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 / Spring 2007 / Issue 46(originally published by Booz & Company)


The Flatbread Factor

Companies often rely on a country’s average gross domestic product (GDP) as an index of the maturity of a local market. But average GDP, because it aggregates middle-class and poor customers, does not accurately represent a nation’s patterns of development. Thus, it can be a misleading measure for timing a company’s entrance into local markets.

This point is especially critical in countries as massive as China and India. Each of those countries contains distinct regions that should be treated as markets in their own right. The Yangtze River delta, with Shanghai at its center, has a population on par with the largest countries in Europe. And the GDP per capita is much higher there than it is in most other Chinese regions.

Executives should focus instead on four factors in a country’s operating environment:

Political and Legal Evolution. A country’s regulatory and legal environment has a huge impact on the patterns of development of all industries within its borders. 

For instance, India’s government has long imposed laws that protect local mom-and-pop retail stores by barring most foreign direct investment. Large retailers also must negotiate central, state, and local government rules that reflect the country’s long-standing socialist influence. 

One 2003 study found that an Indian entrepreneur would need, on average, 15 licenses from 11 government bodies to open a new shop, and securing them would take, on average, six months. Meanwhile, labor laws constrain the growth of large retailers by making it hard to lay off staff. One result: India is a land of 1 billion people and virtually no supermarkets. 

Many observers believe that India’s government will lift these regulatory constraints, which would provide huge opportunities for food companies. Reliance Industries, a conglomerate that is India’s largest private-sector enterprise, is already anticipating regulatory liberalization and plans to invest in more than a thousand supermarkets. Meanwhile, Wal-Mart announced in November 2006 a joint venture with Bharti Enterprises, a large Indian company involved in telephony, insurance, and agriculture. The goal: a new chain of Wal-Mart–branded retail stores with Indian ownership.

In China, by contrast, protections for small shopkeepers do not exist, and workers are not allowed to form independent trade unions (a policy set up to keep employment fluid and wages low). Chinese supermarkets and hypermarkets have thus evolved so quickly in 10 years that they already account for 75 percent of the total value of retail sales in the country. From 1994 to 2002, the number of supermarkets in China grew astonishingly fast, from 2,500 to 53,100, according to a report from the Food Industry Center at the University of Minnesota. The net effect is a more mature food and retail market in China than in India, even though India’s middle class emerged earlier. (See Exhibit 3.)

A clear and enforced property-rights system is another critical piece of a country’s legal and regulatory environment. In China and Mexico, persistently high levels of intellectual property infringement have discouraged Microsoft and other companies from rolling out some products. But as laws emerge that hold violators accountable, reduce the supply of low-cost fakes, and spur demand for authentic products, the maturation of Chinese and Mexican technology industries will accelerate as well.

Infrastructure. The extent, quality, and development of a country’s roads, bridges, ports, and telecommunications — anything that supports physical and informational exchange — deserves close scrutiny. India’s road system, for example, has been severely neglected; traffic congestion, frequent checkpoints, and paperwork add hours of delay. A trip across the country by truck that would take two days on roads like those found in developed nations instead takes a week.

In China, the infrastructure challenges for large retailers such as Wal-Mart are also enormous. China, roughly the size of the contiguous U.S., still doesn’t have a nationwide logistics network of trucks, highways, and warehouses that can efficiently deliver supplies from farm to shop shelf. Refrigerated trucks are scarce, so Wal-Mart often can’t match the fresh produce and low prices found at open-air venues where the Chinese traditionally shop. What’s more, only about one-fifth of China’s freight trucks are containerized, so most cargo is vulnerable to damage on flatbed vehicles. The trade group AmCham-China (the American Chamber of Commerce in China) estimates that transportation and distribution costs make up at least 16 percent of overall product costs in China, compared with less than 4 percent in more developed countries.

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  1. “Carmaking in India: A Different Route,” Economist, December 13, 2006: Tata Motors plots a $3,000 car. Click here
  2. Stewart Brand, “City Planet,” s+b, Spring 2006: Describes the demographic shifts driving many of these market life cycles, and former Unilever executive R. Gopalakrishnan recounts the RIN story. Click here
  3. Guillermo D’Andrea, Leticia Costa, and Fernando Fernandes, “Successful Retail Innovation in Emerging Markets: Latin American Companies Translate Smart Ideas into Profitable Businesses,” Booz Allen Hamilton white paper, January 2007: A study for the Coca-Cola Retailing Research Council shows how breakthrough retailing makes a difference in Latin America’s maturing consumer market. PDF download
  4. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000): Explains how to undo the bureaucratic factors that constrain market life cycles.
  5. Jean Kinsey and Min Xue, “Supermarket Development in China,” paper presented at the China Workshop of the Worcester Polytechnic Institute, June 16–17, 2005: Fascinating preliminary study from two researchers at the Food Industry Center, University of Minnesota, of grocery evolution in China over the last two decades. PDF download
  6. “Looking Forward, Acting Now,” 2005 Annual Report, Gruma SA de CV: An unusually comprehensive annual report lays out the company’s global approach to markets and customers. Click here
  7. Alonso Martinez, Ivan De Souza, and Francis Liu, “Multinationals vs. Multilatinas: Latin America’s Great Race,” s+b, Fall 2003: Explicates the nature of corporate competition in emerging markets. Click here
  8. Norihiko Shirouzu and Stephen Power, Unthrilling but Inexpensive, the Logan Boosts Renault in Emerging Markets,” Wall Street Journal, October 4, 2006: Chronicle of a $10,000 car for developing markets.
  9. Michael Sisk and Andrew Sambrook, editors, The Whole Deal: Fulfilling the Promise of Acquisitions and Mergers (strategy+business Books, 2006): Shows how a more effective acquisition process makes all the difference in implementing a successful two-platform strategy, particularly when a company is entering emerging markets.
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