Profitable Growth For The India

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Profitable growth strategies for the Global Emerging Middle (GEM)

Learning from the Next 4 Billion markets
Full Presentation
Strategy and Research
October 21, 2012
Content
Page 1 2 3 4 5 6 About me Global emerging middle Demographics and growth New value propositions How are businesses reacting Take aways 1 3 13 20 32 45
Section 1 About me
Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Institute of Advanced Management Studies PwC
October 21, 2012 1
Section 1 About me
About me..
Principal consultant, Strategy consulting @ PwC Corporate planning and Strategy @ L&T
Professional
Corporate planning @ Reliance Com
PGDM, IMDR, Pune B.E, RKNEC, Nagpur
Qualification
Personal
Reader, traveller, history enthusiast, and aspiring gardener
Married to Pragya
Stay in Baner, Pune
October 21, 2012 2
Section 2 Global emerging middle
October 21, 2012 3
CK Prahalad and Stuart Hart introduced to the corporate world the concept of the Bottom of the Pyramid
Annual per capita income
More than $20,000
Population in millions
75-100
$ 1,500 - 20,000
1,500 1,750
Less than $ 1,500
4,000
October 21, 2012 4
Six assumptions companies make

The poor are not our target customers because with our current cost structures, we cannot profitably compete for that market. The poor cannot afford and have no use for the products and services sold in developed markets. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. Managers are not excited by business challenges that have a humanitarian dimension. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.
Every single one of these assumptions is generally wrong

Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26
Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Institute of Advanced Management Studies PwC October 21, 2012 5
...and how did companies react

Company Unilever (UK) P&G (USA) Danone (France) Country / Region India Countries in Africa, Asia, Middle East, etc. Bangladesh Business activities Selling low-price shampoo and detergent Selling water purification powder Providing low-price yoghurts for children
Yamaha Motor (Japan)

Nissin Foods India (Japan) Wal-Mart (USA)
Indonesia, etc.
India Bangladesh
Installing compact water purification systems

Selling instant foods in individual servings Establishing sewing plants and providing employment for women previously isolated in rural villages Offering micro credit services so as to enable lending to poor people Selling compact microwaves Selling low-price water supply pumps Selling smokeless stoves for rural village
Grameen Bank (Bangladesh) Galanz (China) KickStart (Kenya) Philips (Netherlands)
Bangladesh China Kenya India
October 21, 2012 6
High growth and under penetrated markets pose substantial opportunities in emerging economies
60,000
* Bubble size indicates countrys population
50,000 Japan
United States
France Germany
Developed nations with low growth forecasts
40,000 United Kingdom
GDP/Capita ($), 2011
30,000
Under-penetrated markets
Emerging economies with high growth potential as well as large under-penetrated population
20,000 Brazil Mexico Indonesia Angola Egypt 0 Senegal Pakistan Kenya India China Argentina
10,000
South Africa Algeria
-2
-10,000
Nigeria
10
12
Real GDP Growth, 2011 (%)

Middle ($12,000 - $4,000) Lower Middle ($4,000 - $1,000) Low (<$1,000)
Rich (>$12,000) Source: IMF and World Bank
October 21, 2012 7
Those nations comprising 4 billion of the 7 billion world population, with GDP/capita of $1,000 - $4,000 per year is the next growth horizon
NEXT 4 BN HORIZON
HORIZON 1
HORIZON 2
Target population
7 Bn Population Income level Yrs of education Urban (%) Mobile phones

(per 100 people)
Upper 1bn
> $ 12,196
Middle 1bn
$ 3,946 - $12,195
Next 4bn
Low 1bn
< $ 995
Difference Middle vs. Next
$ 996 - $ 3,945 10.3 41 47 13.7 20.3
14.5 78 106 68.3 435.1
13.8 74 92 29.9 125.2
7.9 27 22 2.3 5.8
25% 45% 50% 54% 84%
Internet users
(per 100 people)
Cars (per 1,000

people)
Sources: World Bank
October 21, 2012 8
This Global Emerging Middle is concentrated in countries like India, China, Indonesia, Pakistan and large segments of Africa
Next 4 bn ($996 - $3,945) Middle 1 bn ($ 3,946 - $12,195)
the Middle 1 bn, an adjoining segment is also largely in Asia, Africa and Latin America
Sources: World Bank
October 21, 2012 9
Within these countries, the bulk are the Global Emerging Middle comprising approximately 2.3 billion globally (Only sample countries)
1,500
Rich (1 bn) (>$12,000) Reducing disposable income Middle (1bn) ($12,000 - $4,000) Next (4bn) ($4,000 - $1,000) Low (1bn) (<$1,000)
1,200
Catering to needs of the emerging middle class in middle income nations Use innovations and local knowledge to enter upper segment of the market
Population (Millions)
900
Increasing cost pressures may have relevance in these markets
600
Global Emerging Middle Class (~2.3 billion, globally) Use cost and innovation advantages to enter the Next 4 bn, or enter the destitute segment
300
0 Italy US UK Pakistan Greece India Indonesi a Alergia Spain Russia Angola Others China Nigeria Others Brazil Argentina Mutiple Sudan Egypt
The Global Emerging middle class has across counties totals to about 2.3 billion, globally. The definition of Global Emerging middle class varies by country. Our analysis takes a ppp-adjusted view of each country, and estimates a common bracket of emerging middle class, globally.
Source: PwC Analysis, World bank, IMF
October 21, 2012 10
By 2021, India will have about 600 million people constituting the Emerging Middle Class segment
Indias Population Distribution (millions) Household income/year (INR) > 8,50,000 $*/day per capita Upper Middle + >$10 $5-$10 $1.7-$5 <$1.7 1.19 Bn 2010 CAGR (%) 9.7% 6.3% 1.9% -4.6% 1.36 Bn 2021 (Projection) (%) 14% 23% 42% 21%
80 170 470 460
190 300 570 290
3,00,000 8,50,000 Middle 1,50,000 3,00,000 Emerging middle < 1,50,000 Low
Strong domestic growth accompanied by a decrease in numbers of the lower segments will drive the expansion of the lower middle income class The middle will also see a far larger number of people pass through it, which implies that those who have a strong understanding and presence in the emerging middle will be able to build loyalty early But this middle is not monolithic, it has a number of languages, customs traditions that make it complex
Sources: PwC Analysis, NCAER (National Centre for Applied Economic Research), CMI. * The emerging-middle income bracket, PPP adjusted is $5 - $15 per capita per day. Alternatively $1,850 - $5,550 per capita per year All figures are reported at 2010 constant prices
October 21, 2012 11
In India, the Emerging Middle Class will constitute a $1 trillion market, with a young, largely rural base ready for change
$ 1 Trillion economy A 570 million person market and $1 Trillion economy by 2021, additional a large section passing through
1.1 Significant demographic shift and aspiration for change over the next 10 years
Rapid Change Changing patterns of needs and wants underpinned by services economy
Young and rural aspirations Largely youth located in rural ares with aspirations that are in sync with higher segments
October 21, 2012 12
Section 3 Demographics and growth

Demographic and Growth context shows a large, fast changing and young population
October 21, 2012 13
By 2021, India will have about 600 million people constituting the Emerging Middle Class segment
Indias Population Distribution (millions) Household income/year (INR) > 8,50,000 $*/day per capita Upper Middle + >$10 $5-$10 $1.7-$5 <$1.7 1.19 Bn 2010 CAGR (%) 9.7% 6.3% 1.9% -4.6% 1.36 Bn 2021 (Projection) (%) 14% 23% 42% 21%
80 170 470 460
190 300 570 290
3,00,000 8,50,000 Middle 1,50,000 3,00,000 Emerging middle < 1,50,000 Low
Strong domestic growth accompanied by a decrease in numbers of the lower segments will drive the expansion of the lower middle income class The middle will also see a far larger number of people pass through it, which implies that those who have a strong understanding and presence in the emerging middle will be able to build loyalty early But this middle is not monolithic, it has a number of languages, customs traditions that make it complex
Sources: PwC Analysis, NCAER (National Centre for Applied Economic Research), CMI. * The emerging-middle income bracket, PPP adjusted is $5 - $15 per capita per day. Alternatively $1,850 - $5,550 per capita per year All figures are reported at 2010 constant prices
October 21, 2012 14
We project, by 2021, the emerging middle class segment will constitute a $1 trillion economy in India
India's emerging middle class
2,400 Annual Average Per Capita Disposable Income (PPP) USD
470
Consumption share
570 600 500 Population of Lower Middle Income Group ( in million) 4000 3000 $ billion
3,625
2,200 340 2,000 1,800 1,600 2001-02 2009-10 2021-22 (F) Population of Lower Middle Income Group (in mn) Annual PC Disposable Income (PPP) in USD 1,895 2,008
2,190
400 300 200 100 0
2000
1000 0
1,843 28% share 24% share 450 2011 India GDP Emerging Middle Market Size 1,000
2021
The emerging middle class is being increasingly viewed as a market that is growing both in terms of the number of consumers as well as their incomes As per PwC estimates this segment will constitute a $ 1 Trillion economy by 2021. Rising affluence, levels of the lower middle income segment, strong pent up demand and low penetration of this market segment will have a sustainable impact on demand creation in the coming years
Sources: Rajesh Shukla (2010), `How India Earns Spends and Saves, Sage Publications; PwC Analysis, CMI. (All income figures reported in 2001 constant prices), IMF
October 21, 2012 15
Emerging Middle Class wallet spend is shifting toward higher education, ceremonies, and consumer services
Emerging middle market size by 2021* ($ B) 200-250 $ billion Misc. Goods & Services** Food & Beverage Food and Beverage spend of Emerging Middle vis--vis India 460 311 46% share 42% share 110-160 2011 Emerging Middle 2021 180-230
180-230
Housing & Utilities Transport & Communication Medicare & health services Apparel Education, Recreation
135-185 India 170-220
Sidebar: Emerging Middle Spending profile in between India and Urban Poor
Spending Pattern: 2010
60-80
100%
55-75 50% 0% 40-50 67.4 32.6 All India 47.3 52.7 Urban Poor Others Food
Sources: PwC Analysis; Economic Times * Non PPP adjusted ** Includes non-institutional medical expenses, consumer services, conveyance, savings for ceremonies, higher education
The wallet size of Emerging Middle Class in India lies between all India average and that of Urban Poor category. Therefore, their spend on necessities such as Food is between 33% to 53% of the overall spend basket.
October 21, 2012 16
Indias economy will have a services underpinning over the next 10 years
Real Growth (%) p.a. of main sectors of the economy (5year averages)
8.0 6.0 4.0 2.0
Indias economy is predominantly a service economy. 60% of the GDP is service driven, such as financial, insurance, real estate, community social and personal services However, Indias manufacturing sector is developing and India topped developing countries (China excluded) in production of textiles, chemicals, basic metals, general machinery and equipment, and electrical machinery in 2010. Though India is growing relatively slower than China, its domestic consumption-driven economy has proven to be both robust and well insulated against global events Indias domestic consumption alone contributes to over 75% of GDP. This is one of the highest among the developing economies.
October 21, 2012 17
0.0
1995-2005 2006-2015E Agriculture Manufacturing Services 2016-2025E
Contribution to growth (Supply)

7.0 6.0 5.0 4.0 3.0 2.0 1.0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Agriculture & allied Industry Services GDP 10.0 8.0 6.0 4.0 2.0 -
Source: PwC Analysis, World Bank, IMF, OECD, World Economic Outlook, United Nations Industrial Development Organization report; World Economic Forum India scenario report
Indias median age will remain less than 30 years by 2021, which indicates that entire businesses will be built around youth
Population distribution in India
100% 80% 60% 40% 20% 0% 2001 0-29 yrs Others 2006 2011 2021E 62% 60% 58% 51% 38% 40% 42%
Youth market
49%
Currently 58 % of the population in India falls below 30 years of age While 73% of the youth is literate, 62.1% of literate youth live in rural India. However, only 9.6 % are graduates.
Median Age (in yrs) of selected economies: 2011

India Brazil China US Japan 26 29 36 37 45
By 2021, youth population in India is expected to become 51% of the population

This youth market has a higher propensity to spend and is unique from others inspired by social & cultural outlook of society The firms should design their media campaigns & products to appeal to this consumer segment
Source: Economic Times, Planning Commission of India
October 21, 2012 18
Approximately 67% of India will still live in rural areas by 2021, posing unique marketing, sales and distribution challenges
India: Rural urban population distribution
100% 80% 60% 40% 20% 0% 1991 Rural Urban 2001 2011 2021E 74% 72% 69% 67% 26% 28% 31% 33%
By Indian statistics, rural is classed as maximum population of 5,000 and population density less than 400 sq. Km Small pockets of urbanization are emerging in this segment, primarily due to migration, natural increase in population and inclusion of new areas as Urban This will pose additional challenges and opportunities for those in this segment both from a reach and delivery perspective
India: Rural urban population growth

120 80 40 114 90 68 91 75 70
0
1991-2001 Rural Urban 2001-2011 2011-2021E
Source: Economic Times, Planning Commission of India
October 21, 2012 19
Section 4 New value propositions

Considerable value can be unlocked by understanding the new value propositions this population segment values
October 21, 2012 20
Our analysis shows there are three different segments in the emerging middle class; we call them migrants, climbers Aspiration Tradeoffs and settled
Want to move to upper middle INR 3,00,000 1. Settled High 2. Climbers Usually encounter an income ceiling Born with a bronze spoon
Income
Emerging middle income
Low
3. Migrants Perceived income floor
INR 1,50,000 Low Income Emerging Middle Class
Birth
October 21, 2012 21
Each segment is influenced heavily by media and mobile telephony and require an aspirational value proposition to connect with them
Aspiration Tradeoffs
Increased media and telephony availability, and rise of aspirations are catalyzing Demand that seeks to change their lifestyles but in different ways
Segment Profile* Largely in rural areas or smaller towns, can fulfill middle class aspirations Mindset Reasonable disposable income, very similar needs to middle Aspirations
1. Settled
2. Climbers
Born in urban areas, but aspire to climb up rapidly through education
Aspirations of being a professional in next generation, education
3. Migrants
Born in rural areas, want to/have migrated to urban areas, little aspiration
Relatively satisfied with their situation, but disconnected with roots
All three categories are looking for products and services that go beyond low cost they need to connect with their deeper needs
* Each has been profiled in the appendix
October 21, 2012 22
Aspirational products and services have significant potential...

There has been a 20% shift in consumption away from essentials like food, clothing and shelter to non-essential and aspirational products: Consumer expenditure in durables: white goods, electronics, motorbikes and cars Other non-essentials, such as hair dye, coffee, alcohol, cosmetics, clothing and footwear
Number of durables per 100 households Motorcycles Colour TV Refrigerator Air conditioner Car
Middle
Emerging middle
73
47
72
40
63
34
20
2
35
4
Source: NCAER, PwC Analysis. 2005 consumer expenditure data
Expansion in consumer categories: 9 categories accounted for 80% of private consumption in 1991. Today (post 1991 liberalization), there are 22 categories accounting for 80% of private consumption Ex: In the FMCG sector, impulse products such as biscuits, chocolates, salty snacks, and confectionaries are clocking double digit growth and increased retail presence
October 21, 2012 23
Aspirational products and services have significant potential...

Increased media exposure (connectedness), availability and rise of urban aspirations are catalyzing this change making way to the rural household Media exposure, connectedness (mobile), especially in the youth segments are driving awareness for aspirational products Variants, price points and packing sizes are acting as a catalyst Ex: low fat, whole grain, baked, sugar free,...
Urban Aspirations
Neilson, projects 20% growth in FMCG categories such as impulse, health, lifestyle, and convenience driven by product innovation, portfolio expansion and aggressive distribution
In FMCG, Marico, Parle, Dabur and Emami are betting heavily on these categories
Rural Households
Sidebar: Stock market indicators In a study conducted by VCCIRLE, Bombay Stock Exchange (BSE) 500 stocks were divided into aspirational and non-aspirational products. Aspirational product firms grew at faster pace of 31% annually, while essentials grew at 14% Consumer durables and automobile comprehensively outperformed FMCG stocks (~0.3% per month difference in performance over a 5 year timeframe) Aspirational stocks exhibit higher volatility
Source: VC Circle, Economic Time, PwC Analysis
October 21, 2012 24
A number of companies have positioned their products or services as aspirational, to penetrate this market
Titan Sonata: Sonata was launched by Titan as a brand that was for the Titan inclined but who could not afford it These were low-priced stylish watches which appealed to the youth Titan marketed it innovatively by using MS Dhoni as its brand ambassador as he was a small town boy who made it big in international cricket
Micromax mobiles: Micromax mobiles were an instant hit primarily because of their stylish designs at low prices It was the first company to launch an android phone for INR 6,000 for the masses
Value Added Services in Telecom: Mobile Value Added Services in India account for around 10-12% of telecom revenues. Consumers use these services for text messages, multimedia messages, caller tunes, video streaming, participation in polls and contests, mCommerce Infotainment services, content downloads, etc As per TRAI predictions, its share is expected to grow to 30% in next 5-7 years
Bajaj Boxer: Contrary to conventional beliefs, Bajaj Motors launched a 150 cc bike Bajaj Boxer in the Indian markets, catering primarily to the rural consumers and positioned it as a SUV of the bikes The bike primarily caters to rural youths aspirations of driving similar bikes as those in urban areas
Source: PwC analysis and internet research
October 21, 2012 25
Within these three segments, aspirations of youth are particularly important; youth is not a segment - it is mainstream
Rural youth segment is a dominant area for growth (Population distribution in Millions)
100% 27 107
75% 97
50% 25% 43 0% 0.0% Urban Rural From 25 45 Transition Generation (19 yr old in 1991) From 45 65 Partition Generation (39 yr old in 1991) 20.0% From 15 25 Change Generation (4 yr old in 1991) 40.0% 60.0% 80.0% 100.0% 168 238
The rural youth segment comprises the largest single area for growth, as it is both aspirational and looking for change. They thrive on discontinuity and have no strings attached to the historical baggage of India The 25-45 yr segment remains important as a generation that is sandwiched and is at cross roads with its aspirations, juggling traditional and modern aspirations. They are characterized by credit/debit living The 45 -65 yr generation is holding on to traditional values, but has realized that they cannot hold back their mindset to prosper in todays India. They tend to have a high regard for functionality, and look to the community as a propellant for gaining information and respect
Sources: PwC Analysis, Economic times, livemint.com, WPP, ESOMAR
October 21, 2012 26
To target the youth segment three new approaches are seen to work
Approach
Attributes
Examples
Modern Traditional - Youth
While aspiring for modernity this segment is still traditional bound by heirarchy, izzat, etc
True -Youth
Deep and different understanding of youth from 15- 25 years; need deep focus to understand their drivers and aspirations
Youth are socially oriented and traditional, yet aspire to have the modern gadgets they see around them
Mature -Youth
A large number of adults in the 25-45 year age bracket are behaving in ways similar to youth
Driven by new possibilities, desire for change, behave like youth
Women Youth
Fast emerging as a youth segment with aspirations of independence which a number of leading companies are targeting separately
Source: PwC analysis
October 21, 2012 27
A number of leaders have used social orientation, aspirations and new technology to target the youth in this segment
Social Message: 'Jaago Re' campaign of Tata Tea was a hit with both youth & marketers Picked on the most burning social issues which youth could relate to strongly
Style Statement: Pepsi introduced mycan, which was sleek and was supposed to be had in a stylish manner Micromax introduced a mobile phone for girls which was smaller & had Swarovski crystals
Youth Connect: Pepsi introduced catchy punch lines like youngistan meri jaan, dil maange more Changed its brand ambassador from Sachin Tendulkar to Ranbir Kapoor for more youth appeal
New Age Media: As a measure to connect with consumers directly, HUL opted cost-effective digital advertising and consumer engagement modules Gang of Girls campaign for Sunsilk to target young girls; digital campaigns for Bru & Axe
October 21, 2012 28
There are a number of social, psychological, vocational and environmental factors that influence behaviour and buying patterns
8
Social Factors
Family Heirarchy (patriarchical), Caste, Religion, Gender, Language (15 official languages)
Psychological Factors
Values/ethics, Ceremonies, Izzat (prestige), Aspirations
The resulting tradeoffs are surprisingly counter intuitive:
Vocational Factors
Education level (women in particular), Occupation, Profession
Balancing: Survival, Prestige and Aspiration (particularly relevant for the next generation)
Environmental Factors
Size of Village, Town, Neighbourhood, Cyclicality of income, Distance from Government
October 21, 2012 29
The tradeoffs an individual is willing to make depends on which segment he/she falls in, but are very different from those in the top
Issue(s) Food tradeoffs Survival
Examples Eating less nutritional unhealthy cheaper food/lesser calories than required, only kids/male members having nutritional items like milk, curd, etc Pepsi launched small, single-serving fortified-snack packs in India for low-income customers, selling for two rupees, or about four cents. Consumption pattern (given below) of emerging middle class shows their propensity to spend higher on food expenses, compared to India average.
67.4 32.6 India Food 47.5 52.5 Urban Poor Others
Prestige
Living expenses Family members might have to trade-off education for tradeoffs spend on durables, ceremonies
Education tradeoffs
Disconnected from roots tradeoffs (migration)
Trade off rent and transport expenses for necessities such as food, healthcare and education
Economic opportunities in metros and upper tier cities force people staying in tier 3, 4 cities and rural areas to migrate to cities in search of better job opportunities, higher incomes and more avenues for their children
Aspiration
These tradeoffs create a critical difference between need and demand

Source: PwC analysis and primary research, Economic Times
October 21, 2012 30
Example of a typical migrant shows he has number of counterintuitive tradeoffs to make

Background: Name Alam (42) Household size 5 Occupation Contract taxi driver in Mumbai Household income Rs. 240,000 (annual) and monthly income is around Rs. 15,000 - 20,000 Childrens future
Religion
Parents Tradeoffs
Village Food
Corruption
No savings
Loans
Alam is from Asamsul village in West Bengal (eastern India). Like many of his peers, he moved to Bombay for a better life. While Alam earns more than his peers, and has a family home in Mumbai (which means no rent), Alam does not save. ...all I want to do is to ensure that my children have a better future... Alams thoughts are consumed by trying to provide his children a quality education, so that they dont have to make tradeoffs (he calls tradeoffs adjustments). He spends about 40% of his income for his childrens education, at a better school than his peers send their children. Alam has also paid capitation feeds, to the local school board, amounting worth 2-months of his income to get his children admitted. This is his reality.
Alams family will save on day-to-day expenses (ex: bus instead of train, walk instead of bus) to cope with rising food prices and save for a bigger purchase. Alam is still optimistic he sees the value in purchasing durables fridge, TV and mobile phone for his family. To finance these investments, he prefers paying the local loan shark he uses the hindi slang dalal an EMI (3 5%) for loans collateralized with his wifes jewellery, while some of his peers pay 15 20% to legitimate banks.
Alam wants to move back to his village, but says it is unlikely due to the poor infrastructure in his village.
Source: PwC analysis and primary research
October 21, 2012 31
Section 5 How are businesses reacting
October 21, 2012 32
A climber has little disposable income, but chooses and makes a tradeoff for his children's future
Background: Name B. N. Patil (46) Household size 5 Occupation Marathi Teacher in the rural school Household income Rs. 3,50,000 (annual)
Monthly expense distribution
Others 17%
Rent 7%
Food & grocery 10%
B. N. Patil is the only earning member in his family of 5. He has 2 daughters and a son. He stays in a rented house in Pen village of Raigarh district of Maharashtra. Patil owns a TV and a refrigerator, which they bought 8-10 years back. According to him the brand was inconsequential. Maximum share of his household income is spent on childrens education and savings for expenses like childrens marriage, donation for school admission, medical expenses, etc. Mr. Patil is unaware about different in vogue brands and products, however, his children are cognizant of these products and influence the buying decisions in his house. His elder daughter wants to go to Mumbai for higher education and his son aspires to become a cricketer. The Patil family does not mind the tradeoffs they are making currently to secure their childrens future.
Travel 10%
Education
21%
Savings 35%
Education and savings dominate share of wallet for Mr. Patil
October 21, 2012 33
Bajaj developed an aspirational bike for the emerging middle class, to cater to an aspirational need of the youth segment
Case study Customer value proposition Launched an aspirational product catering to youth of rural India Launched Boxer bike for rural India, positioned as SUV of motorcycles Counterintuitive positioning and feature set: Higher engine capacity and lower mileage for rural India? 150 cc bike, as opposed to 100 cc bike oby competitors, for this customer segment 1. Functional Need: Bajaj understood the true need on their target consumer segment in Emerging Middle India: Heavy cartage, poor roads, and multiple people on the same bike Product snapshot
2. Aspirational Need: More significantly, Bajaj understood the psyche of the consumer. A more powerful motorcycle appealed to the underlying need for power, and catered to the young male consumer segment. Accelerating demand Reached out to local people through word of mouth connecting with key village opinion leaders Showed 300 Sarpanchs (Village Heads) how a bike is made, who later promoted the brand in their villages Business benefits/value delivered Scaled model across India: With a pilot project in Malda, West Bengal Bajaj has replicated this model across smaller towns and villages in India and also, plans to service emerging middle class customers in urban India now Approval of key powerful opinion leaders in villages accelerated demand, creating a viable market
Acceleration of demand:
October 21, 2012 34
Bajaj developed an aspirational bike for the emerging middle class and implemented innovative channel and financing strategy
Customer value proposition Launched an aspirational product catering to youth of rural India Launched Boxer bike for rural India, positioned as SUV of motorcycles 150 cc bike, as opposed to 100 cc bike of competitors for this customer segment
Focused on lifecycle costs of the mortorcycle Innovative business model/new ways of working Designed business model to work around institutional voids Appointed ASC owner as sub-dealers a local person with personal relationships within the community A different approach to credit checks: via community member who owns ASC End of 2012, Bajaj Auto plans to have 600 dealerships along with 2000 sub-dealers across India Combine service plan and payment routine Not to cheap, not to expensive. Price as a signal of quality and aspirational value
Ball park pricing
Further reached out to local people through word of mouth making right connects Showed 300 Sarpanchs (Village Heads) how a bike is made, who later promoted the brand in their villages
Source: PwC analysis, primary research
October 21, 2012 35
Bajaj Direct Cash Collection introduced a relevant financing mechanism to a cash strapped segment
Smart Case Reach study
Bajaj Auto Finance realised the poor banking access in rural India, and devised a Direct Cash Collection Model to enable easy financing of its bikes, which translated in low default rate
Bajaj Auto Finance suffered INR 400-500 Cr of bad losses and realized that this customer segment was cash strapped and moreover, had no access to formal credit documentation ASC owner is a local entrepreneur from the community who is responsible for being an informal judge of credit-worthiness of the buyer. The ASC are also empowered to let people default, based on their knowledge of the situation of the financee.
Bajaj Auto Finance
Direct Cash Collection Model
Authorized service centres (ASCs) Bajaj enabled vehicle loans for the customers through these ASCs Customers could pay their loan instalments in these ASCs, where they would be handed a receipt on payment
Customers
Out of 50,000 loans issued by Bajaj Auto Finance every month, currently 50% are issued through DCCM. Approximately 40% of the customers pay their instalments before the due date. Default is now sub 1% (aerial) and loss has reduced significantly (2-3%).
Source: PwC analysis, primary research
October 21, 2012 36
Tata Nano is shifting its original positioning of its car from low cost to smart to position itself beyond cost
Case study Innovation lifecycle Source of innovation Tata identified the price gap in the automotive space in India -- between INR 80,000 costing 2-wheelers and around INR 350,000 costing small car segment and launched a car for INR 100,000 affordable for middle class and suitable for a family of 4 Nano was positioned as a cost effective option to the two wheeler with cost leading to a possible uptake While it has had some success, this positioning missed the aspiration of the emerging middle class The Nano is now being re-positioned as a car that has other features to appeal to the aspirations of this emerging middle class Its marketing campaigns with a tagline khushiyon ki chaabi symbolised joys of riding a Nano as opposed to driving two-wheelers Further, Tata did a promotional campaign with Goldplus Nano Car Nano car made with gold, silver and precious stones Sales graph of Tata Nano 12,000 10,000 8,000 6,000 4,000 3,525 6,515 5,451 2,936 3,260 1,202 Apr-10 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 10,012
Original Positioning
New Position
2,000
0
Tata Nanos repositioning as a car that is aspirational, smart, funky, environmental, is now turning the tide on its sales.
Source: PwC analysis, primary research, economic times
October 21, 2012 37
Godrej designed Chotukool A completely reengineered refrigerator with key features critical for the mass market
Case study New value propositions Introduced a mini refrigerator suitable for needs of Emerging middle India What job is the consumer trying to do? Godrej understood that Emerging middle India, and its poorer consumer pool does not buy food in bulk, but just needs to keep food cold over night The ChotuKool is a smaller refrigerator, 1.5 feet tall by 2 feet wide, catering to smaller living space (especially for urban emerging middle Indian segment. Ex: Migrants) Product snapshot
Mass customization: Smart reduction in feature set and price-position sweet-spot, while meeting latent needs of the Emerging middle Product reengineering: Godrej reduced the components from 200 in a regular refrigerator to 20, to reduce the price to $70 less than one third of the price of a regular bottom-of-the-line fridge. It also consumes only half the power so it keeps electricity bills economical for poor families. Cost savings for the consumer: Instead of compressor, it runs on a cooling chip and fan similar to those used to cool computers. It can survive power surges and outages common in India and even has the option of running on batteries. It uses high-end insulation to stay cool for hours without power.
Business benefits/value delivered

Apart from involving village girls in selling the products at a commission of Rs 150 per item sold (Godrej claims this strategy will reduce the distribution and marketing costs by 40%), ChotuKool was designed using several engineering innovations to keep the price point low. It has tapped an underserved/poorly served market by providing product that was affordable, and exactly met the needs and price point of this consumer segment
Environmental factors:
October 21, 2012 38
GE developed a low cost Baby Warmer suiting rural India, and also adopted a hybrid distribution model to expand its reach
Case study Customer value proposition Customized Baby Warmer reengineering product to meet mass market requirement (80/20 rule), and reduce cost 4 times from $10,000 $2,500 Care for pre-term and full term (low weight) infants Radically different components than western model. For instance, used wax that regulates the babys temperature for 4 hours without electricity. Product snapshot Did you know that infant mortality rate (mainly due to preventable conditions) in the state of UP is 75/1000? Did you know that infant mortality rate the most underdeveloped of countries is about 100/1000?
Simple yet powerful understanding of local needs: included Jaundice attachment, since 50-60% of infants contract such waterborne diseases in Emerging middle India
Removed sophistications such as software to monitor baby's pulse, introduced digital scale to monitor its weight, and LCD monitors to display data to reduce the cost of device. GE effectively reduced the cost of standard Baby Warmer from $10,000 to $2,500-3,000 in India GE adheres to a broader mandate of reducing Infant Mortality Rate (IMR). Solution approach: product +service + training Investments in education for user base, training of tertiary healthcare provider technicians healthcare for infant after she leaves the healthcare centre
Did you know that in more than 25,000 primary/tertiary health centers in India do not even have a single working baby warmer?
Business benefits/value delivered Collaborated with Phoenix medical systems bought their technology to lower cost with vertical integration (2000+ warmers sold in Bihar district during pilot) GE adopted a hybrid model of using its own and collaborative distribution network for channel innovation Used its distribution network to sell these units to tertiary healthcare centers in rural India Partnered with Embrace a NGO based in San Francisco to get access to differentiated technology (low power consumption) Piggybacked on Johnson &Johnsons distribution network to tap their 3000-4000 dealers channels
Reduced product cost by 3-4 times:
Design thinking, and end-to-end solution driven approach

Source: PwC Primary research
October 21, 2012 40
Aravind Eye Clinics treat low income people in India suffering from cataract, using simple and economic tools and techniques
Case study Customer value proposition Low cost high quality cataract diagnosis, operation and after-care Cost of $50/operation compared to the average $300 for treatment in a conventional Indian hospital ($1650 in a US hosp.) making it extremely affordable for rural Indians Education camps set up to educate people on better eye-care Product snapshot
Innovative business model/new ways of working Model based on standardisation and engineering cataract surgery for high volume production Cost of an imported intra-ocular lens was reduced significantly from $100-$150 to $6 through value engineering the design and setting up manufacturing within a division of Aravind Aurolab
Key elements added a dedicated factory for producing lenses, a training centre to provide key skills, specialist ophthalmic research centres, and an international eye bank
Paraskilling: To ensure an adequate supply of key skills 900 ophthalmic assistants are trained each year to support the specialist doctors. This enables high productivity where each surgeon works on two operating tables alternately, and is supported by a team of paramedics to carry out less-skill dependent aspects such as washing the eye, putting in sutures, giving anesthetic injections etc
Business benefits/value delivered Innovation for bottom of the pyramid Largest and most productive eye care facility in the world in the year 2007/2008, about 2.4 million persons received outpatient eye care and over 285,000 underwent eye surgeries at the Aravind Eye Hospitals across Tamil Nadu Enjoy one of the highest EBITDA margins in the industry
Source: PwC analysis, primary research, CK Prahlad: Fortune at the Bottom of the Pyramid
October 21, 2012 41
Dr. Shetty of Narayana Hospitals, radically reduced the cost of heart surgery through economies of scale and specialisation
Case study Customer value proposition Applying economies of scale to the health care system to provide efficient, affordable heart surgeries Original hospital at Bangalore consists of 1000 beds as compared to an average of 160 in US hospitals Focuses only on cardiac procedures better purchasing power, machines used at a higher rate, better value for money and surgeons become more efficient at procedures Product snapshot
Sliding scale of fees used for operations so that richer customers subsidise poorer ones Innovative business model/new ways of working A business model that is based on the belief that higher volumes lead to better quality Established video and internet links with hospitals in India, Africa and Malaysia so that surgeons can give expert advice to those less experienced Clinics on wheels to nearby rural hospitals to test for heart diseases Business benefits/value delivered Profit from economies of scale Dr. Shettys family-owned hospital group reports a 7.7% profit after taxes (compared to an average of 6.9% in US private hospitals) Mortality rate within 30 days of coronary artery bypass surgery is 1.4%. at NH, compared to 1.9% in the US Reduces the cost of average cardiac procedures by a minimum of 50%
Dr. Shetty and team of 40 cardiologists perform about 600 operations a week
Indias high level of manufacturing and expertise allowed the hospital to source equipment from affordable Indian suppliers Three other hospitals have been built a trauma centre, a 1400-bed cancer hospital and a 300-bed eye hospital
October 21, 2012 42
Tata low cost Housing focused on providing quality AND affordable housing solutions using disruptive technology
Case study
Tata Housing
Innovative business model/new ways of working Product snapshot
These low-cost houses will be made available in the form of prefabricated (prefab) kits, which can be assembled at the site.
Completing project on time within 15 months is another significant area of cost reduction for the project
Cost reduction achieved by using cheaper, however, more durable construction material No bricks are used and walls are made wholly of cement, which makes them much stronger and also maintenance-free, lowering long-term costs for the residents. These homes would have a significant amount of non-steel components for wall cladding and other interiors. Rooms are designed in such a manner that tiles can be fitted without being broken. This led to a construction cost of Rs. 650 Rs. 700 per sq. ft Cost of construction was reduced by building the flats outside big cities, where land is much cheaper. Marketing usually makes up 3-4% of costs for a housing project. This cost was reduced significantly by eliminating the sales function where, the marketing team took over and worked on advertising campaigns. Business benefits/value delivered
Further, frills were cut down to optimize cost
The margins in this model have been close to 15-20%, compared to 40% in conventional housing segment.
Tata plans to expand the model to Delhi and Bangalore. Apart from the open market opportunity, the company is also pinning hopes on the mass housing schemes taken up by various state governments for its houses.
October 21, 2012 43
Since this segment is value conscious and not just cost conscious, a number of pure cost warriors have fallen by the wayside
Beyond low Cost
Cost warriors 1 2 Rely solely on cost to attract customer Try to take market share through price
True innovators Rely on understanding what the customer wants in this segment Build new markets by positioning products and service as aspirational
3
4
Low, zero investment in understanding customer need

Mindset lacking to scale up beyond initial success
Invest in research, customer understanding

Invest in infrastructure both hard and soft to scale up
October 21, 2012 44
Section 6 Take aways
October 21, 2012 45
Section 6 Take aways
The global emerging middle class offers a robust growth horizon but needs different strategies for profitable growth
The world is split into four categories with the next 4 Bn residing in countries that are large, growing fast and having largely underpenetrated markets, India with 1.2 billion citizens is a significant segment In the Indian context, the emerging middle class with 570 million people by 2021 will constitute a trillion dollar economy, and see a significant number churn through this segment. In the global context, the Global Emerging Middle (GEM) comprises over 2.3 billion people and over the coming decade is expected to be a $6 Trillion economy The Emerging Middle class in India is significantly youth oriented, and rural in its composition but is aspiring for change, given the strong connectivity and communication with the rest of India. Across the 5 sectors analyzed by this study, we see three areas where leaders have focused to succeed in this market place: New Value Propositions, Innovative Business Models, and Shift in Mindset. Successful companies create new value propositions which focus on Aspiration Tradeoffs, Beyond Cost Position and Mass Customization Those companies that are able to successfully address this segment create strategic capabilities that allow it to address the upper segments as well as other countries with similar emerging middle classes
Professionals entering this market have the opportunity to work on new challenges across areas of marketing, operations, finance, human capital and technology
Profitable growth strategies for the Global Emerging Middle (GEM) Kirloskar Institute of Advanced Management Studies PwC October 21, 2012 46
We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well.
Bill Gates, on creative capitalism (World Economic Forum in Davos, Switzerland)
2012 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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Profitable growth strategies for the Global Emerging Middle (GEM)

October 21, 2012

October 21, 2012 1

Corporate planning @ Reliance Com

PGDM, IMDR, Pune B.E, RKNEC, Nagpur

Reader, traveller, history enthusiast, and aspiring gardener

October 21, 2012 2

Section 2 Global emerging middle

October 21, 2012 3

Section 2 Global emerging middle

Less than $ 1,500

October 21, 2012 4

Section 2 Global emerging middle

Six assumptions companies make

Every single one of these assumptions is generally wrong

Section 2 Global emerging middle

...and how did companies react

Yamaha Motor (Japan)

Installing compact water purification systems

Grameen Bank (Bangladesh) Galanz (China) KickStart (Kenya) Philips (Netherlands)

Bangladesh China Kenya India

October 21, 2012 6

Section 2 Global emerging middle

Developed nations with low growth forecasts

40,000 United Kingdom

GDP/Capita ($), 2011

South Africa Algeria

Real GDP Growth, 2011 (%)

Rich (>$12,000) Source: IMF and World Bank

October 21, 2012 7

Section 2 Global emerging middle

7 Bn Population Income level Yrs of education Urban (%) Mobile phones

Difference Middle vs. Next

$ 996 - $ 3,945 10.3 41 47 13.7 20.3

14.5 78 106 68.3 435.1

13.8 74 92 29.9 125.2

7.9 27 22 2.3 5.8

25% 45% 50% 54% 84%

Cars (per 1,000

October 21, 2012 8

Section 2 Global emerging middle

October 21, 2012 9

Section 2 Global emerging middle

Source: PwC Analysis, World bank, IMF

October 21, 2012 10

Section 2 Global emerging middle

80 170 470 460

190 300 570 290

October 21, 2012 11

Section 2 Global emerging middle

October 21, 2012 12

Section 3 Demographics and growth

October 21, 2012 13

Section 3 Demographics and growth

80 170 470 460

190 300 570 290

October 21, 2012 14

Section 3 Demographics and growth

400 300 200 100 0

October 21, 2012 15

Section 3 Demographics and growth

135-185 India 170-220