3 Questions Entrepreneurs Must Answer to Succeed in Emerging Markets
The investment climates in emerging and frontier markets have made a lot of entrepreneurs nervous recently. Economic slowdowns in China, South Africa and Brazil threw curveballs at formerly bullish investors. Plummeting commodities prices rocked Nigeria, Venezuela and Iran. In Africa, financiers shuddered as Nestlé announced it would slash its labor force over disappointing middle-class growth.
Those are just the issues unique to those countries. Expanding into new markets, whether foreign or domestic, is always challenging. Investors must navigate unfamiliar markets while confronting universal issues such as tax codes, compliance standards and competition with established outfits. Even in the U.S., business laws vary from state to state. Tax rules and guidelines in other countries become even more complicated where, of course, businesses must contend with language barriers and cultural conflicts.
Successful expansion into difficult markets requires preparation and a keen understanding of the landscape. Entrepreneurs considering a move need to answer the following questions to guide their strategies:
1. Is consumer consumption powerful, steady or fragile?
Frontier and emerging economies are marked by extreme disparities in income and purchasing power. Consider, for instance, that the Gini coefficients in Brazil, Turkey and South Africa are above 50, but are significantly lower in the U.S., France and Germany. The large swings in income across a population necessitate regular and incisive analysis of the target market.
Investors in Africa discovered this firsthand through mixed signals from the middle class in the area. Several multinational brands are entering and expanding their fast-moving consumer goods operations in African countries, betting on future growth. But some businesses expressed disappointment that the sector isn’t developing as quickly as they hoped, believing the perceived opportunities are unrealistic.
Investors should engage in frugal innovation and create cost-effective products for markets with low purchasing powers. The Jugaad school of thinking teaches entrepreneurs to adapt a flexible "bottom-up approach" to investment and innovation, an attitude that has transformed development in India and China. Nokia exemplified this mentality by releasing a bicycle-powered cellphone charger in Kenya, which has an 80 percent mobile penetration rate. A Jugaad-based approach helps Western investors think beyond standard structures to accommodate foreign markets.
2. What are the key trends in the evolution of the market?
The proliferation of communication technology accelerates commerce in emerging markets, creating dynamic, fast-changing economic patterns. Cellphones were luxury items in Kenya 15 years ago -- now, 67 percent of phones sold there are smartphones, and the jump in mobile usage catalyzed ecommerce and online shopping platforms. The Postal Corporation of Kenya was reluctant to jump on this trend, and now it's forced to play catch-up as a result. The postal system's situation typifies what happens when enterprises refuse to adapt to rapidly shifting demands.
Investors must learn to forecast market movements and plan ahead for potential pitfalls. Delivery logistics prove especially challenging in developing countries, so solving those problems in advance creates a competitive edge that helps savvy entrepreneurs avoid some obstacles inherent to frontier economies.
3. What strategic partnerships and operation channels are available?
Strategic partnerships and operation channels are key components of successful expansions. Consumers in frontier and emerging economies are loyal to existing brands, so partnering with a local enterprise helps establish inroads into the market. A respected presence also safeguards against competition from late investors who want a piece of the action once the country stabilizes.
Walmart’s presence in Africa exemplifies the importance of strategic positioning. The U.S. retail giant acquired a majority stake in South Africa’s Massmart Holdings in 2011, establishing a foothold in what was at the time Africa’s largest economy. Massmart Holdings followed suit in the Kenyan market in June 2015 through a deal made by its subsidiary, Game, further illustrating the importance of being several moves ahead of other multinationals and investors.
There’s no magic formula for succeeding in a challenging economy. A dedication to understanding the laws and culture combined with ongoing market analyses ultimately lead to profitable investments. Foresight, patience and a willingness to take risks also pay off in these markets more than others, so entrepreneurs should expand into areas where they’re passionate and committed to staying the course.