Why do companies such as P&G target emerging markets? Do you agree with this strategy?
At the beginning of the millennium, Procter & Gamble was the world’s largest consumer goods company, specializing in household products and personal care. Among its well-known brands are Tide detergent, Crest toothpaste, Olay skin care, Pantene shampoo and Pampers disposable diapers. However, with 6 billion consumers worldwide, the company was focused only on the richest 1 billion. Less than a quarter of company sales came from emerging markets,
and those sales were mainly to the wealthier segments of those societies.
All that changed when a new CEO decided that P&G would seriously target developing countries and transitional economies. After all, it was estimated that each week 40,000 Asians used a washing machine for the first time. Long known for its product innovation in the United States, P&G designated 30 percent of its research and development funds to the needs of these lowerincome
markets. Its engineers sought new ways to make products more
cheaply, and P&G researchers visited homes in developing countries to better 397 understand consumer needs. P&G’s acquisition of the Gillette Company was also seen as a way to expand more quickly into emerging markets. The acquisition was P&G’s largest to date. After just six years, company sales in emerging markets reached 50 percent of total sales.
China was a market of particular interest to P&G. In just 20 years the company had established an extensive distribution system and had seen sales rise to $2.5 billion. China had become P&G’s second largest market, and P&G had become China’s largest consumer goods company. With a wide variety of brands and products, the company aimed at various target markets across different price ranges. Still, China often appeared to be two very distinct markets—urban China and rural China. Urban Chinese would pay $1
for toothpaste in exotic flavors. Rural Chinese might prefer to pay half as much and want salt added because they believed salt whitened teeth.
Despite its success in the Chinese market, P&G experienced a major
product crisis there involving P&G’s elite SK-II line of skin care products. Chinese authorities announced that banned chemicals were found in the products sold in China. P&G denied the allegation. Almost immediately articles concerning the safety of SK-II appeared on thousands of Chinese websites. Many experts believed that the banned chemicals were safe in small
amounts and pointed out that these chemicals were not banned in the European market or Japan. Instead, they noted that SK-II products sold in China were imported from Japan and the Chinese government could be retaliating for Japan’s recent adoption of stricter standards for Chinese agricultural imports.
When P&G voluntarily offered refunds to consumers for SK-II products, a number of problems arose. Some consumers tried to return counterfeit products. In some cases violence broke out. Salesclerks were attacked and sales counters robbed. Later the Chinese authorities announced that the banned substances did not pose a health hazard. However, the loss in sales and consumer trust was especially painful to P&G since beauty products
accounted for 60–70 percent of the company’s sales in China.
One of Gillette’s major markets was Russia, another market of particular interest to P&G. However, this market had proven problematic. When a financial crisis caused the Russian ruble to plummet, Russian wholesalers could not afford to buy Gillette products. These products disappeared from retail stores, and Gillette’s Russian sales plummeted 80 percent in a single
month. Gillette found it could not meet its projected global profit growth of 15–20 percent that year. To save money, Gillette planned to close 14 factories and lay off 10 percent of its workforce worldwide.
Despite the setback in Russia, P&G believed that Gillette’s brands,
including its line of razors, would benefit from P&G’s distribution throughout the developing world. However, in certain countries such as India, Gillette’s 398
distribution was already very strong, and when the two companies merged there was considerable overlap. Therefore in the years following the merger, P&G had to restructure distribution in developing countries leading to many distributors being abandoned. This resulted in a disruption of sales.
Unilever, with a much longer history of marketing in developing countries, was a formidable challenger to P&G’s aspirations in emerging markets. Sixty percent of Unliver sales were attributed to emerging markets and half its products competed against those of P&G. The other half of its product lines were in packaged foods where Unilever competed against major multinational
packaged-food companies such as Kraft and Nestlé. With sales stalling in its home market, Unilever announced that it would shift even more resources to the developing world and would consider selling off some of its current brands to support this move.
One of Unilever’s traditional strengths was its positioning strategy of offering different brands at different price points, successfully targeting both the poor and the rich in emerging markets. In India, Unilever had access to many small villages where most MNCs had no distribution. The company worked with a consortium of industry, academics and NGOs to better understand the needs of low-income consumers. However, the company was also focused on expanding its position among the wealthier segments of developing countries, including offering more convenience foods.
Both P&G and Unilever enjoyed years of sustained growth in emerging markets, but then they hit a bump in the road. The economies of several key markets stalled. Issues of inflation and currency devaluations, largely absent for years, returned to hurt the companies’ bottom lines and lowered profit projections. P&G responded by announcing that it would raise prices in
countries experiencing significant inflation or currency devaluation in order to preserve margins. But both companies remained committed to emerging markets. Unilever noted that growth in these markets remained considerably higher than growth in Europe or North America, and management at P&G asserted that emerging markets were definitely the future for the company.
Discussion Questions
1. Why do companies such as P&G target emerging markets? Do you
agree with this strategy?
2. What are the dangers of targeting emerging markets?
3. What advice would you give P&G for engaging competitor Unilever? What advice would you give Unilever?
