SEPTEMBER 2005 :: NTERNATIONAL

Bottom Fishing
Consumer-Product Giants Look to the World's Poor for Growth

By Susanna Howard
Dow Jones Newswires

Big businesses typically go where the big money is. But Procter & Gamble and Unilever, the two giants of the consumer-products industry, are targeting the world's poorest shoppers to drive sales growth.

Both companies need to find new revenue sources to offset price and cost pressures in sluggish mature markets. While the two giants have long had a presence in emerging economies, they are now tapping into the four billion consumers at the base of the economic pyramid rather than aiming just for wealthier elites in those countries.

Even though their disposable incomes may be very low, consumers in developing countries represent the largest and fastest-growing segment of the world's population.

"Competition in developed markets is brutally tough," says Lawrence Hutter, partner in the consumer-business practice at Deloitte & Touche, a consulting firm. "Growth is pretty much a zero-sum game, with consumer-goods companies competing for share of a stagnant market and even seeing price deflation in some areas."

'A Gradual Process'

Unilever described market conditions in Europe as "very challenging" in its first-quarter results, but called its developing and emerging markets "promising." "In Western Europe, the rise of hard discounters such as Lidl over the last 18 months or so has changed the face of the competitive landscape," says Unilever spokesman Trevor Gorin. "Competition between retailers has intensified pressure on pricing from one side, while increased input costs like oil have done the same from the other side."

Mr. Gorin adds that against this background, Unilever expects that developing markets will "over the long term contribute an increasing proportion of revenue." He says that if Unilever's business continues to develop as it has done, then it is probable developing markets will overtake developed ones, although "it's likely to be a gradual process." Mr. Gorin points out that it has taken 15 years for developing markets to reach today's 35% contribution to sales from 25% in 1990.

Doug Shelton, a P&G spokesman, says the company expects developing markets, which account for about 21% of sales, to continue growing faster than developed markets. P&G has told investors it is targeting sales growth of 4% to 6% a year, but the dynamics are changing. Through 2008, the company says emerging- market sales growth will be 5% to 6% a year, while developed markets will see 1% to 2%.

These emerging markets are worth chasing, says Andrew Wood, an analyst at Sanford C. Bernstein. He estimates that Unilever's business excluding North America, Europe, Japan and Australia amounts to about $17 billion in sales. Unilever's presence in developing markets is one of the reasons the company can deliver sustainable revenue growth, Mr. Wood says, but he cites P&G's recent acquisition of Gillette as sharpening competition. He says P&G's acquisition of Gillette brings its developing markets' sales to about $13.2 billion. "We would not be surprised if P&G's developing-markets business was as big as Unilever's within a few years." Mr. Wood says that P&G is eroding Unilever's competitive advantage, with India a major focal point in the past year.

Unilever says it is unconcerned by the P&G-Gillette tie-up. "Of course we keep an eye on industry developments, but we've been operating in a very competitive marketplace for a long time," says Mr. Gorin.

Mr. Gorin says Unilever is deeply committed to protecting its business in India, where the company's Hindustan Lever subsidiary enjoys a powerful position. "Our experience of similar situations such as southern Latin America in the mid-1990s leads us to believe that no matter what the depth and duration of recent developments and if we pursue our current strategy, Hindustan Lever will come out on top," says Mr. Gorin.

Charat Dhall, business head for Unilever's Project Chackti in India, says Unilever is accessing villages of fewer than 2,000 people-communities that are usually hard to reach because they lack distribution or advertising networks. Mr. Dhall says Unilever is working with groups of women in these small villages to sell the company's products, which are broken down into affordable, individual sachets. Unilever provides training and product information.

Mr. Dhall said it has been "very successful" with about 14,000 women or women's groups, covering about 50,000 villages. In total, Unilever has access to about 100,000 of the 600,000 villages in India, but during the next five years, using this method, Mr. Dhall hopes another 100,000 will be reached.

"It's important that companies understand the local context and connect with local players. Products have to be developed with them," says Ted London, director of a group called Base of the Pyramid Learning Laboratory, which works to understand how best to meet the needs of low-income consumers.

"It's no use designing a product in the West and then taking it over to consumers," adds Mr. London. "It's crucial to find what's right with these economies."

How Do I Open This?

P&G says it has learned about product suitability through mistakes with Western products in developing regions. It tried to sell Folgers coffee in China in a can that didn't have a pull tab, not realizing that consumers there didn't have or use can openers. The company has had success with Crest toothpaste that uses cheaper, less glossy, therefore lower-cost, packaging. "We still have to do significant investment in consumer research and understand how to develop unique products for these markets to satisfy local consumer needs," says Mr. Shelton.

P&G anticipates the amount of money spent on research and development and advertising in developing countries will increase. "As our business grows, the absolute amount of spending on research and development and advertising will also increase, but this doesn't mean we will spend less in developed markets," Mr. Shelton says.

Mr. Gorin says some research-and-development costs "may be lower in developing countries, not because we develop less-sophisticated products but more because of lower input costs such as capital, wages and taxes."