Fast moving consumer goods: Why timing is essential in frontier markets
Small changes in income create massive increases in demand of fast moving consumer goods. High growth rates in frontier markets should make your company consider markets and countries that have been avoided in the past.
Fast moving consumer goods
Research shows that incremental increase in income tends to create substantial increases in demand of fast moving consumer goods (FMCG) in low-income markets. Growth in consumption of FMCG is predominantly driven by GPD per capita growth. McKinsey has previously found that an average of 73 percent of the growth in consumption of FMCG is a result of GPD per capita growth.
This makes the high GPD growth rates in emerging and frontier markets as Ghana and Kenya interesting from an investment perspective.
By 2015, it is forecasted that continued urbanisation and economic growth will generate 221 million basic-needs consumers only on the African continent.. A 4.5 percent total growth in compound annual GDP per capita until 2015 is set to increase consumer spending by more than 35 percent.
S-curve growth
The idea behind the forecasted trend is that growth in consumption of FMCG moves along an s-curve. As GDP per capita increases, sales per capita is not following a linear path, but along an s-curve, indicating a phase of intensive growth, between the start phase and maturity phase.
At the initial flat part of the curve the low level of GDP per capita makes products too expensive for the majority of potential consumers. The point where market penetration grows more slowly than GDP per capita is often referred to as the warm-up zone.
The steep part of the curve indicates the phase where sales accelerate significantly, and exceeds GDP per capita growth. This is the zone where opportunities are present. The take-off point varies by product depending on the consumer needs. The steep part of the s-curve is referred to as the hot zone.
As GDP per capita level keeps increasing, the demand for a product will saturate. The saturation point is reached when it is impossible to consume more of the product due to time or physical constraints, and there are no new consumers entering the market.
Timing
Timing is crucial. Successful entry is typically found just before the market enters the ‘hot zone’, which provides a favourable position for the companies to take advantage of rapidly increasing consumer spending.
In several frontier markets, impressive GDP growth rates have been sustained for several years. This trend enables product categories to move into the ‘hot zone’ where the growth opportunities are present.
The challenge for companies is to understand where on the s-curve their product is placed in a given country. Once understood, it is possible to more precisely grasp the opportunity and select the appropriate investment strategy.
Choosing markets
In addition to understanding where your product is placed on the s-curve, it is essential to consider in which markets your organisation has capacities, resources and expertise to develop a new business.
“In most cases, Danish companies do not have full subsidiaries in frontier markets, but often have local partners as sales partners, sales offices, or sourcing offices.” “When establishing a new BOP business, it is essential to use the embeddedness of local partners to obtain information and a local network, and potentially develop the business. Therefore companies need to look inside in addition to understanding the external s-curve.” says Andreas Flensborg, Consultant at DIBD.
Implications: Understanding s-curves
Entering frontier markets is not easy or simple, and massive growth rarely happens instantly. However, high GDP growth rates in countries that were previously disregarded combined with new knowledge make the following points relevant:
- Realise that massive growth opportunities for FMCGs exist in previously avoided markets
- Understand at where on the s-curve your product is placed in a given country
- Consider in which growth markets your organisation has the best capacities, resources, and expertise to enter the market
- Utilize the embeddedness of your local partners