Exploring Growth in Emerging Markets
Exploring the enigmatic terrain of emerging markets requires knowledge and resilience. To map these uncharted territories, scholars must take into account macroeconomic fundamentals and micro-level dynamics.
Rapid industrialization, a burgeoning middle class and favorable demographic trends make emerging markets intriguing laboratories for business researchers. They can also serve as powerful growth engines.
In a world that is increasingly data-driven, growth engines are the lifeblood of your business. Having an engine in place will allow you to funnel business intelligence into your marketing plan for a more targeted approach to growth. There are many different kinds of growth engines – paid, sticky, viral and others. Each one has its own benefits and challenges but they all have a common denominator: they must be based on your customer’s use of your product or service.
With aggregate consumption in developing markets still substantially below that of advanced economies, there is significant room for growth and different consumer-focused sectors stand to benefit differently. Large multinationals with strong brands, innovation and well-developed infrastructure are best positioned to capitalize. These include household-name consumer products firms such as Procter & Gamble Co., baby-formula maker Mead Johnson Nutrition Co. and PepsiCo Inc., as well as food and beverage conglomerate Mondelez International. The higher savings rates in emerging markets also augur well for consumer-oriented companies.
Sectors to Watch
Developing nations’ younger and faster-growing populations and high savings rates augur well for consumer-oriented companies (especially as incomes rise). And their lower energy costs can offset a weaker dollar, providing a competitive edge.
But not all business models travel easily abroad, especially in a culture that may be unfamiliar to managers. Retailers, for example, must adapt products and menus to meet local tastes and cope with complexities such as supply chain sourcing, legal and regulatory issues, and foreign exchange transaction and translation impacts.
The success of some multinationals in emerging markets illustrates the value of careful market research and a long-term perspective. For example, apparel giant NIKE Inc. is expanding its global presence through a strategy that involves investing in locally owned franchises rather than building its own stores. Similarly, beauty-products maker The Estee Lauder Cos. has invested in partnerships to distribute and sell its brands in Asia, Latin America, and elsewhere. Its strategy reflects the belief that local talent can better understand and cater to local consumers.
As the global economy continues to recover from the COVID-19 pandemic, emerging markets’ economic growth is expected to accelerate. After a brief period of financial stress, most EM economies have demonstrated resilience and agility to manage the economic fallout of the outbreak, with low private-sector debt burdens and high — though declining — excess savings helping buffer them from over 475 bps of monetary tightening since early 2021.
Although aggregate emerging market consumption growth slowed last year as low commodity prices and weak global trade sapped demand, they account for an increasing share of total global consumer spending. As a result, large consumer-focused companies with brands, innovation, and diversified global supply chains are well positioned to benefit from emerging market growth.
Successful developing-market expansion will boost sales growth, help companies leverage their cost structures, and diversify exposure to local economic cycles over the long term. This can benefit names like consumer products giant Procter & Gamble, baby-formula maker Mead Johnson Nutrition Co., food-ingredients maker Ingredion Inc., beauty-products company L’Oréal S.A., and NIKE Inc.
Originally, “due diligence” meant “required effort.” It was a phrase first used in the mid-fifteenth century and subsequently developed into its common business sense. Today, the term means the research a company must perform before engaging in a transaction or agreement.
Due diligence is a critical step in M&A. It helps a firm to uncover risks and opportunities, validate the assumptions that are driving its business plan, and ultimately appraise long-term value.
The process includes a comprehensive examination of documents, interviews with customers and employees, and site visits. Responsiveness and organization on the seller’s part are essential to expediting this process. It’s also important to have the right team members working on this effort, including members of human resources, information technology, finance, and operations. These people are needed to gather relevant data and to provide support and answers to questions. They should be given adequate time to complete their work and should be able to focus on this task without distraction.