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Management Agenda

Serving the Low-Income Consumer:


How to Tackle This Mostly Ignored Market
Facing saturation and cutthroat competition in long-established markets,
many multinational companies are seeking new markets. Yet until recently,
they have largely ignored the more than 5 billion low-income consumers,
thinking these consumers have no money to spend or are impossible to reach.
Now several companies are disproving these perceptions.

H ow many of the worlds 6.6 billion


potential consumers does your company
target? For most multinationals, it seems an
The other 5.1 billion people 78 percent of
the global population are low-income con-
sumers. Conventional wisdom says to ignore
odd question, because only 1.5 billion people this group, because there isnt any money
worldwide exceed $10,000 in purchasing there to earn, and anyway the poor are not
power parity for their personal expenditures.1 brand conscious.
Management Agenda

Our research demonstrates that both per- Who Is the Low-Income


ceptions are false. For the right companies,
serving low-income consumers can lead to sig-
Consumer?
nificant growth. Consider: Russian low-income To serve low-income consumers successfully,
consumers spend $104 billion annuallyabout companies must first account for their lower
30 percent of the total personal expenditures purchasing power. Figure 1 illustrates a widely-
in the country. Can you pass up an opportu- used threshold for defining low-income con-
nity to address even a small fraction of this sumers: $10,000 in purchasing power parity
sum? Furthermore, low-income consumers are (adjusted for living costs in different coun-
brand conscious; people with limited savings tries). More than three-quarters of the global
need good, reliable quality at a fair price. Well- population is low income, and many of them
known multinational brands are favored over have been historically beyond the reach of
domestic brands by 70 percent. These custom- organized retail.2
ers might not be able to afford a standard-sized The figure shows an additional threshold
bottle of Pantene shampoo or NIVEA hand that we think doesnt get enough attention.
cream, but they do see the high price of such While many people associate low-income
products as an indication of value. Given the consumers with the bottom of the pyramid
right-sized container, theyre happy to splurge. (incomes of less than $2,500), more than half
of these individuals actually earn between
$2,500 and $10,000. Such medium low-
FIGURE 1 income consumers represent a great majority
of consumers in Eastern Europe, the Middle
Worldwide, approximately 78 percent of the East and Central Asia.
population is low income Furthermore, the pyramid is morphing. By
2020, the very low-income market is expected
to shrink by 24 percent, while the medium-
< 25% low market will change little and the wealthy
of world
population will grow by 80 percent. Whats happening,
Affluent
of course, is that people are marching up
Wealthy the income ladder. Sooner or later, youll be
> $10,000 PPP*
targeting people who are low-income consum-
ers today, and today is when theyre forming
> 75% < $10,000 but
of world opinions and loyalties.
population > $2,500 PPP
Before investing in this new market, com-
panies should consider two questions: Is the
< $2,500 PPP market large enough does it represent suf-
ficient expenditure to justify market entry?
*Note: PPP refers to purchasing power parity Can these customers be served profitably?
Sources: World Resources Institute; World Bank; UN; U.S. Census;
A.T. Kearney analysis For the first question, the answer is yes, the

1
A purchasing power parity exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.
2
For more on improving the lives and living conditions of the worlds poor, see the white paper A New Plan for Rural Development
at www.atkearney.com.

A.T. Kearney | EXECUTIVE AGENDA 49


Management Agenda

market is large enough and we explain why in size to single sachets. This offers several advan-
the sidebar on page 51. The second question tages. For one, low-income consumers tend to
requires a longer discussion and is the basis shop for daily needs since they are often paid
of this article. by the day, which means larger packages are
simply not an option. Sachets bring a high-
priced product within reach while maintaining
Can Low-Income Consumers the perception that high price stands for high
Be Served Profitably? value. Also, small village or roadside shops have
To address the low-income consumer in these only limited stocking capacity, so smaller items
markets, our analysis builds on a concept called allow them to provide a wider product range.
the 4 As (see figure 2).3 Finally, to leverage scale effects, single sachets
Affordability. The most pressing issue can be sold for promotional purposes and to
in the low-income consumer sector is that hotels and airlines.
people have little chance to save money for There are some potential drawbacks, how-
larger investments. Generally, companies can ever. In Western Europe and North America,
address affordability by reducing packaging firms generally sell smaller packages at a higher

FIGURE 2

The 4 As of addressing low-income consumers

Reduce packaging size


Promote offerings for low price per unit
through mix of outlets Maintain operations on
Form partnerships zero (or near-zero) work-
with public and non- ing capital
governmental Leverage scale effects
organizations and sourcing network
Af
s
es

fo
en

rd
ab
ar
Aw

ili
ty

Tailor offer Restructure


to market 4 As value chain
Ac

y
lit
ce

bi
pt

la
ab

ai
ili

Av
ty

Focus development Reduce cost to serve


on customers Shorten supply chain
Employ innovative Select and support
thinking to meet retailers
customer needs Devise stocking strategy
Establish local R&D Localize sourcing

Sources: Jamie Anderson, Niels Billou, Serving the World's Poor: Innovation at the Base of the Economic Pyramid, Journal of Business Strategy, Vol. 28, No. 2;
A.T. Kearney analysis

3
The concept of the 4 As is proposed in Jamie Anderson and Niels Billou, Serving the Worlds Poor: Innovation at the Base of the Economic Pyramid,
in Journal of Business Strategy, Vol. 28, No. 2, pp. 14-21. However, our discussions of market tailoring and value chain restructuring represent
A.T. Kearney analysis.

50 serving the low-income consumer


Management Agenda

Is the Market Large Enough?


In Eastern Europe, 56 percent of example, the Russian-based cos- cent of pharmaceuticals in Pakistan,
consumers, or 57 million people, metics group Kalina, which has a for example), while the largest
are low income. Additionally, Rus- distribution network touching more market of basic food products may
sian and Ukrainian populations are than 23,000 outlets, holds one- be totally closed off. In the personal
70 percent low income. Altogether, quarter of the Russian skin- and care sector, low-income consum-
190 million low-income consumers oral-care market. Its 32 brand ers typically purchase inexpensive
are geographically close to Western toothpaste is preferred by 20 per- skin care and shampoo but branded,
Europeand Western European cent of Russian buyers. Likewise, high-priced perfume. Therefore, fra-
markets. Even larger is the market Arko razor blades and complimen- grances (which comprise more than
in the Middle East and Central Asia, tary products from Turkish personal one-third of the Russian personal
where 90 percent of consumers are care company Evyap hold more care market) are an especially prom-
low income, with 315 million people than 25 percent of the Turkish ising market.
(by comparison, the total EU15 popu- market for mens shaving products. In light of this, the poten-
lation is approximately 382 million).4 Multinationals can address tial addressable market share in
Although there is a huge at best a 20 to 30 percent market Eastern Europe, Russia, Ukraine,
number of low-income consumers, share for low-income consumers. the Middle East and Central Asia
is each individuals expenditure The health and communications is $129 billion. Thus in many sec-
large enough to make the market sectors promise lots of market share tors there will indeed be sufficient
attractive? To calculate this, we (multinationals account for 60 per- expenditures to justify market entry.
multiply the number of low-income
consumers by their dollar expen-
Calculating personal expenditure by region ($ billions)
ditures.5 In the Middle East and
Central Asia, the result is $298 bil-
Western Eastern Russia and Middle East and
lion a 56 percent share of per- Europe Europe Ukraine Central Asia
sonal expenditures. Eastern Europe, Total: $7,328 Total: $476 Total: $414 Total: $534
Low income: $681 Low income: $134 Low income: $143 Low income: $298
Russia and Ukraine amount to a Percent share: 9% Percent share: 28% Percent share: 35% Percent share: 56%
$277 billion market (see figure).
Clearly, these markets are
not the sole playing field of multi-
nationals. Typically in countries
dominated by low-income consum-
ers, most food products are pro-
duced locally and sold at outdoor
markets. Similar dynamics affect
housing and household goods. Even
in the personal care sector, home-
grown competitors have a solid
standing that makes it difficult for Note: Low-income expenditures calculated using the Gini coefficient and income distributions
published in the UNs Human Development Report 2006.
multinationals to compete. For Sources: UN; World Bank; A.T. Kearney analysis

4
Countries surveyed: Egypt, Iran, Israel, Jordan, Kazakhstan, Pakistan and Turkey.
5
Many studies provide expenditures in purchasing power parity. However, companies must calculate their earnings in euros or U.S. dollars. For example,
despite being rather similar markets in purchasing power parity (about $4,320 per capita), Turkey and Kazakhstan differ significantly in current dollar
expenditures ($2,435 and $1,877, respectively).

A.T. Kearney | EXECUTIVE AGENDA 51


Management Agenda

unit price, extracting a premium for conve- In each case the company will not strip down an
nience. Reaching the low-income consumer existing model but instead develop a spacious
in a developing country requires a lower rela- vehicle especially for Indian buyers using
tive price. You dont want a premium, just a Indian labor, logistics and sales networks.
customer. The drawback is that middle- and Companies that cannot disaggregate prod-
upper-income consumers may eventually notice ucts into smaller units can aggregate consum-
the lower price, switch their buying habits and ers. Financing can often be secured by grouping
start a price erosion. several users together. For example, in Mexico,
Notwithstanding the drawbacks, India is a the international cement and construction
rich source of examples for tailoring affordable company Cemex saw a market opportunity.
products. Roughly 45 percent of smaller 50- Because of a housing shortfall and the inabil-
gram tea packs are sold in rural markets, and ity to get a construction loan, many poor
people were building their own
homes. A typical home took five
years to complete, had just one
room and no access to sewage
re aching the low - income facilities. Today, Cemex provides
families with access to credit for
consumer in a developing
cement and architectural consult-
country requires a lower relative ing, which has reduced construc-
tion time by one-third and costs
price. you don t want a by 20 percent. Three families are
premium , just a customer . grouped together into communi-
ties with joint responsibility for
weekly payments. In part because
of peer pressure, Cemex says repay-
ment rates reach 99 percent.
Hindustan Unilever Limited sells 5 billion The outlook: Making products afford-
pieces of penny candy a year, earning rev- able for the customer means employing a
enues of $50 million. Even computers are low-margin, high-volume strategy, and lever-
sold in smaller packages. Novatium, an India- aging scale effects to achieve low costs of goods
based technology company, introduced the sold. Return on capital not on revenue is
Nova netPC, a personal computer for the the critical yardstick in low-income markets.
Indian market priced at roughly $100. The Companies can achieve this goal and reduce
machines have no local storage or program- risk by operating on zero (or nearly zero)
ming. Instead, users pay a small monthly sub- working capital.
scription fee to connect to a network where Availability. Many low-income consumers
a central server hosts applications and files. live in remote villages or urban communities
Affordability is often achieved by restruc- that lack access to conventional retail markets.
turing the supply chain. Renault is planning Reaching these consumers requires creative
an automobile priced at $3,000 for the Indian thinking and finding alternative means of
market, and Tata has announced one for $2,500. transportation.

52 serving the low-income consumer


Management Agenda

One way to replace the standard retail program. Golden stores are tiny mom-and-pop
environment is to build on the entrepreneurial shops that carry 40 or more P&G products and
spirit of many low-income consumers. Recent display them together on the shelf rather than
media attention has heralded microfinance next to competing brands. In return, these mer-
institutions that make small loans to help poor chants get regular visits from P&G reps who
rural residents establish their own businesses. spruce up the displays.
These microenterprises often sell products to Sometimes creating completely new ways to
other low-income consumers in the neighbor- sell is the best path. Nestl Brazil, for example,
hood, but need a way to reach out to remote established a direct sales channel for women
villagers. Recently, Accion International devel- to sell yogurt and biscuits from their homes.
oped an application called PortaCredit, which Many customers are given two weeks (the
runs on a personal digital assistant and allows interval between sales calls) to pay. Although
loan officers to meet clients in their homes, credit is unsecured, peer pressure keeps default
input data, process the application, and calcu- rates below 2 percent. Likewise, in Russia and
late loan payments, all on a PDA.6 The result Central Asia, door-to-door selling accounts
is improved efficiency for the institution and for nearly 19 percent of the beauty market.
a faster turnaround for the applicant. China, too, has recently loosened restrictions
In Africa, cellular leader Vodacom discov- on direct selling.
ered budding entrepreneurs by tracking cell Meanwhile, in India, Hindustan Unilever
phones with an abnormally high number of provides personal care products such as soap
calls. Believing the owners were renting out and shampoo for womens Shakti self-help
their phones, the company contacted them groups to sell in their villages. The project
and offered them franchise opportunities to could expand the companys coverage and help
operate their own phone kiosks. Each kiosk is more than 30,000 entrepreneurs earn a living
run by a franchisee who invested in the initial by serving potentially up to 500,000 villages,
costs and receives one-third of the revenues. each with fewer than 2,000 residents.
To date, Vodacoms network includes about Such projects are less about helping entre-
5,000 kiosks. Also in Africa, the sale of pre- preneurs and more about expanding markets.
paid phone cards has become big business as These microenterprises represent a new logistics
most low-income consumers cannot afford the solution, shortening supply chains and lowering
mandatory two- or three-year mobile phone working capital while opening new markets.
contracts. Today, farmers in Africa use their The outlook: Although improving availabil-
mobile phones to access weather forecasts and ity often requires labor-intensive distribution,
gauge market prices. low labor costs can be leveraged. For example,
Where basic sales channels already exist, self-employed Shakti saleswomen in India earn
companies simply need to be more fastidious in $15 to $22 a month, about 8 percent of sales.
their support. Procter & Gamble told the Wall Furthermore, the direct selling approach can
Street Journal that it is targeting low-income quickly establish a sales network, bypass inter-
consumers in Mexico through its golden store mediaries and help address the final two As.

6
Accion is a nonprofit organization. The microfinance sector continually shows how commercial enterprises can learn from innovations by nonprofits,
and we expect to see this IT example replicated elsewhere.

A.T. Kearney | EXECUTIVE AGENDA 53


Management Agenda

Acceptability. Many low-income consum- by marketing edible cutlery. Its edible because
ers retain traditional roles, religious motiva- its made from sorghum flour, a popular heat-
tions and other unique cultural factors. When and drought-tolerant and nutritious crop.
we think of designing products acceptable to In other countries indeed, we must admit,
these consumers, we often think of factors such even to ourselves edible cutlery seems a bit
as halal (Islamically permissible) foods in the farfetched. But the product is designed for
Middle East and refrigeration in the tropics. Indias unique cultural factors, not ours.
As with all consumers, understanding their The circumstances surrounding daily life
daily lives and all related needs is most critical. should also be considered. Low-income con-
For example, Danone sells calcium- and iron- sumers in Brazil typically have long commutes,
leaving early and returning home late.
They must often prepare meals over
the weekend, so freezers and micro-
wave ovens are more common than

the absence of conven -


one would expect and acceptability
for frozen or semiprepared meals is
tional advertising in the growing.
Finally, one of our favorite
lives of low-income consumers examples of tailoring product offer-
ings for acceptability comes from
can be both a challenge
China, where the appliance manu-
and an opportunit y. facturer Haier simply listened to
its customers requirements. Called
to service a clogged drainpipe in one
of its clothes-washing machines,
the company discovered an unusual
enriched biscuits in China, where half of the cause: potatoes. Millions of people in the
population suffers from a lack of calcium. Sichuan region grew potatoes and used wash-
Likewise, illiteracy might suggest a product ing machines to rinse off the mud. But instead
adaptation. How does one operate an ATM, of blaming customers for misuse, Haier devel-
for example, without reading? In India, ICICI oped a machine with wider pipes that could
Bank and Citibank developed biometric ATMs, wash potatoes and other vegetables in addition
featuring fingerprint authentication and voice- to clothes. (Later, Haier developed another
enabled navigation. This technological leap- washing machine to make cheese from goats
frogging made the product more acceptable milk.) The result was a strong increase in use
to low-income consumers. To improve afford- of Haiers products among low-income con-
ability, the banks also did away with minimum sumers and market leadership in China.
account balances. The outlook: Acceptability comes from
Sometimes adaptation comes from cre- innovative thinking and a deep understand-
ative thinking about traditions. For example, ing of local needs of low-income consumers.
Indian entrepreneurs are hoping to cut down Companies with local R&D and market research
on the waste of plastic forks, knives and spoons are more likely to develop a useful product.

54 serving the low-income consumer


Management Agenda

Awareness. As with the absence of wear manufacturer Scojo Vision, which trains
conventional retail outlets, the absence of local entrepreneurs to give basic eye exams
conventional advertising in the lives of low- and sell low-cost reading glasses in their com-
income consumers can be both a challenge and munities. Theres no doubt that inexpensive
an opportunity. How will they know about reading glasses improve the lives of low-income
your product? Can you learn enough about consumersand they also open a new market
their lives to get your message across? In India, for Scojo Vision.
for example, Hindustan
Unilever uses magicians
and dancers to promote
products. Additionally,
partnerships with micro-
enterprises (as discussed
above) come with built-
in town crier awareness
opportunities.
TV, Internet and
word of mouth play a
big role, too, as infor-
mation travels fast and
across purchasing-power
categories. As rural work-
ers move into the cities for employment, they Likewise, Procter & Gamble developed
become more familiar with brand-oriented a water purifier for developing countries.
lifestyles, influencing product decisions back In Uganda, the company partnered with
home where they often send money. In less Population Services International and the
media-saturated areas, companies can increase International Council of Nurses to increase
awareness by tapping into the power of social low-income consumers awareness of the
networks. For example, in rural India, Colgate- importance of safe water and the P&G prod-
Palmolive took its marketing campaign on uct offering. In a country where only half
the road with video vans that show local the population had access to safe water, and
movies and advertising for its personal care where diarrhea was a major public health issue,
products. Open-air marketing at festivals and the water treatment project reduced instances
in village markets is another cost-effective of disease by 30 to 50 percent. Its a great
approach, allowing companies to reach large example of a socially engaged company yet
numbers of consumers. P&G had undertaken it to grow revenues for
Wed like to close with one more cre- its water purifier.
ative approach for building awareness. When The outlook: Without downplaying the
addressing health or nutrition issues, coop- value and importance of doing good deeds,
eration with non-governmental organizations partnerships with philanthropic groups can
can foster mutual success. One example is the be creative ways to increase awareness. Its
Scojo Foundation, associated with the eye- just one example of the compelling economic

A.T. Kearney | EXECUTIVE AGENDA 55


Management Agenda

reasons to serve the worlds poorgiving them bonus: Companies able to cope with the require-
a choice of products they can afford to purchase ments of low-cost value chains can become more
(rather than a handout of a product they cant) competitive in their home markets.
and also increasing your revenues. Your competitors may already be discov-
ering the low-income consumer. You must act
quickly to profit from first-mover advantage
More Choices and Chances and establish your brand name among this
The advantages of the low-income consumer consumer group as it climbs the income ladder.
market should be clear: It offers growth rates well Its the classic win-win situation of the free
above long-established markets and customers market: giving people more choices and chances
hungry for new choices. There is also a hidden while increasing a companys revenues.

Consulting Authors

Peter Pfeiffer is a partner in the firms consumer industries and retail practice. Based in the Dsseldorf
office, he can be reached at peter.pfeiffer@atkearney.com.

Sven Massen is a principal in the firms consumer industries and retail practice. Based in the Munich
office, he can be reached at sven.massen@atkearney.com.

Ulrich Bombka is a consultant in the firms consumer industries and retail practice. Based in the Munich
office, he can be reached at ulrich.bombka@atkearney.com.

The authors wish to acknowledge the valuable contributions of their colleagues Lian Hoon Lim, Ruslan Korzh,
Kaustav Mukherjee and Markus Stricker in writing this article.

56 serving the low-income consumer


executive
agenda ideas and insights for business leaders

Executive Agenda is published by A.T. Kearney to offer fresh perspectives


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