Emerging Markets I

There is a perception that succeeding in Emerging Markets is just a matter of reduced pricing and adapting to distribution channels. Our experience, having traveled to many countries, that it is much more complex. To evaluate this and other factors the WAVE REPORT went to 19 countries in early 2010. We explored markets related to the PC, software, hardware and mobile. The methodology used was to visit retail locations selling PC and Mobile products, to talk with consumers and sellers and observe what was on sale.

Where did the WAVE REPORT go?

Markets in the capitol cities in these countries, with the exception of Iraq, were evaluated:

These countries spanned the regions of Europe, Africa and Middle East. The total population is 38% of the US. The gross domestic product (GDP) at purchasing power parity (PPP) per capita, normalized to the US *100, varied from 3.9 in Kosovo to 83.7 in Kuwait. Iraq is a special case with the largest population of 30.8m, an adult literacy rate of 74.1% and a PPP of only 7.7. Iraq represents one of the most interesting emerging markets and it is reported separately. As we will see, this spectrum of markets was valuable in understanding the buyer ecosystem.

A summary of the engagements includes:

• Interviews – 74
• PC Stores – 61
• System Builders – 31
• Mobile Stores – 12
• Consumers – 9
• Miles Walked – 121.7

This latter figure emphasizes the importance of “feet on the ground.” Stores were discovered and engagements happened which were not planned, they just appeared. Some proved valuable.

Market research in emerging markets is characterized well in “Emerging Markets”, 2^nd Edition, Pacek, N and Thorniley, D.

“Market research takes more time in emerging markets than in developed markets and the outcome of intelligence gathering is often disappointing… [managers] should rely more on primary research than on secondary research, whenever possible. Primary research means going straight to the source, in many cases through interviews with potential customers and other companies. Carrying out primary market research in emerging markets is time-consuming and is not cheap.”

This was a process of discovery. When patterns became clear one wanted to draw conclusions and at the next shop or country one would learn more which would frequently disrupt those patterns. This goes back to a tenant of this assessment, Emerging Markets are complex and only by being in them is it possible to discover some of the underlying ecosystem. However, only by living in them, will the full dimension of the market ecosystem be understood.

Key Findings

Market disruptions are being caused by:

• Malls & Hypermarkets
• Credit
• Netbooks
• Open Software
• Apple
• Internet Buying

These disruptions are a part of the market dynamics which reflect how consumers buy products and why. As in many forms of market research, understanding market dynamics is the first step in knowing market behavior. As we shall see the definition of an ecosystem is also very useful.

Uniformly Netbooks are selling well but in the underdeveloped markets Netbooks are enabling computer penetration. These could be well termed the Emerging Market computer. However, in a few markets Notebooks and even systems still dominate.

While Malls are on the decline in the US, this is not the case in every country evaluated. We were amazed to find in Erbil, Iraq the freshly opened Majidi Mall and in it the City Centre HyperMarket from Kuwait. The mall was packed and buyers flocking around aggressively priced computers. The malls and hypermarkets are changing the landscape of how individuals see and buy computers. But it also has important product distribution implications it what has been characterized as Managed Retail.

System builders, in many of the Emerging Markets, were a pathway to privacy. They spoke openly of installing unlicensed versions of the OS and office suite. Yet, the malls and netbooks are decimating their ranks. One system builder had gone from 13 shops to 3 and saw further declines coming. Many of the system builders spoke of the low margin conditions they must exist in. Yet, they are keeping a presence based on customer support. The mall sellers are seen as having poor after sales support and long repair wait times. Another interesting tend, where a few examples were found, is direct product from ODM to System Builder. One such small builder buys components, including mouse products, directly from China. This has the advantage of lowering costs and improving quality, from their perspective. They scoffed at the need for such accessory products by Logitech or Windows products. These are too expensive for their market.

There is not a need be an Apple company owned store for Apple to have a market impact. We assessed numerous Apple resellers. The percentage of switchers, those who switched from Windows to Mac, ranged from 40% to 60% of the buyers of Macs. Most of the resellers cited percentages above 50%. One reseller was blunt in his comment – “Our best sales generator was Vista.” But Apple resellers also have numerous distribution and support issues which the dealers were willing to describe.

The smart phone category is being driven by Apple but not because it is a smartphone. Apple does not need to have an authorized carrier in the market to have an impact. Over and over again it was stated that the buyers of the iPhone did not buy it because of what it did but to have the phone as a “fashion statement.” One consumer interviewed showed his iPhone laying face down on a table just to show the Apple logo. This provides some interesting opportunities in the market. There were many examples where Android based phones are being shown as an alternative to the iPhone but it is too early to tell if these will dent the iPhone presence.

We saw early indications of Internet purchasing having a major impact on the traditional sales and distribution channel. Tracing buyers by geography will be next to impossible. In Kuwait it was stated that the level of Internet buying, and thus the bypass of local sources of supply, had increased to the level that the government has levied a 5% customs duty on Internet purchases. One customer said I buy off of eBay, and she was not unique in this respect, by looking for price and free shipping. She did not care where in the world the product came from. Sophisticated techniques are in use to overcome “ship only to the US restrictions” imposed by many companies and sellers.

This reporting supported the notion that every emerging market is different. To better understand this a consumer ecosystem model was developed and discussed in Emerging Markets report V.