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The New Champions: How Local Players Are Dominating Growth Markets

By Niels Bormans, Managing Director, The Abraaj Group

It should not come as a surprise to anyone that the consumer opportunity in growth markets is huge and rapidly growing. To illustrate the order of magnitude: In Nigeria, every year more babies are born than in the whole of Western Europe combined or in the United States for that matter. These demographic trends provide enormous opportunities for consumer products companies that offer diapers, baby formula, dairy based products and other related items.

These attractive growth rates are often driven by significant levels of under penetration. As income per capita levels are substantially lower than in developed markets, access to many consumer goods and services has either not been unlocked for the mass market consumer or they have been structurally under penetrated compared to Western levels. As income levels rise over time, economies tend to follow a predictable path: many categories ride a penetration wave at rates of up to two to three times the local GDP growth.

Today’s consumer is increasingly looking for more convenience and time saving opportunities. As more women participate in the work force and climb the career ladder, there is less time for traditional home-prepared and cooked meals. This offers opportunities for pre-packaged, ready-to-cook and ready-to-eat solutions. In Vietnam, for instance, a greater number of families replace the traditional noodle based breakfast with ready-to-eat bakery products. This has created an opportunity for smart companies who have their pulse on market and demographic trends and can respond with speed and agility to changing lifestyle preferences.

Buy Local, Be Local

It is a widely held belief that Fast Moving Consumer Goods (FMCG) multinational companies like P&G, Unilever and Nestle dominate growth markets. However, from our experience of investing and operating on-the-ground from Mexico to Thailand, we can say that this is not the rule.

While multinationals collectively have about 40% of market share on average in growth markets, the remaining 60% belongs to local and regional companies.

Of course there are local nuances, which are important for understanding local dynamics. Take the Pacific Alliance countries, for example. In Colombia and Peru, multinationals have a share of between 30-40% in the top 15 largest consumer categories, offering opportunities for private equity firms to invest in local businesses. In Mexico, on the other hand, their share in the 15 largest categories reaches 70-75%, as a result of the many US players that entered Mexico decades ago and built up dominant local positions.

Our own experience has been to partner with leading local businesses and grow them into national and regional champions. This experience has played out in several of our businesses across the consumer spectrum from FMCG and consumer durables to retail and F&B.

 Prospects for Growth

Another interesting phenomenon is that local and regional companies tend to grow faster than multinationals. We observe four reasons for this:

  • Superior understanding of local tastes and the ability to adapt quickly

Consumer companies that are successful in our markets often have a superior understanding of their end-user base. They typically understand local preferences and flavours very well, which are key drivers in the decision making process of consumers. In Mexico, our research shows that many consumers value the flavours of local street food very highly. Their overwhelming preference for particular flavours means that they are even prepared to risk food poisoning once or twice a year, rather than foregoing their favourite snack in favour of more hygienic, but less tasty alternatives. The same dynamic does not play out everywhere, but understanding local nuances is essential to identifying the right value proposition in each market.

Our markets are not immune to volatility and changes in the business environment. But the faster a business can respond to them, the more successful it will be. Local and regional companies are typically not burdened with the same red tape in their decision making processes and restrictions on local customizations that some multinationals face.

Capa de Ozono – an Abraaj partner company – is the third largest fashion footwear company in Mexico and caters to teenagers and young adults. As of 2016, the company has 235 stores in more than 50 cities, including the six largest, as well as more than 300 wholesale clients and a thriving online retail presence.

 

  • Superior route to market strategies

Another area where local companies often stand out is their innovative route to market strategies. In markets with underdeveloped infrastructure and a high share of traditional “mom and pop” retail, well-developed route to market strategies is a key success factor. In addition to under penetration as a growth driver, so-called weighted distribution is critical. Once a household consumes a particular product, higher household income does not necessarily translate into more consumption of the same good or service. A company’s growth potential is then to a large extent driven by its ability to reach more households effectively and efficiently.

  • Affordable price points for the mass market

As discussed earlier, the average income per capita is (substantially) lower in growth markets compared to the developed world. This implies that consumer goods and services not only need to offer great value for money, but also need to adhere to maximum price points that are affordable to the average household. This often implies smaller pack sizes and single packs as opposed to larger economy or multi-pack packaging. Local companies have often found it easier to identify the right price points to meet mass consumer affordability. Sometimes local players are also protected by import duties, making it more difficult for multinationals to compete effectively when they lack local manufacturing capabilities.

  • Sourcing the right talent

Finding the right management talent can sometimes be challenging. However, there are often innovative ways to address this, such as tapping into diaspora populations. Many talented locals have left to study or work abroad and are increasingly willing to return to their home countries to take on leadership positions in local and regional businesses. These individuals have often worked at best-in-class businesses in the West and bring back with them these experiences, enabling local companies to compete effectively on quality of talent with multinationals.

Value Creation: A Partnership Approach

We have a strong track record of investing in leading local or regional consumer goods companies that we believe can ride the consumer penetration demand wave. In order to do so successfully, it is critical to understand the local consumer needs and the value proposition that the company offers in addressing those needs.

At Abraaj, value creation lies at the heart of the investment process. As providers of growth capital, we assess every investment opportunity from a value creation perspective. Alongside opportunities to institutionalize the business and strengthen the core value proposition, we look to create break-out strategies that can drive step-change growth. This can range from developing new products to cater to untapped consumer segments, pioneering new usage occasions or partnering/merging with complementary businesses

While these ambitious growth plans translate to high expectations from our partner companies, we do not expect them to achieve this on their own. As partners in the growth journey, we are focused on identifying and developing customer value and supporting management to achieve the value creation plan.

Our partner companies have the local knowledge and customer insights to set them apart from other players in the market. With a strong commitment to supporting management with our expertise and experience, we are determined to turn these local companies into the consumer champions of tomorrow.