Big Corporations Try to Tap a Market They Have Ignored

Monday, June 4, 2007

The world’s biggest corporations are scrambling to tap a market they have largely ignored for decades – the world’s four billion poor people.

From South Africa to Brazil, companies like Danone and Unilever sell individual packets of yogurt and soap in rural villages and urban open-air markets. In the telecommunications sector, the biggest growth area is among the poor, who are snapping up cellphones.

Some 60 percent of the world’s population exists on less than $2 a day. Previously shunted aside as lacking purchasing power, they are now regarded as a buoyant growth market.

“We have to get away from thinking of the poor as a problem,” said C.K. Prahalad, author of the book “The Fortune at the Bottom of the Pyramid.”

“Part of the problem is that people have not had a full understanding of the size of the opportunity,” he said in a recent presentation in Johannesburg.

Prahalad, a business consultant and professor at the University of Michigan, said the purchasing power of poor people seemed small expressed in dollars, but carries more clout in emerging market economies, where goods cost less.

The world’s four billion poor are estimated to have $5 trillion of annual purchasing power parity, a measure that tries to translate local buying strength into another currency based on common goods.

Prahalad sees the move by big firms as a win-win situation, with companies increasing sales while low-income consumers get access to low-cost, quality goods and new technology.

To tap the market, though, innovation is the key. Firms have to develop new, affordable products and devise novel ways of selling them.

In India, where the trend got off the ground several years ago, the local unit of the Anglo-Dutch consumer products group Unilever developed a detergent that requires less water for poor rural customers.

The unit, Hindustan Lever, also put together a rural selling network, Shakti (meaning “strength”), which employs about 31,000 women to sell soap, shampoo, detergent and other products door-to-door in more than 100,000 villages.

“Rural consumers’ incomes are rising, and for a consumer goods company, women are at the heart of what we do,” a spokesman for Lever said.

While Unilever has rolled out its Shakti model of direct selling in Sri Lanka, Bangladesh and Mozambique, other firms are also seeking to duplicate Unilever’s model.

In Brazil, the Swiss food group Nestl? opened a factory this year to produce small packets of powdered milk, biscuits and coffee to be sold door-to-door or in small shops.

In South Africa, the French food group Danone and a local dairy group, Clover, have started a project selling individual pots of vitamin-enriched Danimal yogurt for 1 rand, or 14 cents, by a network of women in townships.

Danone created a new business model, set up a new distribution network and promoted the product in schools with a show that teaches the benefits of nutrition.

“We also wanted to cut out as much as possible any kind of middleman to make the product really affordable to the end consumer. If this product was to go into the normal chain, it would never cost 1 rand,” said Maria Pretorius, a Danone marketing manager.

It recruited women like Joyce Daka, 50, who was struggling to survive in Orange Farm, a sprawling township west of Johannesburg. Now she is a thriving entrepreneur earning around 2,000 rand, or $287, per month.

“In the morning I go house to house, and then in the afternoon I find a busy spot,” said Daka, sitting under a yellow Danone umbrella in her brightly colored Danimal T-shirt.

On a busy day she can sell over 700 pots of yogurt, but the average is around half of that. The saleswomen keep a profit of 20 South African cents from each yogurt pot they sell.

“It’s made a huge difference in my situation,” said Daka, who is taking care of two orphaned relatives in addition to her own children.

After less than two years, sales by volume of the new low-cost product, so far only rolled out in the Johannesburg area, are outstripping some of the firm’s major national brands.

The trend has spread into a host of other sectors, ranging from banking to medicine.

Continue reading “Big Corporations Try to Tap a Market They Have Ignored

Source: Reuters (link opens in a new window)