Brazil’s Bumpy Road Ahead

Brazil

Brazil’s recovery from the previous quarter’s economic slowdown has proven more difficult than multinationals expected, and the road to growth appears to be very bumpy. FSG clients reported underperforming sales growth during the first half of the year with many considering a slowdown as a viable threat to overall sales in 2012. Regardless, FSG clients are looking to capitalize on growth opportunities in the second half of the year by introducing new products into local markets.

The weakening real is providing some aid to exporters, but recent efforts by the government to stimulate consumer credit have failed to engender sustainable growth as consumers’ appetite for credit wanes. Brazil’s complex tax system is adding even further strain to multinationals’ business operations, yet FSG clients have reported scarcely allocating resources towards strengthening tax compliance teams. FSG surveys indicate that 35% of clients foresee a significant increase in the tax burden on their profits this year. FSG believes that tax compliance efforts by clients must be ramped up in order to capture cost-saving opportunities and protect profit margins.

Acquisitions have been a popular strategy for multinationals seeking to capture Brazil’s rising middle-class, but recent obstacles have made joint ventures a cost-effective alternative. Intensifiedcompetition for the “middle of the diamond” along with consumer growth in far-reaching regions and adaptation to regional middle-class preferences has made acquisitions more difficult and more costly. By targeting local companies offering popular products and with established distribution networks, JVs offer a successful alternative strategy to commonly pursued acquisitions.

*Erick Soto contributed to this piece

MNCs and Local Companies Fight for Brazil’s Middle Class

Brazil Middle Class

Multinationals in the consumer space are looking increasingly to the middle class for growth as high-end segments mature.

Local firms are following their traditional customer base as it moves into the middle and upper middle class, putting them on a competitive collision course with multinationals moving down market.

“New middle class consumers are bringing their traditional tastes and preferences with them, helping incumbent local producers tap into the emerging consumer segments.” – FSG Executive FMCG Company

Drivers

The middle class is surpassing the lower class in quantity of households, which changes the traditional shape of the market pyramid and demands a change in strategy.

Leading multinationals are acquiring local producers to enhance their product portfolio and distribution infrastructure in order to meet emerging middle class demand.

Companies that are reluctant to adapt products or stretch their brand equity risk losing middle class customers to more nimble local competitors.

Middle- and higher-end segments are becoming more competitive.

As more multinationals enter Brazil, higher-end segments are becoming increasingly saturated, forcing multinationals to look down-market for new opportunity.

Frontier Strategy Group View

Multinationals that continue to focus primarily on the higher-end segments risk losing emerging middle class consumers to local competitors who are consistently improving and expanding their capabilities in the  medium and high-tier segments in order to gain first-mover advantage.

A failure to plan accordingly will result in MNCs being restricted in their maneuverability as local companies grow in strength.

 

Emerging Middle-Class in Emerging Markets

Reuters recently released an interactive infographic depicting the evolution of the middle-class around the world. Emerging markets such as China, India and Indonesia are estimated to increase Asia’s share of the global middle-class to 64% and account for over 40% of global middle-class consumption by the year 2030.

Middle-Class Consumers

Opportunity Indonesia – A Growing Middle Class

Indonesia is the fourth largest country in the world in terms of population. Fast growing consumption, powered by growing affluence of the middle class, is the main driver of Indonesia’s economic growth

Favorable Demographic Profile

  • With a total population of 238 million, Indonesia is the fourth most populous country in the world after China, India, and the US
  • Indonesia has a favorable demographic profile with 60% of population aged below 40

Consumption Driven Economy

  • Private consumption is the biggest driver of Indonesia’s economic growth, representing 56% of total GDP output
  • Private consumption per capita is expected to double from its current level of US$1,500 to US$3,000 in 2015

Indonesia’s Growing Middle Class

50 million households in Indonesia have a disposable income of US$3,000 or more, and this number is expected to reach 150 million by 2015

  • 8 million scooters, a favored form of transportation among urban residents, were sold in 2010, compared to 1.7 million in Thailand

For MNCs, this could mean:

  • Consumer goods companies should look at Indonesia seriously as the consumer spending boom is just getting started
  • Despite various operating difficulties in doing business in Indonesia, MNCs should establish on-the-ground presence, either through wholly owned subsidiaries or partnerships, to catch this growth opportunity at its onset

 

Myths and Realities of the African Middle Class

(Luanda, Angola: behind the tattered façade, a new middle class is emerging - author’s photograph)

In March 2007, long-serving Angolan President Jose Eduardo dos Santos formally opened a perfect metaphor for Africa’s changing consumer market profile. Located in the Talatona suburb of the country’s malarial and overcrowded capital city Luanda – perhaps best known for its pock-marked buildings, and the orphaned street children – the Belas shopping center is one of the most modern facilities of its type anywhere in Africa. The complex includes restaurants, banks, a planetarium and a multiplex cinema; high-end consumer brands with retail outlets in the center include Swatch (wristwatches) and Samsung (electronic  goods); reflecting a growing local appetite for luxury items of which it is the perfect embodiment, the center also organizes Belas Fashion, showcasing the season’s latest apparel styles and designs.

The African middle-class: who (and where) are these guys?

Anyone who has taken a commercial flight into Africa from London, Paris, Brussels or Johannesburg will have seen members of the African consumer population with their own eyes: individuals and families with the disposable incomes not only to travel abroad but to bring back (often large quantities of) Western consumer goods home with them. Given both data absences and disputes over definitions, accurately scaling the size of this population is challenging. A recent report by the African Development Bank attempted to do exactly that; its headline finding was that estimated that Africa’s middle class has expanded to over 300m people. Equivalent to roughly a third of the continent’s total residents, this places Africa’s middle class close to the same size as both India’s and China’s.

The study’s definition of individuals with annual income exceeding $3,900 in purchasing power parity (PPP) terms as ‘middle-class’ is problematic; clearly, between US$2-$20 per day in available income is not a definition of middle-class that many in the West would recognize. The proportion of these people at risk of dropping back into poverty if food prices continue to rise much higher, for example, is also significant. Regardless of some of its limitations, however, the message of such data is that this emerging population is demographically significant – and therefore that the growing business opportunity it presents is compelling.

Sale of the (twenty-first) century

The pre-existing awareness of and appetite for Western brands amongst consumers in Africa is considerable– as the ubiquitous, proudly-worn English Premier League soccer jerseys and hand-drawn Nike logos that adorn the sides of minibus taxis the length and breadth of the continent illustrate. In many ways, the region is highly conducive to retail growth: its mostly wide-open and rapidly expanding multi-media channels for advertising, large diaspora populations in the West, comprehensive traditional and growing modern retail networks and the comparatively smaller and less sophisticated counterfeiting problem than Asia presents all work in the continent’s favor.

Recognizing the increasingly widely-quoted aphorism that Africa’s consumer market is ‘where China was twenty years ago, where India was ten years ago’, growing numbers of companies are planning to exploit this last great untapped (and still relatively uncluttered and uncompetitive) market, using footholds in upscale parts of the biggest cities and locally-tailored packaging and pricing solutions just as similarly foresighted pioneers were doing in those Asian markets years earlier. Recent store openings in West African cities such as Lagos and Abidjan include franchise outlets selling Mercedes Benz motor vehicles and European giant Mango’s clothing lines.

A powerful model for the rest of Africa is South Africa, where the emergent middle-class within the county’s majority ethnic group even has its own nickname – the ‘black diamonds’ – as well as a wealth of retail analysis, events and marketing targeted specifically at its growing numbers, influence and spending power. This group is estimated to comprise around one-tenth of the 22m adult black South Africans, and account for up to 40% of that population’s overall spending. Identifying and accessing similar cohorts in other populous African counties will represent a holy grail for businesses seeking to find new customers in the years ahead.

Buy one (benefit), get two free

The emergence of a growing and increasingly affluent African middle-class should have additional ‘virtuous circle’-style benefits above beyond the pure (and considerable) new business opportunity it represents:

  • Itself often a beneficiary of more democratic, peaceful and liberalized political systems, Africa’s growing and ever better-informed middle-class population should also be an increasingly vociferous source of demands for ever better governance, public service provision and transparency / accountability from its governments and public servants
  • Perhaps recipients of overseas or newly universal primary school education, the determination and spending ability of new generations of middle-class African parents to secure the best possible local education for their own offspring in turn will in the medium-term be a critical factor in closing Africa’s often acute talent deficit; a spate of recent private equity investor interest in affordable private schooling providers in South Africa illustrates this dynamic in action

Interested in learning more about the opportunity for your business to sell to and grow in Africa? Contact africa@frontierstrategygroup.com to learn how we can help

 

Capturing Africa’s transformative urban growth

(Photo © Mayssa Daye: Satellite dishes in Juba, South Sudan highlight consumer appetites in even the poorest parts of Africa's rapidly growing cities)

Recent African headlines have rightly focused on desperate news of looming famine in the Horn of Africa; the vulnerability to adverse weather conditions of the large proportion of the continent’s population that continues to rely on subsistence agriculture remains a significant impediment to its future development. What is less widely known or reported is how rapidly that proportion is shrinking: Africa is now the world’s fastest-urbanizing region, a phenomenon that promises not only to transform the region’s food security outlook but also offers significant business potential.

Mass migration, massive potential market…

Africa’s total population only passed the 1 billion mark in 2009. By 2040, it will have 1 billion urban inhabitants and by 2050, 60% of all Africans will be living in cities. Lagos, Nigeria – which will shortly overtake Cairo as Africa’s largest city – grows by 58 residents every hour; at an estimated 10.5 million inhabitants today, Lagos is 40 times larger than it was in 1950. Between 2010 and 2020, it and seven other sub-Saharan African cities will add more than 1m residents each; of those, the Congolese capital Kinshasa will by itself add 4m.

Such an enormous mass population movement will inevitably create huge challenges: an estimated 70% of African cities’ inhabitants currently live in slum conditions. Overstretched and under-resourced municipal authorities will continually struggle to provide water, electricity and social services, not to mention governance and security, to their swelling populations as well as to investing companies. The continent’s urban centers will also remain focal points for political unrest, and – as a recent survey that deemed the Angolan capital Luanda the world’s most expensive place to live suggests – day-to-day operating costs for multinational companies can also be surprisingly elevated.

Yet Africa’s diverse and complex cities are also a magnet for consumer goods companies with the vision to recognize the combined potential of an emerging middle-class and a hitherto under-served  mass market that exemplifies potential profits to be made at the so-called bottom of the [wealth] pyramid. Africa’s urban markets remain crucibles for business model innovation and adaptation, as exemplified by the trailblazing (and highly profitable) successes enjoyed by telecommunications and financial services firms over the past decade.

Capturing the urban African consumer opportunity

Increasingly it is Asian consumer goods companies having perfected their product mix and marketing strategies for targeting poorer customers in addition to swelling ranks of higher-spenders in home markets such as India or China – that are now taking the boldest steps into the region’s towns and cities. Seeing market stalls offering Indian-branded footwear and clothing or foodstore shelves stacked with Mandarin-branded produce is an increasingly common experience from Mauritania to Mozambique. While investments from the EU into Africa tripled between 2000 and 2008, Chinese FDI grew tenfold over the same timescale.

The emphatically urban emphasis of African consumer demographics – combined with an increasingly congested competitive landscape – points to the growing importance of developing an African city strategy for Western companies seeking to capitalize on growing business opportunities in the continent and avoid falling further behind their Eastern competitors.

Many newcomers to the region are surprised to learn that Africa already has more than fifty cities with a population of at least one million. While the projected average growth of 32% for those locations from 2010-2020 is both steep and enticing, 70% of Africa’s urban population growth over this decade will actually occur in smaller cities. Longer-term growth strategies for the continent will therefore involve eventually spreading to capitalize on opportunities in these locations as well: by 2025, Africa is projected to have 73 cities of 1-5m inhabitants and a further 84 of 0.5-1m inhabitants.

Difficult market access is often held up as an obstacle to expansion in Africa yet fourteen of the twenty largest cities on the continent are also sea ports, removing the overland logistics challenges that limit distribution and customer penetration in much of the continent. Clustering nearby cities around central hubs achieves further economies of scale, as does utilizing the so-called development corridors many African governments are prioritizing to accelerate infrastructure improvement and enhance market access and industrial investment. The spread of retail and distribution networks ever further into Africa’s interior offers further leverage possibilities: a major factor in US giant Wal-Mart’s recent investment in South Africa’s Massmart was a pre-existing footprint in twelve countries beyond its home country base.

Names like Ouagadougou, Lubumbashi, Ibadan and Douala may not yet rank alongside Chengdu, Wuhan or Zhengzhou in consumer goods’ companies expansion planning but they should definitely be on the radar. Fortune favors the brave, and the well-informed.

Curious to know how other major multinationals are planning to capture the urban African opportunity? Take part in Frontier Strategy Group’s inaugural African investment benchmarking survey. Contact africa@frontierstrategygroup.com for more information.