A grassroots approach to emerging-market consumers

A grassroots approach
to emerging-market
consumers
By tapping into local networks, companies can serve low-income markets
profitably, delivering significant value to shareholders while creating the
essential market infrastructure for economic development in the neediest
communities.

Christopher P. Beshouri

When companies figure out how to serve low-income consumers in

developing countries profitably, everyone wins: the disadvantaged gain

access to products and services that the private sector is best positioned to
deliver, while companies tap into vast new markets. On top of that,
when core sectors of the economysuch as banking, electricity, telecommunications, and waterthrive, they transform consumers into producers
and promote economic development.
Unfortunately, this happy dynamic is more the exception than the rule. Lowincome consumers just cant afford many products and services. A shaky
infrastructure raises the costs of distribution. Incomplete information makes
extending credit difficult, and collecting whats owed poses enormous
challenges. Some low-income consumers feel entitled to connect into water
mains or electricity lines illegally. Low-income environments are also more
susceptible to insurgent activities that raise security and infrastructure costs.
To complicate matters, the resolution of these issues sometimes calls for
untangling a unique principal-agent problem. A company (the principal) is
in a weaker position than the community (the agent) when it comes to
gaining local information, shaping peoples views, and dealing with bad
behaviorby defaulters, for examplethat could disrupt service for
customers and company alike.

61

The McKinsey Quarterly 2006 Number 4

62

Article at a glance
Companies serving low-income consumers in
developing countries face daunting problems, such
as security, customer acquisition, distribution,
and collection.
Whats more, for obtaining information about local
developments, shaping viewpoints, and sanctioning behavior, companies are frequently in a weaker
position than communities.

A few companies are adopting

creative community-based solutions
to overcome many of the difficulties they face serving low-income
consumers:

The McKinsey Global Survey of Business Executives:

Business and Society,
Web exclusive, January 2006

Corporations as global citizens,

2004 Number 1

The solution involves enlisting community leaders

and residents to monitor and influence developments
on the ground and to create a positive dynamic that
helps companies adapt their business models to the
challenge of serving low-income consumers.
Building awareness and providing economic benefits
that extend beyond core products and services
are often key elements of a community strategy.

Related articles
on mckinseyquarterly.com
What is the business of business?
2005 Number 3

In the Philippines, Manila Water

relies on collective billing to
ensure the timely payment of bills,
employs small-scale entrepreneurs
as couriers and pipeline contractors, supports microlending,
and brings affordable water
to schools and hospitals. The
mobile-telephony providers Globe
Telecom and Smart Communications use initiatives (ranging from
educational programs to food
and medical assistance) that
benefit the whole community to
encourage local leaders to
safeguard cell towers and protect
company employees.

In Mexico, Cemexs Patrimonio

Hoy program broadens access
to services and to cement and other
building materials by organizing low-income customers into groups
of three families that monitor each others progress in constructing their
own homes and collectively pay off debts at regular ten-week intervals. To promote and monitor the program, Cemex employs people, such
as teachers and church leaders, who have large personal networks and
are widely trusted.

In

India, Hindustan Lever has developed Shakti, a program that trains

rural women to operate as entrepreneurial distributors of consumer
products in villages of fewer than 1,000 people. This effort generates
annual sales of roughly $250 million in villages that would otherwise
be uneconomic to serve.

Some of the benefits are directly measurable. Manila Water serves 5.1 million residents, has trained more than 1,000 engineers, and disburses a
$16 million annual payroll in impoverished east Manila. The distribution of
mobile-telephony services in the Philippines generates roughly $200 million

A grassroots approach to emerging-market consumers

a year for more than one million small-store proprietors. Cemex has made
home ownership a reality for 70,000 low-income Mexican families.
Hindustan Levers Shakti program provides annual cash flows of roughly
$25 million to its female distributors. And the Grameen Bank of Bangladesh,
which along with founder Muhammad Yunus won the 2006 Nobel Peace
Prize, has made small loans to 6.6 million people while providing services
in more than 70,000 villages.
Less quantifiable benefits are just as important. Cheaper, higher-quality
water frees up income for other purchases and raises the quality of life and
health. Reliable telecom services help farmers ascertain market prices,
make it less necessary to use bad roads, and provide a substitute for weak
postal services. Home ownership raises the net worth of families, makes them
more safe, and generates self-esteem. In addition, many of these programs
promote a culture of entrepreneurship.

The idea that social issues can be

central to strategy is applicable
beyond low-income markets. For a
broader look at this topic, see
When social issues become strategic,
on mckinseyquarterly.com.

In view of the benefits, it might seem

natural to describe communitybased initiatives as a form of corporate
social responsibility. Yet in most
cases, the local initiatives actually make
the business sustainable. Addressing
social issues, in short, isnt adjacent to
strategy but rather central to it.

What are the obstacles?

The higher costs of doing business and the fundamental principal-agent
problems prevalent in low-income markets will take on growing importance in the future: at least ten of them are in fast-growing economies that
together represent about half of the worlds population and nearly $15 trillion in income.1 Within such economies, the most importantand difficult
business sectors for solving the low-income challenge are those where the
expected profit is low but the potential impact of successful penetration is
high (Exhibit 1, on the next page). Water and mobile telephony are prime
examples, and the Philippines is a prototypical low-income market: the
bottom 90 percent of households, representing more than 60 percent of the
countrys purchasing power, each earn an average of less than $300 a month.
Familiar, but more daunting . . .
Some of the factors that raise the cost of serving poor consumers
are actually acute forms of challenges that businesses confront across all
consumer segments.
1

Brazil, China, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Thailand, and Turkey. GDPs are
calculated on a purchasing-power-parity basis.

63

exhibit 1

Taking on the challenge

Developmental impact and expected profitability of industries in low-income markets
High
Developmental impact on communitys economy

64

Q4 2006
Low income
Exhibit 1 of 3
The McKinsey
Quarterly
2006 Number
4
Glance:
Special attention
is needed
where expected
profit is low but potential
impact on economic development is high.

Water
Electricity
Housing

Typically governments,
multilaterals (eg, United
Nations, World Bank), and
nongovernmental organizations
(NGOs) perceived as highly
developmental but unprofitable

Credit

Telecom
Moderate

Tobacco
Alcohol

Low
Low

Moderate

Businesses stereotyped as highly

profitable but with little or no
contribution to development

High

Expected profitability of serving low-income segment

Customer acquisition and parceling. When low disposable incomes limit

the amount consumers can buy at any one time, it becomes extremely
important to deliver products and services in affordable parcels, such as
single-use packets of products like shampoo or detergent. Consider the
problem faced by Globe Telecom and Smart Communications, operating in
a country where a mobile handset costing 3,000 pesos (roughly $60) might
represent 20 percent of an average low-income consumers monthly wages.
Acquiring new customers was virtually impossible without radical changes
in the parceling and pricing of services.
Collection. Consumers in low-income segments have trouble saving money,
given their pressing need for liquidity. This factor makes the collection
problem acute for sectors such as telecom services and water, where consumers generally receive bills after consumption. Furthermore, the
difficulty (and sometimes the danger) of locating and contacting delinquent
consumers raises costs. And the harder it is to collect, the higher the
eligibility standards that companies must set for their customers; this in
turn reinforces the problem of acquiring new ones.
Infrastructure. Low-quality roads, postal services, electricity, and other
basic forms of infrastructure make it harder and costlier to support
production and distribution in many areas. A large number of households

A grassroots approach to emerging-market consumers

in Manila Waters target market, for example, live in shanties that lack
proper faucets, toilets, or in-house piping. As a result, not only service
providers but also potential customers must start from scratch. For customers, the cost of installing basic plumbing can be substantialaround
7,000 pesos, or more than 40 percent of the average monthly income.
. . . and unusual
Other difficulties are less familiar to companies that primarily serve more
affluent consumers.
Desperation. As a result of a 1997 privatization initiative, Manila Water
has the right to sell water in the eastern part of the metropolitan area.
Before then, all of it was served by a government monopoly, and roughly
65 percent of the water that left the treatment plant was nonrevenue
water. A weak infrastructure was responsible for a good deal of the problem,
but as much as one-third of it resulted from pilferage. Consumers felt
that they had to make illegal connections to the pipeline in order to obtain
watersomething vital to the hygiene and health of their families. But
pilferage jeopardizes the long-run provision of services.
Security. Large concentrations of low-income consumers who endure high
unemployment and receive minimal government support are ripe targets
for radical political and social groups that encourage resistance to contracts
and threaten corporate assets. Since 2002, for instance, lawless elements
have damaged more than 30 of Globe Telecoms cell sites in retaliation for
the companys refusal to pay revolutionary taxes. Protecting infrastructure from straightforward theft is also a problem: copper cables belonging
to Globe Telecom and Smart Communications have been cut and sold
as scrap metal.
Education and culture. Companies must often invest to overcome or accommodate mind-sets that undermine consumer participation in conventional
market transactions. In the Philippines, for example, there is a ubiquitous
custom of five-six lending: borrowing five pesos and repaying six, usually
within a week, for an annual interest rate of roughly 13,000 percent. Since
low-income consumers, lacking good information and formal education,
dont understand the implications of this kind of borrowing, they wind
up even poorer and further removed from the economic mainstream.
The solution lies in the community
Running through many of these challenges is a classic principal-agent
problem: a variety of agents (consumers and community leaders) may act in
ways that are not necessarily in the best interests of the principal (product

65

66

The McKinsey Quarterly 2006 Number 4

and service providers). For the phone companies and Manila Water,
the conventional solution would be to safeguard thousands of base stations
and hundreds of miles of pipeline with security guards, police protection,
and enclosures. Since tactics like these would be prohibitively expensive,
companies need creative business models to resolve principal-agent
problems in a sustainable way.
People in local communitiesnot only the mayors and barangay (village)
captains but also school principals, teachers, religious leaders, and residents
themselvesare in the best position to help companies deal with the
challenges of doing business in low-income areas. These community agents
have the information and ability to monitor and influence what happens
on the ground. If a company can show that its own interests are aligned with
their
interest in employment and commerce, it can then enlist community
Q4 2006
support
for security, collection, and system monitoring. Community-based
Low income
approaches
Exhibit 2 of 3 help companies address principal-agent issues head on while
creating
positive
dynamic
reinforces
business
model adaptations
Glance: Onea can
map the
dynamics that
of commercial
and key
community
interactions.
(Exhibit 2).
exhibit 2

Commercial and community dynamics

Key intervention points

Community events1
Credit

Community
support, stability
Community action
Asset security

Enabling
infrastructure
Transport
Fulfillment
Payments services
Interactive platform

Productive capacity
Human capital
Health
Safety

Community

Primary service
provider2
Products and services
Costs (operating,
collections)
Business model

Community wealth
Initial condition
Accumulated benefit

Training/education3

1 For
2 For
3 For

example, disaster relief, distribution of food, medicine.

example, banking, electricity, telephony, water.
example, job-training campaigns, information, key workers.

Business

Capital, labor
employment
Key workers
Suppliers
Investments

Micromarket traffic
(economic activity in
local market)

A grassroots approach to emerging-market consumers

To understand these dynamics, consider what happens when a telecom

company provides service in an area. Rising local employment at the
company and its suppliers stimulates local economic activity. Meanwhile,
telecom services make transportation, the flow of information, and the
fulfillment of transactions cheaper and easier. These second-order benefits
make the community better off, which of course stimulates demand and
improves the way the community perceives the company. Improved alignment between the community and the business, in turn, makes it easier to
address issues such as security and pilferage. Education and initiatives that
make communities more aware of the broader economic and social role that
companies play can reinforce the positive dynamics or reverse negative ones.
While tapping into these commercial and community dynamics, Manila
Water, Globe Telecom, and Smart Communications have delivered strong
returns on invested capitalaround 19 percent, 16 percent, and 17 percent, respectively, over the past three years. Lets explore the stories behind
the numbers at Manila Water and Globe Telecom.
How Manila Water does it
To overcome the difficulties in acquisition and collection, Manila Water
devised a game-changing scheme: letting communities themselves decide
if they want individual or collective installation, metering, and billing. The
company offers three options: one meter per household, one meter for
3 or 4 households, and a bulk meter for 40 to 50 households. Where households band together, the connection fee (ordinarily 7,000 pesos a household)
can fall by as much as 60 percent, depending on the number of customers
who shoulder the cost of pipes, the meter, and installation. Submeters
measure water usage in each household, and everyone on a group meter
takes responsibility for paying the total bill, an arrangement that in effect
gives consumers (and Manila Water) group insurance coverage on payment.
About 30 percent of the urban poor served by Manila Water now pool their
bills, and in communities using this technique the company collects 100 percent of the money they owe. Consumers recognize both the savings from
collective installation and the fact that ensuring sustained service depends
upon their own actions. Tied households, given their close proximity, can
observe and shape day-to-day behavior, encourage the clusters members to
meet their obligations, and impose sanctions on those who dont.
Nonetheless, some low-income consumers still make illegal connections
to the companys pipelines. Furthermore, winning cooperation from
local officialsabsolutely essential for a heavily regulated businessis
problematic for a company like Manila Water, which eschews the bribes
and other extralegal practices many businesses accept. The companys

67

68

The McKinsey Quarterly 2006 Number 4

response has been to come up with several community-based initiatives.

They include the following:
Providing

jobs to more than 10,000 people, either as couriers who deliver

Manila Waters bills or as contractors who help lay pipelines; the
company also fosters the development of small supplier businesses and
cooperatives, such as printing outfits.

Bringing

clean, affordable water to public schools, hospitals, and

marketsinstitutions of great importance to the broader community
while addressing the sanitation needs of low-income residents.

Increasing

awareness within the community that illegal connections

pose a risk to the long-run provision of water and that canned water is
seven times more expensive than the companys offering.

Making

small loans, in partnership with Bank of the Philippine Islands

and the International Finance Corporation, to organized groups operating
microenterprises such as street stalls and food services.

Combined with collective billing, these actions are solving the principalagent problem by giving agent communities a vested interest in principal Manila Waters viability. As people see their living conditions and
productivity improve, they become more willing to monitor water
connections, protect infrastructure, ensure timely payment, and win over
local-government officials.
Globes approach
Globe Telecom began expanding into lower-income segments in 1998
because the top of the market was too small to support the capital expenditures required to extend the companys mobile network throughout
the Philippines. Its initial push involved selling prepaid service cards in
denominations of 300 and 500 pesos. Although the prepaid scheme
eliminated most of the problems associated with billing, assessing credit
risks, and collection while significantly expanding the market, the cards
were vulnerable to theft. Furthermore, manufacturing and distribution costs
made it uneconomic to offer cards worth less than 300 pesos, and at
around $6 these were pricey for many consumers.
Globe responded by delivering small-value bundles through over-the-air
(OTA) reloading: customers pay a licensed distributor for network access.
Since the costs associated with OTA are almost zero, it can involve whatever
amount of money the customer wants, down to a single peso. The customer takes a mobile phone to a sari-sari store (small roadside variety shops

A grassroots approach to emerging-market consumers

preferred by 90 percent of Philippine consumers) or a village store, gives the

proprietor the money, and the proprietor uses a mobile phone to transfer
a load onto the customers phone. The customer can then make calls until
the credit is used up. OTA to wholesalers has eliminated the opportunity
for card heists while allowing Globeand Smart, which also employs OTA
to relax the eligibility requirements for wholesalers. (After all, the companies can swiftly identify and take action against slow-paying ones.) Both
credit risk and the initial cost of setting up shop decline. As a result, the
benefits are being felt by an army of proprietors; their numbers have swelled
from 50,000 in 2003 to more than 400,000 in 2006 for Globe alone (and
to more than 1,000,000 in the industry as a whole).
Providing a livelihood for shopkeepers is just one of the many ways Globe
is deepening its ties with low-income communities where the company
has assets, such as base stations, offices, and business centers. There are
others as well:
Providing

aid (including food, medical missions, books, and educational

TVs) for primary schools, as well as an engineering curriculum for

vocational schools; Globe tailors programs to local needs by consulting

community leaders, who frequently, in turn, become supporters of the
companys broader activities.

Building

awareness of the way mobile services help people and communi ties to flourish, such as giving farmers updates on weather conditions
and rapid, low-cost access to market prices.

Using

mobile handsets as an electronic payment mechanism to deliver

credit safely and cost effectively. The phone sends payments from one
individual or business to another (much as some consumers use PayPal for
Internet transactions), so the lender can see how the person receiving
the money actually spends it, in real time.

As the link between Globe Telecom and employment-income, education,

and medicine becomes more explicit in peoples minds, low-income
communities help the company both to protect its assets and employees
and to deepen its subscriber penetration.
Exportable lessons
Some clear lessons emerge from the experiences of Manila Water and Globe
Telecom, as well as other budding leaders, such as Cemex, Hindustan
Lever, and Smart Communications. Communities are frequently in a better
position than companies are to resolve issues that make it uneconomic to
serve low-income groups. Building awareness of the benefits that a company

69

70

The McKinsey Quarterly 2006 Number 4

can bring is essential for resolving principal-agent problems. And companies

that want to solidify their role in low-income communities must typically
provide economic benefits beyond the direct impact of their core products
and services.
Within these broad guidelines, three
business model archetypes are
emerging (Exhibit 3). Each addresses
different aspects of the low-income
challenge and can be used individually or in combination. The first
collective accountabilityfocuses on
collection problems associated with
either direct lending or postpaid services. This approach involves developing
small groups, such as Cemexs family clusters or Manila Waters collectivebilling units, whose members substitute for the monitoring efforts of the
business itself and provide social insurance to one another.

Another way companies can make a

difference in low-income communities
is through long-term, systematic philanthropic efforts. See One businesss
commitment to society: An interview
with the president of the Novartis
Foundation for Sustainable Development, on mckinseyquarterly.com.

The second business modelscalable, embedded distributionreduces

costs and promotes a companys reputation by enlisting trusted community
members (such as the sari-sari proprietors, Cemexs Patrimonio Hoy
Q4 2006
monitors,
and Hindustan Levers entrepreneurial women) to provide the
Low income
distribution
infrastructure for goods and services. The challenge, of
Exhibit 3 of 3
course, is how to recruit, train, and manage an army of community-based
Glance: Three models address different aspects of the low-income challenge.
agents.
Hindustan Lever, whose Shakti program has expanded from
exhibit 3

Three models are emerging

Business
model

Core issue
addressed

Community-based
intervention

Collective
accountability

Problems with collection,

pilferage

Small groups monitor

usage, promote compliance,
provide social insurance

Relevant
industries

Sample
businesses

Utilities, eg,
water, electricity
Finance

Scalable,
embedded
distribution

Traditional delivery too

costly relative to
purchase size, density
of consumers

Low-cost, communitybased distribution

points employ key workers
in low-income areas

Fast-moving
consumer goods
Telecom
Low-value consumer
goods

Livelihood
partnership

Brands lack positive

equity; cultural
divisions can separate
interests of consumers
and producers

Business offers additional

services around core
product/service that
promote primary demand
while providing training or
cooperative business
programs to community

Telephony services
Utilities, eg,
water, electricity
Agriculture

Manila Water
(Philippines)
ICICI Bank
(India)

Indofood
(Indonesia)
Hindustan Lever
(India)
Kodak Brazil
Globe Telecom
(Philippines)
Manila Water
(Philippines)
ITC e-Choupal
(India)

A grassroots approach to emerging-market consumers

50 villages with 150 rural women in 2001 to 80,000 villages with 25,000
women entrepreneurs today, has created a four-week training program for
all participants and employs some of the companys leading entrepreneurs
as trainers.
Companies that use the third of these business model archetypeslivelihood
partnershipssurround a core product or service with additional benefits. Rather than treating communities purely as collections of consumers,
companies that take this approach provide low-cost, productivityenhancing assistance, such as Manila Waters training and cooperative
business programs. These initiatives bridge cultural gaps between
company and community, create positive associations with the companys
brand, raise switching costs, and promote micromarket activity. All
this has positive consequences for both the community and the companies
doing business there.
All three approaches involve deep, long-term community relationships and
investments, whose value is illustrated by the extraordinary support
Manila Water received when it asked regulators for a rate increase in 2002.
Ninety barangay captains and community leaders showed up at the hearing and expressed their appreciation for the powerful positive impact Manila
Water had on their communities. These people told stories about the way
residents formerly began their trek at midnight to get water back to their
households by dawn, about new jobs and entrepreneurial activity, and
about Manila Waters support for the communitys special needs and projects.
To these local leaders, Manila Water had become an essential partner
in their livelihood and quality of life; they were prepared to stand by
the company.

Serving the bottom of the income pyramid may seem daunting. But by
crafting community-based strategies that reflect the distinct characteristics of
the low-income segment, companies can tap into a huge growth opportunity
for themselves and achieve competitive rates of return while also delivering
important developmental benefits to the communities they serve.

The author would like to thank Kristine Romano, Adam Schwarz, and Benjamin Soemartopo
for their contributions to this article.

Christopher Beshouri is an associate principal in McKinseys Manila office.

Copyright 2006 McKinsey & Company.
All rights reserved.

71