Finding profits and growth in emerging markets

By Claudia Benshimol Severin, Rogerio Hirose, Udo Kopka, Subho Moulik, Taro Nordheider and Fábio Stul

Over the next 10 years, consumer spending in emerging markets is expected to grow three times faster than in developed nations, reaching a total of $6 trillion by 2020. Consumer-goods companies must understand and address these changing patterns—by both geography and category. This report suggests how.

What do companies need to know about the changing dynamics of the global consumer market? And how can they use that information to ring up profits? Using McKinsey's Cityscope database and other research, we take a crack at answering those questions.

Introduction

What do consumer-goods companies need to know about the changing dynamics of the global market? Using McKinsey's Cityscope database, as well as other researc (both proprietary and outside), we take a crack at answering that question.

Today some 5 billion people live in 37 countries where nominal GDP per capita is in most cases less than $1,000 a year. Despite representing roughly 70 percent of the world’s population, these emerging-market consumers account for only 35 percent of the world’s GDP. This is changing; by 2020 the collective GDP of the emerging markets will overtake that of the developed economies for the first time. And over the next 10 years, consumer spending in emerging markets is expected to grow three times faster than consumer spending in developed nations, reaching a total of $6 trillion by 2020.

Fast-growing cities will account for the lion’s share of growth in emerging-market consumer spending. For example, sales in hair-care products in São Paulo are expected to grow by approximately $1 billion over the next decade, double the $0.5 billion growth in hair-care sales expected from the whole of France (Exhibit 1 in PDF).

Growth is a critical source of shareholder value for consumer goods companies. Today, one-third of the combined market value of global consumer goods players is linked to growth. Dynamic emerging markets therefore deserve particular attention from global players, although few are extensively active in these arenas yet: only 30 percent of the top 15 fast moving consumer goods (FMCG) companies’ revenues came from emerging markets in 2009.

Decision makers in FMCG multinationals must understand and address changing patterns of growth in consumer goods consumption, in both geography and category. But deciding how best to allocate resources among a large number of rapidly growing potential consumer goods markets is difficult. Sound decisions depend on understanding which areas will offer the highest prospective returns in particular categories and when. Focusing simply on the BRIC countries—Brazil, Russia, India, and China—cannot be the right answer for all categories. Even when it is, which BRIC cities will be the most important?

We have developed the Global Growth Compass to help decision makers at multinational companies analyze the proliferating opportunities in emerging markets quickly and rigorously. This tool combines historical data on category growth, macroeconomic indicators, statistical growth modeling, and knowledge of local markets to enable consumer goods companies to understand differences in market potential and choose investment strategies for particular geography and category combinations. The Global Growth Compass database covers 50 consumer categories, 60 countries (both emerging and developed), and more than 2,000 cities around the world. The countries represented in the database together account for 96 percent of 2010 global GDP.

This paper explains the overall emerging-market opportunity for FMCG companies and then details different levels of growth opportunities in emerging country and city markets. It outlines the analysis underpinning these findings and finally describes how the Global Growth Compass can help business leader.