As consumers trade in emerging markets, what should they do

As the global economic downturn continues to affect emerging markets, consumers there are increasingly trading, prompting some Western premium brands to get rid of the mid-range product segment. However, it seems now that business-wise things may cost them, as once conditions improve, it will be difficult to re-enter these markets.

Also read: World Bank Group releases data to drive investment in emerging markets

The inflation in post-developed economies has undergone a major change in habits, especially in two major emerging markets, sub-Saharan Africa and Latin America, with few exceptions, consumers have shifted from medium-term premium brands to cheaper, essential options. Or, for some southern African markets, choose cheaper, high-quality, locally produced products as well as imports from other emerging markets such as Türkiye, India and China.

In Latin America, trade sales have been particularly common in mass market FMCG and non-essential commodities industries over the past few years. Many Western companies have decided that they will no longer play a role in the former sector and will mainly choose to have a premium in the latter. That is, focus on consumers who have more money and ignore any moderate level of consumers.

However, changes in change do not make Western brands profitable. Even if the premium segment is more resilient (consumer spending is more disposable and less sensitive to inflation), the mass market segment is larger. Indeed, some people who are trying to stay in the mid-range, non-essential merchandise category (mainly clothing, cosmetics, electronics and household appliances) have already made positive discounts and brought to American-style price holidays (such as Black Friday) to create Buzze and Offload Novent.

In sub-Saharan Africa, multinationals focus all brand developments on the premium market. Actually, this means a refreshing brand and product portfolio, which can look stale and dated-basically a bit out of date. So what we’ve seen is that these companies double in major markets like South Africa, Nigeria and Kenya, so that you still have consumers buying premium items.

This trend is particularly evident in the candy, non-alcoholic beverages and food ingredients segments. While not all have abandoned the mass market, some have explored markets in high-growth economies such as Tanzania, Ethiopia, Côte d’Ivoire and Ghana to offset weak growth elsewhere.

Pressure to exit the mid-end section

The decision to exit the mid-segment is driven by enormous business pressure, especially overtaking profits. Western brands have seen higher investment costs, just as consumers are starting to turn their backs on mass-market products. On the shareholders’ concerns, urging these businesses to improve their performance in sales has shifted their focus to the advanced segment. However, in emerging markets, exiting the market may cause the company to look to reenter the cost later.

In sub-Saharan Africa, it takes longer for companies to build size. The return on investment after the product is launched is much longer than that of Western countries. That’s because operational and financing costs are higher; logically, it’s very complex; the regulatory landscape is different. And the currency fluctuates even more. In addition, shoppers have different preferences and different behaviors, so it takes longer to tailor marketing strategies and brand building strategies for local consumers. In short, it takes longer to build brand and customer loyalty in sub-Saharan Africa.

This means that if a company exits the market, it will inevitably take years to try to build a business if they choose to re-enter the business. And it will be expensive. The companies tell us that they work to justify capital or budget allocations to return to the segments they leave behind – that’s the cost of hiring new minds, conducting market participation research, and evaluating the applicability of their supply chains and local labor. This is a very heavy lift.

In sub-Saharan Africa outside of South Africa, the reason for withdrawal and re-entry is so difficult because most companies work in local partners and distributors. So if you cut a relationship, it’s very difficult to try to build a relationship with a new distributor. Building trust and reliability takes years.

Latin America faces similar challenges. But from the perspective of the brand community, the situation is slightly different because the region is so westernized. The closer you are to the United States, even if they are not on the market, Western brands will be recognized and expected. The key issue, however, is relatively small distributors such as grocery chains and department stores. The market for local partners is often very closed. There aren’t so many players. Meanwhile, other American brands are competing for them. Therefore, it takes a long time to build a relationship in the region.

The additional difficulty is the regulatory components, especially in Brazil. Here, it is very difficult to establish yourself because the tax system is so complex that the changes in the state and city to the municipality. Understanding local regulations and nuances requires a lot of budget. If you even exit a segment and try to return, the initial upfront fee may be too high. The amount of infrastructure you need to rebuild is very high, and many times the talent you need, especially the legal talent supply, is very competitive in the market.

How to maintain existence in the market through trading

Therefore, in both regions, when consumer trade is long-term, it may be more expensive when consumer trade is reduced over the long term than when it remains in these markets (although shrinking). There are several ways to maintain a foothold in competitiveness: Enhance competitor monitoring and respond faster to competitor behavior, especially in terms of pricing strategies.

When consumers are considering a deal or resisting a deal, a few cents or a dollar product can be a key sales determinant. It is also worth considering offering smaller packaging sizes. So basically, the same product is sold, but half the quantity or size, is cheaper. With relatively high social media penetration in a rapidly growing market, investment in e-commerce and digital marketing may also be an effective way to maintain a foothold.

Essentially, Western brands need to be more strategic in emerging markets when the economic downturn changes consumer buying habits, especially trade. It can be said that in the established mass market, investment in the fast-growing high-end market is more than investments that exit the former, and the former alone can offset the growth of the lower mass market. At first, a more balanced approach seems to be more risky. But in the long run, this may prove to be a business-wise move as the economy rebounds and consumer confidence returns.

Auhtor is

Mariana Zepeda Lead Frontierview’s Latin American macroeconomic research team. She directs the company’s market intelligence and strategic consulting for Latin American markets. Mariana holds a Master of International Economics and Latin American Studies from the Johns Hopkins School of Advanced International Studies

Matthew Friendly Lead Frontierview’s sub-Saharan Africa macroeconomic research team. He advises multinational corporations on the impact of economic, political and regulatory developments on business throughout the region. Matthew received his Master of International Economic Law from Warwick University.