resources.

Glass as well as molasses, which are majorcomponents in the alcoholic beveragesindustry, has witnessed a price increaseof 25- 35 percent and 6-9 percentrespectively in India alone over the lastyear due to rising oil prices. Similarly,palm oil and petroleum oil, which are keyraw materials in soaps and detergents,

have seen price increases of 55 percent inthe last year resulting in the increase ofoverall production costs by 3 percent to4 percent for manufacturers.

The rising demand for biofuel productsdue to oil shortage has also increasedfood grain prices. The price of rawmaterials such as sugar, flour and palmoil, has risen by 25 -30 percent in Indiaimpacting the food industry.

In 2007, the China CPI (Consumer PriceIndex) increased by 6.9 percent, reaching

its highest level in the past 11 years dueto oil and energy prices. In particularcrops were affected: rice-6.6 percent,food oil-35 percent, meal-56 percent, andcotton-4 percent, significantly impactingthe cost of raw materials for all consumerpackaged goods companies includingbeverages (alcohol & non-alcohol),clothing, personal care and household.

Other costs such as transportation,packaging material and the cost of energyto run plants are creating constantmargin pressures on the industry.

Another impact is the overall price leveland inflation. The magnitude of impactwill depend on the degree of monetarytightening, the extent consumers seekto offset their expenses through higherwages and the extent to which producersseek to restore profit margins, but it couldcreate a wage/price spiral for the industry.

Understanding the need to sustaineconomic growth, both China and Indiaare looking at overseas exploration andalternative resources for additional

supplies of energy. But in light of theincreasing demand-supply gap and risingglobal prices, the pressure on energyprices in China and India continues.


Increase efficiencies

Focusing research & developmentefforts on improving overall productionefficiencies with better consumptionratio/yields to absorb the increasingraw material costs and remain pricecompetitive will be essential.

Look for alternative resources

Companies in these regions will needto identify low cost resources andalternate raw materials to sustain in thecompetitive market.

4. Emerging consumers andinnovationBy 2020, 35 percent of the worldspopulation is expected to reside in Chinaand India.18 It is estimated that the

number of middle-class households inChina and India will reach nearly 128millionexceeding the number of middle-class households in the United States by2020and likely to result in significantdemand impetus.3 In addition, numerousdemographic and lifestyle changes areconverging in China, India and Vietnamto make these markets even morelucrative for consumer packaged goodsmanufacturers.

For instance, the growing urban middleclass and a young population meanthat large numbers join the consumingclass every year. Increased globalization,urbanization and rising education levelsare leading to more women joining theworkforce. There is also a rise in thenumber of single-family householdsin these markets, moving away fromtraditional joint family systems.

As a result, consumer needs and desiresare evolving. Consumers in these marketshave been largely price sensitive, thoughthis is now changing, mainly in the urban

areas. For instance, Accentures researchindicates that the middle classes arestarting to trade up in many homecarecategories in emerging markets. Inaddition, urban consumers are drivingthe preference for convenience products.An evolving health-consciousness ispart of a global trend toward healthierand environmentally safer consumerproducts. Rural markets are also showingan increased preference for brandedproducts. In the alcoholic beveragesmarket, Accentures High Performance

Business research shows that highperforming companies targeting emergingmarkets to spearhead their drive for highperformance can take advantage of these


6/12

6


7/12

7

changes by creating a global market ofkey local brands that deliver high marketshare and profitability.

China, India and Vietnam have also seena sudden rise in urban spending on luxuryand premium goods as income grows.For instance, in the alcoholic beveragessector, Accentures research has shown

that in several Asian countries, middle-class drinkers are trading up and willaccount for an increasing share of valuegrowth in the future.19

Clearly, these lifestyle changes have thepotential to drive innovation. Consumersare more open to innovation and MNCsare increasing country-focused R&Dspend in these markets.[Accentures Innovation survey in China(Jun 07) showed that new products havehad a positive impact on consumers,

making them more efficient among otherbenefits].

Within the food and non-alcoholicbeverages segment, Accentures HighPerformance Business research suggeststhat the businesses best positioned totake the lions share of future value todrive high performance in these emergingmarkets will make innovation a key partof their strategies. High performers willfocus on a limited number of attractive,innovation-sensitive categories andniches; they will seek to dominate these

categories by being the first to spotnascent consumer trends, rapidly andcontinuously innovating against themand rigorously focusing their marketingspend on their most successful productsand brands.


Satisfy price-value equation

Companies will need to innovate to tackleprice sensitivity. For example, the LUP(low unit pack) strategy was a success in

Indiashampoo sachets costing 2-4 centsrevolutionized category sales and nowconstitute 70 percent of the shampoomarket.

Increase R&D spend

Consumer packaged goods companiesneed to increase spend on localizedR&D and product innovations focusedon evolving consumer needs anddemographic and lifestyle changes.

Address differential needs of urban and

rural consumers

Each of these markets have skewedurban-rural consumption patterns due toincome and cultural differences. A growthstrategy must cater to this landscape.

Invest in branding and advertising

Companies need to drive category growththrough increased spend on brandingand advertising. To do so effectively,Accentures High Performance Businessresearch indicates that high performers willneed to turn insights derived from listeningto consumers into a differentiating

customer experience and create theconsumer needs of the future. Portfoliomanagement and innovation marketingwill be crucial to ensure that branding andadvertising money is spent wisely.20

5. Unique value chainThis dimension has a varying impact onconsumer packaged goods manufacturersand retailers.

Implication for consumer packaged

goods manufacturers

China, India and Vietnam continueto face considerable supply chainchallenges. A fragmented supplier basemakes raw material supply inconsistent.Coupled with price controls on certaincommodities and government protection(for example, tobacco in India), sourcingcan be a challenge.

Each country has a multi tiereddistribution structure to retail andservice the vast geographic spread ofthe market, leading to high distributioncost. The logistical challenges includepoor infrastructure, limited presence ofthird party logistics players and absenceof cold-storage, necessitating a trade-offbetween transportation costs and stock-outs. However, the scenario is graduallychanging. China, in particular, has seenthe entry of multinational third-partylogistics companies that are expandingtheir reach in this market.

In spite of these distribution and logisticalchallenges, these markets are attractiveas manufacturing and sourcing hubs,

primarily due to access to raw materialsand low labor costs. In China, MNCs areincreasingly pushing into tier two cities tofurther gain labor cost advantages, whileIndia is seeing an increase in contractmanufacturing.20 Since its accession tothe WTO (and the resulting fall in tariffs),Vietnam is recently emerging as animportant manufacturing and sourcinghub.

Accentures High Performance researchshows that those companies able tocontrol the route to the consumerensuring the availability of their productsand brands to target consumers in theoutlets of their choicewill positionthemselves as the future high performers.


Focus on building relationships with

suppliers and distributors

Specifically in China, it is critical to buildand maintain relationships (called theguanxi system in China) across thesupply chain. Accentures research revealedthat Chinese high performers leveragerelationships with governments, industryassociations, international companiesand even competitors to compete moreeffectively in the local market.25

Manage complex, multi-tiered

distribution

Consumer packaged goods companiesneed to manage a regionally fragmenteddistribution system due to differingtax laws in India and varying provinciallaws in China. Companies also needto effectively manage goods flow and

channel inventories across the networkfor better inventory management.

Align global supply chains

Companies need to leverage the low-costsourcing potential of China, India andVietnam while overcoming the challengeof a fragmented supplier base. Forinstance:

Nestle is sourcing coffee from India forits global production needs

Japanese food firms have bases inChina for sourcing raw materials

Li & Fung, a Hong-Kong-based appareltrading firm, acts as an intermediarybetween apparel retailers and avery fragmented base of textilemanufacturers and suppliers acrossChina and South East Asia

Implication for retailers

Though each of the countries differ interms of retail market maturity, looseninggovernment regulations and the increasedpresence of MNC retailers are set tocatalyze growth going forward. India and

Vietnam, with low retail penetration of3 percent and 7 percent respectively, areset to grow rapidly in the coming years.1,12In China, which has an organized retailpenetration of 25 percent, penetration isexpected to grow at an approximate 11percent compound annual growth rateover 2006-10. In each of these markets,non-food retailing is likely to drive retailgrowth.1,14

All three markets are seeing a rapidrise in the number of retail formats

(supermarkets, hypermarkets, conveniencestores) catering to varying consumer needs.However, to attain a profitable retail model,particularly in India, companies will need tofactor in high rental costs.


8/12

8


9/12

9

Currently, the retail markets remain highlyfragmented with a large presence oftraditional retail outlets. For instance, inIndia, more than 5 million kirana outletscontribute to 97 percent of retail sales.9 InChina, where organized retail penetrationis the greatest at 25 percent, the top fiveorganized retailers share only 5 percent

of the market. Globally, the average shareof top five retailers is approximately 50percent to 70 percent.22

Even within organized retail (sometimescalled modern trade), domestic playerscontinue to dominate, but the presenceof multinational companies is rising,including in India and Vietnam. Whiledomestic retailers like Lianhua dominatethe market in China, consumers rate MNCretailers like Carrefour and Wal-Marthigh on in-store shopping experience.21

With the increased entry of multinational

retailers in China, there is likely to bemore consolidation in the retail space.


MNC retailers need to determine right

entry strategy

While MNC retailers will need to focuson the right entry strategy for India andVietnam, domestic retailers in all threemarkets need to deal with increasedcompetition.

Benefit from economies of scale

Increased retail consolidation, particularlyin China, will lead to economies of scalebenefiting large players, both domesticand MNC.

Increased bargaining power of retailers

will lead to margin squeeze

The rise of retailer power is likely to be anadditional source of margin pressure forconsumer packaged goods manufacturers,along with rising commodity prices.

Differential service models

Consumer packaged goods companies

need to have different service modelsto cater to the various emerging retailformats, like supermarkets, hypermarketsand convenience stores, as well asthe traditional mom and pop retailstores. Suppliers need to be moretightly integrated with retailers globalsupply chain: The global operatingmodels of leading food retailers havetraditionally been aligned with thoseof food manufacturers; for instance, tointegrate more closely with the retailerssupply-chain, manufacturers will locate

production bases closer to the retailers.

Building capabilitiesfor successTo address the implications of thesemulti-polar trends and drive highperformance, consumer packaged goodsmanufacturers will need to build certain

distinctive capabilities.

1. Consumer-driven strategyThis implies an aligned and adaptiveoperating model capable of rapidlyresponding to and taking advantage ofevolving sources of value creation acrossthe global base.

With many companies now entering thesemarkets, an accelerated market entryand growth strategy is a key imperative.For those that aim to grow through

acquisitions, the post-merger integrationprocess is critical to realize value to thecompany.

In the Indian alcoholic beverages market,main player United Spirits acquired ShawWallace and went through a seamlesspost-merger integration process. As aresult, the company saw an increase ofmore than 50 percent in revenues andthe creation of the third-largest alcoholicbeverages firm in the world, with adominant share in Indiaone of the high-potential markets globally.

2. Demand fulfillmentCustomer service and fulfillment

excellence

In the face of a large, differentiatedcustomer base, emerging retail formatsand the rising power of retailers,companies need to build a customer-centric organization capable of sensing,anticipating, and monitoring drivers andsources of customer value across thechannels and geographic markets.

This would involve segmenting customersand ensuring optimal service levels toeach segment. Companies need to servenot only the various formats of organizedretail, but also the large number of momand pop outlets that exist in each ofthese countries.

Unilever in India has a three-tier channelstrategy. The bulk of the market is madeup of mass retailers and wholesalers. Italso uses a focused approach to reachthe high-end (value) market and low-end

rural market. An Account Managementstrategy is in place to focus on large andprofitable accounts. Innovation effortsare directed at the top and bottom of thischannel triangle.

Supply network configuration

Reaching the consumer in the most cost-effective manner and at the right timeis a key success factor. To ensure this,consumer packaged goods companiesneed to have a globally optimizedend-to-end supply network, simple onthe inside and differentiated on the

outside, delivering the right productat the right time with right cost to theshelf; the supply network will also needthe flexibility to cope with increasingcomplexity, stretch and volatility.

Since these markets have numerous,unique supply chain challenges,companies need to ensure back-endefficiencies through integrated demandand supply planning and optimized supplychain management. In China, for instance,Zara and H&M have implementedefficient feedback systems, thus using

technology to reduce supply chain leadtimes to 15-20 days.24

Key players notice the social, economicand psychological differences betweenthe urban and the rural segments andsuitably modify the implementation of thedistinctive capabilities to straddle bothsegments.

With China, Vietnam and India emergingas manufacturing and sourcing hubs,the integration with companies globalsupply chains is critical. Efficient sourcing

includes building capabilities for low-cost country sourcing as well as usingtechnology to reduce procurement costsand sourcing complexity.

3. Workforce transformationIn a global economy, companies need tobuild aligned and specialized networks ofskills in an integrated talent managementframework. In the face of risingrecruitment and retention challenges,talent management and leadership

development become critical. Managinglocal people resources involves culturalunderstanding and empowerment of localtalent.

Capabilities for MNCsand local companiesMultinational corporations lookingto spearhead their drive for highperformance in China and Vietnam canlearn from the more successful local and

MNC companies in those markets. InIndia, MNCs have traditionally been highperformers, and local firms need to buildexpertise to compete effectively.


10/12

10

Key Capabilities Capabilities for MNCs inChina

Capabilities for local firmsin India

Capabilities for MNCs inVietnam

Consumer-drivenStrategy

Do the right deal: Rightpartner, right form andright magnitude-evaluatethe merits/demerits of entryoptions and choose local

partner carefully

Increase spend on R&D andproduct innovations focusedon evolving consumer needs

Invest in branding andadvertising, to drive category

growth

Evolve strategies to deal withvaried consumer markets

Partnership with localenterprises will help to driveexpansion

Demand Fulfillment Critical to build relationshipsacross the supply chain

Evolve different strategies tocompete in both urban andrural markets

Thoroughly understanddifferent provincial laws tocompete with regional players

Leverage low-cost countrysourcing and align supply

chain strategy accordingly

Differential service models fordifferent retail formats andchannels

Exclusive set-up to service keyaccounts

Develop point of sale solutionsto improve distributoreffectiveness, manage channelinventories and improverevenues

Gain support of localauthorities to build distributorand supplier linkages

Explore potential for low costsourcing of raw materials andfinished goods

Invest in improving back end

Focus on both fast-growingmodern trade stores and thegeneral trade

Evolve strategies for providingoptimal service levels to largeretailers

WorkforceTransformation

Allow greater local control

Invest in local talent for long-term growth

Understand cultural nuances ofthe China workforce

Invest in talent management

Increased autonomy toprofessionals (especially infamily-owned firms)

Invest early and heavily in localtalent development

Provide for a transition time tobuild local managerial control


11/12

11

References1 Euromonitor

2 Datamonitor

3 Economic Intelligence Unit

4 CIA World Factbook

5 India Brand Equity foundation

6 Consumer markets in India the nextbig thing?, KPMG, 2004

7 Foreign Direct Investment in Vietnam,Ha Thanh Nguyen, Hung Vo Nguyenand Klaus E. Meyer, 2002

8 Retail & CGS Survey (India, China,Japan), Accenture, June 2007

9 Organized Retail Unfinished agendaand challenges ahead, FICCI, April 2007

10 Global Industry Surveys, Foods & Non-Alcoholic Beverages, S&P, Oct 2006

11 Accenture Multi-Polar World Research,2006

12 India Retail Overview, Accenture, Sept2006

13 Key Trends Impacting consumerism inAsia, TNS Worldpanel, Nov 2006

14 China: Packaged Food Industry,Accenture, Aug 2006

15 McKinsey Quarterly [Tracking the growthof Indias Middle class, October 26, 2007]

16 Achieving High Performance in theFood and Non-alcoholic BeveragesIndustry, Accenture, 2007

17 Achieving High Performance in theHome and Personal Care Industry,Accenture, 2006

18 Accenture Multi-polar World research,2006

19 Achieving High Performance in theAlcoholic Beverages Industry,Accenture, 2006

20 China Packaged Food Study, Accenture,August 2006

21 Accenture Innovation Survey in China,June 2007

22 U.K. Department for InternationalDevelopment (DFID), Supermarkets, fresh

produce and new commodity chains:what future for the small producer, 2004

23 Multinational Business Review,Challenge for successful joint venturemanagement in China: Lessons from afailed joint venture, May 2004

24 China Business, Fashion MagnatesSupply Chain Contest, May 8, 2007

25 Accenture High Performance Businessin China 2007


12/12

Copyright

2008 Accenture

All rights reserved.

Accenture, its logo, and

High Performance Delivered

are trademarks of Accenture.

About Accenture

Accenture is a global management

consulting, technology services andoutsourcing company. Combining

unparalleled experience, comprehensivecapabilities across all industries andbusiness functions, and extensive research

on the worlds most successful companies,Accenture collaborates with clients to helpthem become high-performance businesses

and governments. With more than 175,000people in 49 countries, the company

generated net revenues of US$19.70 billion

for the fiscal year ended Aug. 31, 2007. Itshome page is www.accenture.com.

For more information, please contact

Asia Pacific:

Apolonia Kersch+61 2 9005 [email protected]

ASEAN:

Jeffrey S. Russell+65 6410 7788

[email protected]

Australia:

James Layard+61 2 9005 5393

[email protected] China:

Woolf Huang+86 21 2305 [email protected]

India:

Anish Gupta+91 11 2330 [email protected]

Japan:

Atsushi Egawa+81 3 3588 3007

[email protected]

Korea:

Won-Joon Lee+82 2 3777 [email protected]

Documents

Winning in Emerging Markets Final