European and US consumer goods makers, confronted by slowing growth at home, are turning to the fast-growing countries of Africa, Asia, and Latin America. In 2002 the top 20 consumer goods companies spent more than $10 billion to expand their share of these markets, which now account for nearly 40 percent of all worldwide sales of clothing and grocery products (Exhibit 1). However, many such companies find that their expensive brands and management processes are more a hindrance than a help in reaching the lower-income segments.

Our study of global consumer goods makers¹ operating in emerging markets revealed a consistent pattern: companies perform best in the vast low-income segment by adopting local branding and organizational strategies, which often run counter to established practice in more advanced regions.² Most of the companies we studied entered an emerging market by acquiring a local competitor; they were essentially buying access to local distribution networks and facilities. Next they brought in brand managers from more developed markets, who typically overhauled manufacturing processes and launched expensive marketing campaigns. In addition, most multinationals sought to integrate their acquisitions into the parent organization by extending their corporate functions to the local companies and allocating a share of those costs. In almost every case, the companies then had to raise prices.

That approach can work for products aimed at affluent consumers, who in emerging as in developed markets will pay a premium for brand names. But it usually prices products out of the mass market: local competitors have such an enormous cost advantage that it isn’t unusual for multinational companies to lose half of the market share of the brands they acquire. In one emerging market we studied, for instance, the product of the lowest-priced local competitor sold for about 40 percent less than a global company’s brand-name soap powder. The local company merely manufactures and distributes its soap; it has no marketing or brand-management expenses and enjoys far lower costs for materials, packaging, and production. The local product thus gives its manufacturer margins quite comparable to those of the global company and provides higher margins for retailers (Exhibit 2), thus increasing their loyalty. Local manufacturers can maintain their profitability even without tax evasion—a common charge against them.

To compete, the global manufacturers should develop two distinct approaches to emerging markets. For the high-income segment, such companies can build profitable positions by continuing to pursue sophisticated brand-building strategies. But to capture the low-price market, they would do better to emulate their local competitors. First, global companies should retain the best local managers, who, we found, are less likely to change products (or their packaging and promotion) extensively. The manufacturers that didn’t make such changes achieved profitable growth two-thirds of the time, while those that did usually failed to do so. The key is to focus on cost reduction, operational efficiency, and simplicity rather than product reformulations or marketing efforts. Companies relying on managers imbued with the branding mind-set of advanced markets tended to focus on the wrong things.

Second, successful global entrants in emerging markets further minimized the risks by adhering to local standards of quality and technology; these companies let the consumers define quality and refrained from uprooting local design and production systems. In response to a low-cost competitor in India, Unilever, for example, introduced an inexpensive powder detergent called Wheel and outsourced its production to a local manufacturer. The product was less refined than Unilever’s premium Indian brand and sold for about one-third as much, allowing the company to serve a previously neglected low-price market. With only one strong competitor in it, Wheel quickly won 38 percent of the powder-detergent market in India, thereby matching the competitor’s market share.

Finally, companies that acquired local manufacturers but kept their operations separate—sharing only a few functions, such as purchasing or logistics—outperformed those that fully integrated local acquisitions. The parent should act much as a venture capital firm does, by investing in companies that are growing, preserving their autonomy and lower cost structures, and transferring product ideas from one country to another. (After achieving success with Wheel, for instance, Unilever introduced a similar product in South America.) But such successes will remain elusive unless companies accept a hard lesson: in the low-end segment of emerging markets, homegrown management methods and an awareness of local tastes and incomes will usually work best.