The Bottom of the Pyramid
Thursday, June 23, 2011
MANAGEMENT gurus have rhapsodised about “the fortune at the bottom of the pyramid” in emerging markets ever since C.K. Prahalad popularised the idea in 2006. They have filled books with stories of cut-price Indian hospitals and Chinese firms that make $100 computers. But when it comes to the bottom of the pyramid in the rich world, the gurus lose interest.
This is understandable. McDonald’s and Walmart do not have the same exotic ring as Aravind Eye Care and Tata Motors. The West’s bottom-of-the-pyramid companies are an unglamorous bunch. Many rely on poorly educated shift workers. Some inhabit the nether world of loan sharks and bail bondsmen.
But even in one of the world’s richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.
This is a challenge to the American dream. But it is also an opportunity for clever companies. Even the poorest Americans are rich by the standards of many other countries, so there is money to be made by serving them. McDonald’s, for example, is booming. Since 2006 its restaurants have generated an annual increase in sales of 4%, despite rising food prices. (This figure excludes restaurants that have been open for less than a year.) In April the firm hired an astonishing 50,000 full- and part-time staff in America, at a time when many others are shedding hands.
Frugal shops have been thriving, too. Walmart and Target are marching into new markets (such as basic medical care) and new places (such as inner cities). Aldi, a German discounter, has been doing surprisingly well in America, too. Unlike Walmart, it specialises in small stores-the size of a basketball court rather than a football pitch. More than 90% of its goods are its own unfancy brands. To keep its supply chain simple, Aldi stocks barely 1,000 products; some of its rivals stock 100,000. Yet Aldi is not a grotty place to shop. It has wide aisles and bright decorations, unlike some of the discount stores that disfigure American inner cities.
Aldi’s success highlights an interesting fact: that there is a lot of innovation in this market. Companies are reconfiguring themselves to appeal to the nouveaux pauvres as well as the old poor: middle-class people who enjoy lattes and salads but who are currently strapped for cash. Walmart has vastly expanded its grocery section. McDonald’s sells healthy fast food, such as fruit and walnut salad, as well as the usual slabs of meat and cheese in a bun. It also plans to remodel or rebuild 6,000 of its 14,000 American stores. And both McDonald’s and Dunkin’ Donuts are challenging Starbucks by offering drinkable coffee for less.