Firms adapt to new middle classes

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Martinne Geller

From chocolate and dumplings to toothpaste, consumer goods companies are adapting to new spending habits as incomes rise in emerging markets while protecting profits in places where they can be volatile.

Packaging toothpaste into tiny tubes or moving more manufacturing locally, consumer firms are cutting prices and costs to make their wares more affordable and accessible to people who can buy their products for the first time.

The key, executives say, is to challenge thinking and processes that have driven growth in developed markets.

“If I want to successfully conquer India… I can’t do that with a plant in Hamburg,” said Stefan Heidenreich, the head of Beiersdorf, whose products range from Nivea to the high-end La Prairie creams. “It sounds relatively simple, yet we were for years and years in a very centralised mode.”

Nivea plans to open a factory in India next year, to make creams in smaller, cheaper packs, products with different scents and whitening creams, which are popular in Asia.

Consumer companies have long been seen as a good investment as they should grow with the new middle classes which are clawing their way out of poverty thanks to higher growth in many Asian, African, Latin American and post-communist economies.

Consultancy EY reckons the middle class – defined as people earning more than $10 (R105) a day – will grow by 3 billion in the next two decades, with almost all the growth coming in emerging markets.

Currency volatility and changes such as a curbs on gift-giving in China to crack down on corruption or a drop in economic growth in Brazil can suddenly squeeze earnings.

Despite the risks, makers of everyday products such as food, soap and shampoo are spending time and money to win new buyers who they hope will be long-term shoppers.

One way they cut costs is by producing goods locally, using local ingredients and labour. That allows them to pass on lower prices to consumers, gain market share and reduce the effect of foreign exchange fluctuations as costs and prices are in the same currency.

Diageo, the maker of Johnnie Walker whisky, ships kit in to set up small distilleries in Africa to make what it calls “mainstream” spirits such as Gilbey’s gin that cost less than half of its international brands thanks to lower overheads, labour costs and input prices.

Another way of cutting prices is simply using smaller packages, giving buyers the opportunity to try a new product without spending too much. Colgate-Palmolive chief executive Ian Cook cited small, 10-rupee (R1.70) tubes of toothpaste for big gains in household penetration in rural India.

In markets with hot climates and inadequate refrigeration, selling perishable foods can be tricky, again challenging companies to think differently. Firms including Nestlé, Hershey and Mondelez International have all worked on heat-resistant chocolate bars. – Reuters


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