The bottom of the pyramid is where the real gold is hidden

Opportunities for brands in the developing world are increasing but local companies are using cultural knowledge to get there fast.

Half the world’s population has yet to make its first phone call. Four billion people – a majority of the world’s population – earn below $1,500 (£766) a year and are malnourished. Brands as we know them, on the other hand, only reach a minority of a billion or so relatively rich consumers. This is odd if brands are supposed to identify and meet peoples’ needs.

Now, however, a potent cocktail of greed and altruism plus fear and PR bandwaggoning is turning this status quo upside down. Big brand companies are driving in a new direction: to the bottom of the social and economic pyramid.

Take one straw in the wind: a Danone project in Bangladesh to make and sell low-cost, nutritionally-fortified yoghurts. The project, in partnership with microcredit banking organisation the Grameen Foundation, will also provide income to a thousand local farmers (who will provide it with milk) and thousands of local villagers (who will distribute the yoghurt). The venture is designed to cover its operating and capital costs: no profit, but no loss. If successful, it will replicate itself across the countryside, helping to fight malnutrition as it does so.

Danone is not alone. Unilever has been working with Unicef to distribute nutritionally fortified Blue Band margarine in Nigeria and low cost iodised Annapurna branded salt in Ghana (iodine deficiency causes mental retardation). P&G has been selling nutritionally fortified drinks in the Philippines plus its Pur water brand for those without access to safe drinking water. Nestlé has been doing the same with chocolate drinks and soups in southern and central America.

So why the change of heart? Is it just a good bit of PR? Hardly. Positive PR is a bonus but this is much more than that. Over the past ten to 15 years, economic growth has made around 1 billion people “first-time consumers” of manufactured goods. Over the next decade another billion will join them. This so-called “bottom of the pyramid” is morphing into a huge commercial opportunity: Unilever predicts that its sales in developing and emerging markets will overtake those in developed markets within five years. Procter & Gamble investor presentations now routinely list “developing markets and low income consumers” as one of its three core growth strategies (along with focusing on top brands, markets and retailers in its core businesses and shifting its product portfolio to faster growing, higher margin sectors such as health and beauty).

Local competition
This burgeoning new market is also a huge threat, however. If today’s brand owners don’t meet the needs of “first time” consumers someone else will. In fact, they already are. The biggest selling soap powder brand in India isn’t marketed by Hindustan Lever. It is Nirma, a brand which started out 35 years ago selling at a third of the price of western competitors. Nirma is now expanding into personal care and food.

Arvind Mills makes denim jeans for Lee, Wrangler, Arrow and Tommy Hilfiger – brands which sell for £30 or more in the West. But Arvind also owns the biggest selling Indian jeans brand Ruf and Tuf, which it markets at just £3 via tailors in the form of a complete “sew it yourself” kit.

Nike was an early bird when it came to recognising the importance of emerging markets, launching its World Shoe Project back in 1998. The aim was to develop a shoe that would meet the needs – and price points – of first-time consumers. But the project soon got impaled on Nike’s addiction to its existing high-cost, high-price retail outlets – channels which fed its own internally-imposed high margin requirements. Long term, this could be one of the biggest mistakes it ever made. Indigenous competitor Li-Ning is now the biggest sports brand in China and moving aggressively abroad. In the past two weeks alone, it’s signed itself up as official sports apparel provider of the Swedish Olympic team and the Australian national basketball team.

This story of ruthless, ambitious and innovative domestic competition is paralleled in every sector. The Grameen Foundation started out lending tiny amounts of money (often less than $1) to people traditional banks wouldn’t even sniff at. Today, it’s a $9bn (£4.6bn) business and expanding fast. With mobile phones way beyond the pockets of most Indian villagers, innovative indigenous telcos is digging in by providing shared services: one phone per village, with calls purchased by the unit. The Narayana Hrudayalaya cardiac care centre in Bangalore provides state-of-the-art heart surgery with western mortality rates at less than 4% of western costs. Tata’s takeover of Corus (formerly British Steel) is proof that globalisation is a two-way street.

In each case, indigenous brands are emerging with ingenious product, price and distribution strategies more suited to local conditions – strategies that often have the ability to adapt and travel. Don’t believe for one minute that Toyota’s mooted “ultra low-cost car” won’t make the journey from India and China to Europe and America. Enter the real reason for multinationals’ fascination with this new market: it’s a hotbed of potentially breakthrough innovations in product offerings, distribution and communication strategies, pricing and more.

“The traditional multinational model of local subsidiaries operating with globally-imposed processes, capabilities, structures and branding is not up to the job in these low-income markets,” warns Unilever chief executive Patrick Cescau. “It can even be counter-productive.”

Many western brands are over-engineered and over-priced, delivering features and functions users don’t use and quality thresholds they don’t notice. “Instead of the traditional cost plus margin method of determining price, we’ve had to re-engineer our thinking,” says Cescau. First, discover the price consumers can afford to pay. Second, design everything to deliver this price. The only way to do this is to “re-engineer the entire supply chain, production and marketing process”.

This, in turn, opens up opportunities for a rich cross-fertilisation of new ideas.

Danone chief executive Franck Riboud is clearly excited by experiments like his yoghurt venture with the Grameen Foundation. These are new economic models and they “may become the models of the future,” he says. “Our future depends on our ability to explore and invent new businesses and new types of enterprise”.

C K Prahalad, the Michigan business school professor who invented the term “bottom of the pyramid”, stresses that “this market poses a major challenge”, forcing companies to find new ways to “combine low cost, good quality, sustainability, and profitability”. But these aren’t “bottom of the pyramid” things. They lie at the very heart of value. And marketing. When it comes to creating and defining marketing best practice, the bottom of the pyramid may not remain at the bottom for long.

• Alan Mitchell,


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