Winning in Emerging Markets

The Quest for High Performance in China, India and Vietnam in the Consumer Packaged Goods and Retail Industries

A significant market opportunity

With fast-growing economies and robust GDP growth projections over the next few years, the emerging triumvirate of China, India and Vietnam is set to provide a significant market opportunity for consumer packaged goods and retail companies. Accentures High Performance Business research has shown that emerging markets will be the key battleground for companies; the ability to be in the right place at the right time and dominate these markets will distinguish the industrys high performers. The growth story across China and India has numerous similarities. Each market is characterized by a large population. While the majority of people reside in rural areas, there is rapid urbanization. The booming economy is producing a rising middle class with greater disposable incomes and increased propensity to spend. The burgeoning middle class is expected to form the largest consumer segment in each of these markets. In India, for instance, the middle-class is expected to form 75 percent of the urban population by 2020.15 Furthermore, India and Vietnam benefit from favorable demographics, with close to 50 percent of the population under 25 years.3 In comparison, China is faced with the challenge of a rapidly ageing population-30 percent of the population is expected to be above the age of 60 by 2050.6

The packaged food segment dominates these markets with a 47 percent1,2 share of the consumer packaged goods category in 2006. Though this segment remains fragmented, companies are beginning to consolidate their market share. In China for example, local companies have increased their market share from 14 percent in 2001 to 26 percent in 2005. The player mix varies across these markets: Multinational corporations (MNCs) have traditionally enjoyed a strong presence in India, while China and Vietnam continue to see higher market fragmentation and domination by local players. However, the fast-growing fashion and alcoholic beverages segments are expected to lead future growth in this region, with growth rates over the period 2006-10 of 10 percent to 19 percent and 10 percent respectively.1 Three factors stand out as drivers of future growth: Evolving consumer needs of health, convenience and indulgence as the middle class grows16 New category entrants, such as working women and youth as demographics and lifestyles change17 Rapidly rising penetration of organized retail9,12

1. Winning talent
China, India and Vietnam have a large potential talent pool with the first two countries accounting for more than 60 percent of the total global workforce.11 Although many MNCs are boosting their global operations, Accentures research indicates that most are still failing to develop the operational readiness or nurture the talent excellence to support high performance on a truly global scale. Talent development, particularly by MNCs, remains chequered across these markets. While India shows a traditionally strong emphasis by MNCs to develop talent, China and Vietnam lag behind in this aspect. A survey of companies in China showed that many joint ventures failed due to inadequate transfer of control or development of local managerial talent.23 Escalating wages and rising attrition levels are proving a challenge to consumer packaged goods companies due to the lack of people with the right skills and an increased global demand for local talent, especially in India and China. Further, demand from other growth sectors such as IT in India, is causing a shortage in industries like consumer packaged goods. Vietnam in particular lacks in sufficient local managerial expertise, but the government is now investing in education and training.

Consumer packaged goods industry growing at a rapid pace

This vast market opportunity is set to translate into projected industry growth rates of nearly 9 percent1 in these three markets. However, the growth trajectories vary across the countries. China, with a consumer packaged goods market of $470 billion (the largest amongst the three), is set to grow at 9 percent1 from 2006-10, while the Indian consumer packaged goods market (valued at $140 billion in 2006) will grow at 6 percent1 over the same period. Meanwhile, Vietnam ($7.2 billion in 2006) is at a growth inflexion point and is expected to register a high growth rate of more than 16 percent1 from 2006-10.

Key trends and implications for consumer packaged goods manufacturers

The emergence of a world characterized by multiple centers of economic power and activitya concept Accenture calls the multi-polar worldis driven by three powerful, mutually reinforcing trends: technology, economic openness and multinational strategies. There are five key dimensions of the multi-polar world: winning talent, the flow of capital, the battle for resources, emerging consumers and the new map of innovation. Though these dimensions are applicable to the emerging cluster of China, India and Vietnam, the unique characteristics of this block requires one to consider an additional dimension of Unique Value Chain from the perspective of both the manufacturers and retailers.

Business implications
Continued investment required in managerial talent Due to high demand in the labor market, recruiting and retaining managerial talent requires continued investment. New entrants especially need to invest early in people. Empower local talent Consumer packaged goods companies should invest in building predominantly local management. Understand the culture Understanding culture-specific issues remains key, especially in China. Be ready to deal with rising wages Since supply is unable to meet demand in China and India, companies need to be prepared to deal with rising wage inflation coupled with a global talent shortage. The local workforce is being lured into other sectors, such as IT and business process outsourcing. In addition, there is a global demand for Indian and Chinese talent due to a shrinking labor market and changing demographics in the United States and Europe.

2. The flow of capital

Increased government liberalization has led to a sharp rise in foreign direct investment. The increased foreign direct investment has in turn spurred a rise in cross-border acquisitions in China and India. Vietnam continues to see an increase in investments by multinational companies and regional players (particularly Taiwanese companies), with nearly 80 percent of new foreign projects being green-field ventures.7 A key development has been the accession of China to the World Trade Organization (WTO) in 2001 and of Vietnam in 2007. This has led to a steady decline in trade barriers besides opening these markets for the import of foreign goods. As a result, the number of MNCs has grown in Vietnam, where the consumer packaged goods sector has been traditionally dominated by local firms. India, however, has increased its global investment, with the consumer packaged goods sector witnessing bigticket acquisitions in the beverages space.

domestic resources which has resulted in the increase in energy prices significantly. The oil prices in these countries have increased by 50 percent to 70 percent over the last five years. The degree of impact of energy demand versus price on the consumer packaged goods industry has been different across various categories. However, most segments in this industry have been adversely impacted due to shortages and rising prices of raw material resources. Glass as well as molasses, which are major components in the alcoholic beverages industry, has witnessed a price increase of 25- 35 percent and 6-9 percent respectively in India alone over the last year due to rising oil prices. Similarly, palm oil and petroleum oil, which are key raw materials in soaps and detergents, have seen price increases of 55 percent in the last year resulting in the increase of overall production costs by 3 percent to 4 percent for manufacturers. The rising demand for biofuel products due to oil shortage has also increased food grain prices. The price of raw materials such as sugar, flour and palm oil, has risen by 25 -30 percent in India impacting the food industry. In 2007, the China CPI (Consumer Price Index) increased by 6.9 percent, reaching its highest level in the past 11 years due to oil and energy prices. In particular crops were affected: rice-6.6 percent, food oil-35 percent, meal-56 percent, and cotton-4 percent, significantly impacting the cost of raw materials for all consumer packaged goods companies including beverages (alcohol & non-alcohol), clothing, personal care and household. Other costs such as transportation, packaging material and the cost of energy to run plants are creating constant margin pressures on the industry. Another impact is the overall price level and inflation. The magnitude of impact will depend on the degree of monetary tightening, the extent consumers seek to offset their expenses through higher wages and the extent to which producers seek to restore profit margins, but it could create a wage/price spiral for the industry. Understanding the need to sustain economic growth, both China and India are looking at overseas exploration and alternative resources for additional supplies of energy. But in light of the increasing demand-supply gap and rising global prices, the pressure on energy prices in China and India continues.

Business implications
Increase efficiencies Focusing research & development efforts on improving overall production efficiencies with better consumption ratio/yields to absorb the increasing raw material costs and remain price competitive will be essential. Look for alternative resources Companies in these regions will need to identify low cost resources and alternate raw materials to sustain in the competitive market.

4. Emerging consumers and innovation

By 2020, 35 percent of the worlds population is expected to reside in China and India.18 It is estimated that the number of middle-class households in China and India will reach nearly 128 millionexceeding the number of middleclass households in the United States by 2020and likely to result in significant demand impetus.3 In addition, numerous demographic and lifestyle changes are converging in China, India and Vietnam to make these markets even more lucrative for consumer packaged goods manufacturers. For instance, the growing urban middle class and a young population mean that large numbers join the consuming class every year. Increased globalization, urbanization and rising education levels are leading to more women joining the workforce. There is also a rise in the number of single-family households in these markets, moving away from traditional joint family systems. As a result, consumer needs and desires are evolving. Consumers in these markets have been largely price sensitive, though this is now changing, mainly in the urban areas. For instance, Accentures research indicates that the middle classes are starting to trade up in many homecare categories in emerging markets. In addition, urban consumers are driving the preference for convenience products. An evolving health-consciousness is part of a global trend toward healthier and environmentally safer consumer products. Rural markets are also showing an increased preference for branded products. In the alcoholic beverages market, Accentures High Performance Business research shows that high performing companies targeting emerging markets to spearhead their drive for high performance can take advantage of these

Business implications
Evaluate multiple entry options Firms now have multiple options for entering these marketsincluding joint ventures, mergers & acquisitions, and green-field investments based on the capabilities required. However, its imperative for new entrants to assess the merits and demerits of partnering with local companies. Ensure strong management controls in case of joint venture Though joint ventures remain a favorite entry route among new entrants, past experience shows that not all have been successful. In a survey of companies in China who used the joint ventures to enter the market, 56 percent did not meet profit targets due to non-alignment of partner strategies and weak management control.23 Challenge for domestic players Domestic players in these markets will face competition from increased foreign brand penetration. In Vietnam, domestic players are likely to face increased challenges from the rising cost competitiveness of MNCs combined with falling import tariff barriers.

3. The battle for resources

China and India are faced with the challenge of balancing the large growing energy demand of the regions huge population with the relative shortage of

changes by creating a global market of key local brands that deliver high market share and profitability. China, India and Vietnam have also seen a sudden rise in urban spending on luxury and premium goods as income grows. For instance, in the alcoholic beverages sector, Accentures research has shown that in several Asian countries, middleclass drinkers are trading up and will account for an increasing share of value growth in the future.19 Clearly, these lifestyle changes have the potential to drive innovation. Consumers are more open to innovation and MNCs are increasing country-focused R&D spend in these markets. [Accentures Innovation survey in China (Jun 07) showed that new products have had a positive impact on consumers, making them more efficient among other benefits]. Within the food and non-alcoholic beverages segment, Accentures High Performance Business research suggests that the businesses best positioned to take the lions share of future value to drive high performance in these emerging markets will make innovation a key part of their strategies. High performers will focus on a limited number of attractive, innovation-sensitive categories and niches; they will seek to dominate these categories by being the first to spot nascent consumer trends, rapidly and continuously innovating against them and rigorously focusing their marketing spend on their most successful products and brands.

Invest in branding and advertising Companies need to drive category growth through increased spend on branding and advertising. To do so effectively, Accentures High Performance Business research indicates that high performers will need to turn insights derived from listening to consumers into a differentiating customer experience and create the consumer needs of the future. Portfolio management and innovation marketing will be crucial to ensure that branding and advertising money is spent wisely.20

Business implications
Focus on building relationships with suppliers and distributors Specifically in China, it is critical to build and maintain relationships (called the guanxi system in China) across the supply chain. Accentures research revealed that Chinese high performers leverage relationships with governments, industry associations, international companies and even competitors to compete more effectively in the local market.25 Manage complex, multi-tiered distribution Consumer packaged goods companies need to manage a regionally fragmented distribution system due to differing tax laws in India and varying provincial laws in China. Companies also need to effectively manage goods flow and channel inventories across the network for better inventory management. Align global supply chains Companies need to leverage the low-cost sourcing potential of China, India and Vietnam while overcoming the challenge of a fragmented supplier base. For instance: Nestle is sourcing coffee from India for its global production needs Japanese food firms have bases in China for sourcing raw materials Li & Fung, a Hong-Kong-based apparel trading firm, acts as an intermediary between apparel retailers and a very fragmented base of textile manufacturers and suppliers across China and South East Asia Implication for retailers Though each of the countries differ in terms of retail market maturity, loosening government regulations and the increased presence of MNC retailers are set to catalyze growth going forward. India and Vietnam, with low retail penetration of 3 percent and 7 percent respectively, are set to grow rapidly in the coming years.1,12 In China, which has an organized retail penetration of 25 percent, penetration is expected to grow at an approximate 11 percent compound annual growth rate over 2006-10. In each of these markets, non-food retailing is likely to drive retail growth.1,14 All three markets are seeing a rapid rise in the number of retail formats (supermarkets, hypermarkets, convenience stores) catering to varying consumer needs. However, to attain a profitable retail model, particularly in India, companies will need to factor in high rental costs.
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5. Unique value chain

This dimension has a varying impact on consumer packaged goods manufacturers and retailers. Implication for consumer packaged goods manufacturers China, India and Vietnam continue to face considerable supply chain challenges. A fragmented supplier base makes raw material supply inconsistent. Coupled with price controls on certain commodities and government protection (for example, tobacco in India), sourcing can be a challenge. Each country has a multi tiered distribution structure to retail and service the vast geographic spread of the market, leading to high distribution cost. The logistical challenges include poor infrastructure, limited presence of third party logistics players and absence of cold-storage, necessitating a trade-off between transportation costs and stockouts. However, the scenario is gradually changing. China, in particular, has seen the entry of multinational third-party logistics companies that are expanding their reach in this market. In spite of these distribution and logistical challenges, these markets are attractive as manufacturing and sourcing hubs, primarily due to access to raw materials and low labor costs. In China, MNCs are increasingly pushing into tier two cities to further gain labor cost advantages, while India is seeing an increase in contract manufacturing.20 Since its accession to the WTO (and the resulting fall in tariffs), Vietnam is recently emerging as an important manufacturing and sourcing hub. Accentures High Performance research shows that those companies able to control the route to the consumer ensuring the availability of their products and brands to target consumers in the outlets of their choicewill position themselves as the future high performers.

Business implications
Satisfy price-value equation Companies will need to innovate to tackle price sensitivity. For example, the LUP (low unit pack) strategy was a success in Indiashampoo sachets costing 2-4 cents revolutionized category sales and now constitute 70 percent of the shampoo market. Increase R&D spend Consumer packaged goods companies need to increase spend on localized R&D and product innovations focused on evolving consumer needs and demographic and lifestyle changes. Address differential needs of urban and rural consumers Each of these markets have skewed urban-rural consumption patterns due to income and cultural differences. A growth strategy must cater to this landscape.

Currently, the retail markets remain highly fragmented with a large presence of traditional retail outlets. For instance, in India, more than 5 million kirana outlets contribute to 97 percent of retail sales.9 In China, where organized retail penetration is the greatest at 25 percent, the top five organized retailers share only 5 percent of the market. Globally, the average share of top five retailers is approximately 50 percent to 70 percent.22 Even within organized retail (sometimes called modern trade), domestic players continue to dominate, but the presence of multinational companies is rising, including in India and Vietnam. While domestic retailers like Lianhua dominate the market in China, consumers rate MNC retailers like Carrefour and Wal-Mart high on in-store shopping experience.21 With the increased entry of multinational retailers in China, there is likely to be more consolidation in the retail space.

Building capabilities for success

To address the implications of these multi-polar trends and drive high performance, consumer packaged goods manufacturers will need to build certain distinctive capabilities.

1. Consumer-driven strategy
This implies an aligned and adaptive operating model capable of rapidly responding to and taking advantage of evolving sources of value creation across the global base. With many companies now entering these markets, an accelerated market entry and growth strategy is a key imperative. For those that aim to grow through acquisitions, the post-merger integration process is critical to realize value to the company. In the Indian alcoholic beverages market, main player United Spirits acquired Shaw Wallace and went through a seamless post-merger integration process. As a result, the company saw an increase of more than 50 percent in revenues and the creation of the third-largest alcoholic beverages firm in the world, with a dominant share in Indiaone of the highpotential markets globally.

Supply network configuration Reaching the consumer in the most costeffective manner and at the right time is a key success factor. To ensure this, consumer packaged goods companies need to have a globally optimized end-to-end supply network, simple on the inside and differentiated on the outside, delivering the right product at the right time with right cost to the shelf; the supply network will also need the flexibility to cope with increasing complexity, stretch and volatility. Since these markets have numerous, unique supply chain challenges, companies need to ensure back-end efficiencies through integrated demand and supply planning and optimized supply chain management. In China, for instance, Zara and H&M have implemented efficient feedback systems, thus using technology to reduce supply chain lead times to 15-20 days.24 Key players notice the social, economic and psychological differences between the urban and the rural segments and suitably modify the implementation of the distinctive capabilities to straddle both segments. With China, Vietnam and India emerging as manufacturing and sourcing hubs, the integration with companies global supply chains is critical. Efficient sourcing includes building capabilities for lowcost country sourcing as well as using technology to reduce procurement costs and sourcing complexity.

Business implications
MNC retailers need to determine right entry strategy While MNC retailers will need to focus on the right entry strategy for India and Vietnam, domestic retailers in all three markets need to deal with increased competition. Benefit from economies of scale Increased retail consolidation, particularly in China, will lead to economies of scale benefiting large players, both domestic and MNC. Increased bargaining power of retailers will lead to margin squeeze The rise of retailer power is likely to be an additional source of margin pressure for consumer packaged goods manufacturers, along with rising commodity prices. Differential service models Consumer packaged goods companies need to have different service models to cater to the various emerging retail formats, like supermarkets, hypermarkets and convenience stores, as well as the traditional mom and pop retail stores. Suppliers need to be more tightly integrated with retailers global supply chain: The global operating models of leading food retailers have traditionally been aligned with those of food manufacturers; for instance, to integrate more closely with the retailers supply-chain, manufacturers will locate production bases closer to the retailers.

2. Demand fulfillment
Customer service and fulfillment excellence In the face of a large, differentiated customer base, emerging retail formats and the rising power of retailers, companies need to build a customercentric organization capable of sensing, anticipating, and monitoring drivers and sources of customer value across the channels and geographic markets. This would involve segmenting customers and ensuring optimal service levels to each segment. Companies need to serve not only the various formats of organized retail, but also the large number of mom and pop outlets that exist in each of these countries. Unilever in India has a three-tier channel strategy. The bulk of the market is made up of mass retailers and wholesalers. It also uses a focused approach to reach the high-end (value) market and low-end rural market. An Account Management strategy is in place to focus on large and profitable accounts. Innovation efforts are directed at the top and bottom of this channel triangle.

3. Workforce transformation
In a global economy, companies need to build aligned and specialized networks of skills in an integrated talent management framework. In the face of rising recruitment and retention challenges, talent management and leadership development become critical. Managing local people resources involves cultural understanding and empowerment of local talent.

Capabilities for MNCs and local companies

Multinational corporations looking to spearhead their drive for high performance in China and Vietnam can learn from the more successful local and MNC companies in those markets. In India, MNCs have traditionally been high performers, and local firms need to build expertise to compete effectively.

Key Capabilities Consumer-driven Strategy

Capabilities for MNCs in China

Do the right deal: Right partner, right form and right magnitude-evaluate the merits/demerits of entry options and choose local partner carefully Critical to build relationships across the supply chain Evolve different strategies to compete in both urban and rural markets Thoroughly understand different provincial laws to compete with regional players Leverage low-cost country sourcing and align supply chain strategy accordingly

Capabilities for local firms in India

Increase spend on R&D and product innovations focused on evolving consumer needs Invest in branding and advertising, to drive category growth Differential service models for different retail formats and channels Exclusive set-up to service key accounts Develop point of sale solutions to improve distributor effectiveness, manage channel inventories and improve revenues

Capabilities for MNCs in Vietnam

Evolve strategies to deal with varied consumer markets Partnership with local enterprises will help to drive expansion Gain support of local authorities to build distributor and supplier linkages Explore potential for low cost sourcing of raw materials and finished goods Invest in improving back end Focus on both fast-growing modern trade stores and the general trade Evolve strategies for providing optimal service levels to large retailers

Demand Fulfillment

Workforce Transformation

Allow greater local control Invest in local talent for longterm growth Understand cultural nuances of the China workforce

Invest in talent management Increased autonomy to professionals (especially in family-owned firms)

Invest early and heavily in local talent development Provide for a transition time to build local managerial control

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References
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McKinsey Quarterly [Tracking the growth of Indias Middle class, October 26, 2007] Achieving High Performance in the Food and Non-alcoholic Beverages Industry, Accenture, 2007 Achieving High Performance in the Home and Personal Care Industry, Accenture, 2006 Accenture Multi-polar World research, 2006 Achieving High Performance in the Alcoholic Beverages Industry, Accenture, 2006 China Packaged Food Study, Accenture, August 2006 Accenture Innovation Survey in China, June 2007 U.K. Department for International Development (DFID), Supermarkets, fresh produce and new commodity chains: what future for the small producer, 2004 Multinational Business Review, Challenge for successful joint venture management in China: Lessons from a failed joint venture, May 2004 China Business, Fashion Magnates Supply Chain Contest, May 8, 2007

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Accenture High Performance Business in China 2007

Euromonitor Datamonitor Economic Intelligence Unit CIA World Factbook India Brand Equity foundation Consumer markets in India the next big thing?, KPMG, 2004 Foreign Direct Investment in Vietnam, Ha Thanh Nguyen, Hung Vo Nguyen and Klaus E. Meyer, 2002 Retail & CGS Survey (India, China, Japan), Accenture, June 2007 Organized Retail Unfinished agenda and challenges ahead, FICCI, April 2007 Global Industry Surveys, Foods & NonAlcoholic Beverages, S&P, Oct 2006 Accenture Multi-Polar World Research, 2006 India Retail Overview, Accenture, Sept 2006 Key Trends Impacting consumerism in Asia, TNS Worldpanel, Nov 2006 China: Packaged Food Industry, Accenture, Aug 2006

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