Global brands need to think longer term, lower prices and (slightly) lower quality #live11

Future business success lies almost exclusively in emerging markets, and to capitalise on it, companies need to look to “affordable innovation” because consumers are wising up.

According to Daniel Thorniley, a leading commentator on emerging markets, speaking at Orange Business Live event in Munich (you can read more social commentary here), over the next 10 years, 75% of incremental consumer spending will come from emerging markets like China, India, Russia and Brazil, but also hot spots such as Turkey, South Africa, Indonesia, Vietnam.

In the early stages of the growth spurt that these economies enjoyed, wealthy consumers gobbled-up premium western brands...the best watches, best cars, best handbags. But that was pre-downturn. As these markets emerge fastest from the downturn, consumers are looking for better value, whether they are the rich or the emerging middle classes. Wising up, they are looking beyond the brand to products that last longer but aren’t necessarily accompanied by the bling.

Western companies, therefore, need to rethink the way they approach emerging markets. Thorniley argues that they shouldn’t try to replicate what they have done successfully in France, US or Australia. In fact, the approach of premium brand, premium quality and premium prices needs to be ring fenced, and completely different attitude needs to be taken for RoTW.

In emerging markets, the same companies need to strip out the inessentials – the extra packaging, the extra chemicals, the extra chips - that do not impact underlying performance. (It’s the idea of “good enough”, which Wired magazine in 2009  argued was changing the face of consumer electronics and was the reason for the success of the Flip HD video camera against higher spec rivals. The same low costs and acceptable functionality are driving Android handset sales on OEM devices.)

This affordable innovation will play well to the new consumers in emerging markets, but also depressed countries in Europe such as Spain, Portugal and Ireland where consumers will begin to look beyond traditional brands to new entrants that can offer near-enough the same quality at a much more competitive price.

It also means that we need a new approach to IT in emerging markets. Instead of imposing the same KPIs that shackle middle managers in the UK or US, we need much quicker decision making and more autonomy to act a local level. And we must do this with medium-quality IT that’s available at a lower cost. Whether global brands can really adapt to this think local approach really remains to be seen.

Two other key points from Thorniley’s talk relate to global finance and rising costs.

Firstly, let us not forget our partners, says Thorniley, who may be struggling to recover from the global recession. Global brands might be able to turn their backs on banks if the lending conditions are unfavourable, but that isn’t possible for the distributors, partners, resellers and wholesalers that global brands will need to work with at a local level in emerging markets. These smaller organisations have depended on bank lending at the local level – which is just as well that growth in bank lending in emerging markets is way outstripping that of European bank lending.

And secondly, rising costs have impacted consumer prices. The consumer has tolerated prices rises until now, but Thorniley believes this goodwill is elastic but maybe close to snapping. Companies will have to invest in making their processes more efficient (through IT) because the cost of raw materials is not going to come down (exhibits: with oil at $120 a barrel, and Chinese consumers wanting to replace rice with meat, there is unlikely to be an relief from inflationary costs)

If you’d like to read more excerpts from Thorniley’s presentation, check out these live blogs from Herve Kabla and Ben Ellis.