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


The Flatbread Factor

Nevertheless, China is rapidly building an extensive higher-quality road network. Infrastructure improvements are also spurring the growth of third-party logistics companies, which are still largely absent in India. The burgeoning logistics industry has a ripple effect, encouraging the entrance of more companies as confidence grows that they can coordinate the storage and movement of their goods around the country. 

Anyone seeking to develop a strategy for the fruit and vegetable retail industry in China — or, for that matter, the chocolate industry in Mexico — needs to track the speed at which the infrastructure is changing. Specifically, how soon might refrigerated transportation be available? Wherever it shows up, a more mature market will follow. 

The infrastructure can also include such transactional supports as financial and legal services. A strong consumer finance industry can accelerate sales of products as varied as automobiles, white goods, cell phones, and apparel. In South Korea, for example, the rapid rise of consumer financing and information about products and services drove a huge wave of growth. From 1999 to 2002, LG Card, the country’s leading credit card company, boosted card issuance from some 40 million to more than 105 million, translating into a 600 percent increase in total consumer spending.

Urbanization. As Stewart Brand noted in his article “City Planet”  (s+b, Spring 2006), the proportion of humanity living in or near cities is passing 50 percent for the first time in history. In a country like China, where the population of urban dwellers grew by 90 million people between 1999 and 2003, it’s hard to overstate the impact of this trend.

Urban families tend to have two incomes, with both adults working outside the home. This gives consumers more purchasing power, but also less time for food preparation and other household chores. Urban dwellers thus tend to buy more manufactured foods, particularly staples such as bread. Food companies then sell less flour directly to consumers and more in bulk to bakeries. Demand also grows for such personal-care products as shampoos, conditioners, and deodorants. Sales of microwave ovens, refrigerators, and washing machines rise. So do fast-food restaurant revenues, driven by women entering the sales force. (In Shanghai, the average person eats most meals outside the home.) 

Urbanization explains why Gruma’s flatbread strategy is so powerful. Flatbread provides a quick and inexpensive meal; thus flatbread is one of the most popular premade food products that new city dwellers purchase.

Distribution Channels. As an economy evolves, so too do the channels through which consumers purchase products. By anticipating these changes, companies can outmaneuver the competition. 

Perhaps the most obvious distribution channel is the retail format, which evolves and converges in very similar patterns across the world. Large formats such as hypermarkets and mass merchandisers have grown quickly in emerging markets. France’s Carrefour SA has become the largest player in both Brazil and China. A Carrefour in Shanghai is similar to one in Sao Paulo, but with added sections for Chinese products such as dumplings, mushrooms, and teas.

Gasoline retailers also follow a near-universal evolutionary arc. First come full-service stations that sell only gas, then stations with convenience stores, and then  chains with self-service gas pumps and employees running a retail store.

The skill and education of the local sales force and the customer base also affect maturation. The more expensive or complex the product being sold, the more sophisticated the sales force must be. Retailers such as Home Depot and Lowe’s thrive in Europe and the U.S., where the do-it-yourself approach is prevalent. But in China, people have little experience with home remodeling or repairs, which is why Home Depot entered the market only in 2006 (when it acquired China’s leading home improvement retailer, The Home Way, a chain with just 12 stores).

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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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