CASE 1: Starbucks—Going Global Fast
The Starbucks coffee shop on Sixth Avenue and Pine Street in downtown Seattle sits serene and orderly, as unremarkable as any other in the chain bought years ago by entrepreneur Howard Schultz. A few years ago however, the quiet storefront made front pages around the world. During the World Trade Organization talks in November 1999, protesters flooded Seattle’s streets, and among their targets was Starbucks, a symbol, to them, of free-mar- ket capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters and riot police were black- masked anarchists who trashed the store, leaving its windows smashed and its tasteful greenand-white decor smelling of tear gas instead of espresso. Says an angry Schultz: “It’s hurtful. I think people are ill-informed. It’s very difficult to protest against a can of Coke, a bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous brand and a place where you can go and break a win- dow. You can’t break a can of Coke.” The store was quickly repaired, and the protesters scattered to other cities. Yet cup by cup, Starbucks really is caffeinating the world, its green-and-white emblem beckoning to consumers on three continents. In 1999, Starbucks Corp. had 281 stores abroad. Today, it has about 7,000—and it’s still in the early stages of a plan to colonize the globe. If the protesters were wrong in their tactics, they weren’t wrong about Starbucks’ ambitions. They were just early. The story of how Schultz & Co. transformed a pedestrian com- modity into an upscale consumer accessory has a fairy-tale quality. Starbucks grew from 17 coffee shops in Seattle 15 years ago to over 19,000 outlets in 58 countries. Sales have climbed an average of 20 percent annually since the company went public, peaking at $10.4 billion in 2008 before falling to $9.8 billion in 2009. Profits bounded ahead an average of 30 percent per year through 2007 peaking at $673, then dropping to $582 billion and $494 billion in 2008 and 2009, respectively. The firm closed 475 stores in the U.S. in 2009 to reduce costs. But more recently, sales revenues rebounded to $11.2 billion in 2011, and profits reached a record $1.2 billion. Still, the Starbucks name and image connect with millions of consumers around the globe. Up until recently, it was one of the fastest-growing brands in annual BusinessWeek surveys of the top 100 global brands. On Wall Street, Starbucks was one of the last great growth stories. Its stock, including four splits, soared more than 2,200 percent over a decade, surpassing Walmart, General Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total returns. In 2006 the stock price peaked at over $40, after which it fell to just $4, and then again rebounded to more than $50 per share. Schultz’s team is hard-pressed to grind out new profits in a home market that is quickly becoming saturated. The firm’s 12,000 locations in the United States are mostly in big cities, affluent suburbs, and shopping malls. In coffee-crazed Seattle, there is a Starbucks outlet for every 9,400 people, and the company considers that the upper limit of coffee-shop saturation. In Manhattan’s 24 square miles, Starbucks has 124 cafés, with moreon the way. That’s one for every 12,000 people—meaning that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of 10 percent or more if the company is going to match its historic overall sales growth. That, as they might say at Starbucks, is a tall order to fill. Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication: “A New Starbucks Opens in Restroom of Existing Starbucks.” And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets. “We probably selfcannibalize our stores at a rate of 30 percent a year,” Schultz says. Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Starbucks is at a defining point in its growth. It’s reaching a level that makes it harder and harder to grow, just due to the law of large numbers.” To duplicate the staggering returns of its first decades, Starbucks has no choice but to export its concept aggressively. Indeed, some analysts gave Starbucks only two years at most before it saturates the U.S. market. The chain now operates more than 7,000 interna- tional outlets, from Beijing to Bristol. That leaves plenty of room to grow. Most of its planned new stores will be built overseas, representing a 35 percent increase in its foreign base. Most recently, the chain has opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off Jakarta. Athens comes next. And within the next year, Starbucks plans to move into Mexico and Puerto Rico. But global expansion poses huge risks for Starbucks. For one thing, it makes less money on each overseas store because most of them are operated with local partners. While that makes it easier to start up on foreign turf, it reduces the company’s share of the profits to only 20 percent to 50 percent. Moreover, Starbucks must cope with some predictable chal- lenges of becoming a mature company in the United States. After riding the wave of successful baby boomers through the 1990s, the company faces an ominously hostile reception from its future con- sumers, the twenty- or thirtysomethings. Not only are the activists among them turned off by the power and image of the wellknown brand, but many others say that Starbucks’ latte-sipping sophisti- cates and piped-in Kenny G music are a real turnoff. They don’t feel wanted in a place that sells designer coffee at $3 a cup. Even the thirst of loyalists for high-price coffee cannot be taken for granted. Starbucks’ growth over the early part of the past decade coincided with a remarkable surge in the economy. Consumer spending tanked in the downturn, and those $3 lattes were an easy place for people on a budget to cut back. To be sure, Starbucks has a lot going for it as it confronts the chal- lenge of regaining its fast and steady growth. Nearly free of debt, it fuels expansion with internal cash flow. And Starbucks can maintain a tight grip on its image because most stores are company-owned: There are no franchisees to get sloppy about running things. By relying on mystique and word of mouth, whether here or overseas, the company saves a bundle on marketing costs. Starbucks spends just $30 million annually on advertising, or roughly 1 percent of revenues, usually just for new flavors of coffee drinks in the summer and product launches, such as its new in-store web service. Most consumer companies its size shell out upwards of $300 million per year. Moreover, Starbucks for the first time faces competition from large U.S. competitors such as McDonald’s and its new McCafés. Schultz remains the heart and soul of the operation. Raised in a Brooklyn public-housing project, he found his way to Starbucks, a tiny chain of Seattle coffee shops, as a marketing executive in the early 1980s. The name came about when the original owners looked to Seattle history for inspiration and chose the moniker of an old mining camp: Starbo. Further refinement led to Starbucks, after the first mate in Moby Dick, which they felt evoked the seafar- ing romance of the early coffee traders (hence the mermaid logo). Schultz got the idea for the modern Starbucks format while visiting a Milan coffee bar. He bought out his bosses in 1987 and began expanding. The company is still capable of designing and opening a store in 16 weeks or less and recouping the initial investment in three years. The stores may be oases of tranquility, but management’s expansion tactics are something else. Take what critics call its “predatory real estate” strategy— paying more than market- rate rents to keep competitors out of a location. David C. Schomer, owner of Espresso Vivace in Seattle’s hip Capitol Hill neighborhood, says Starbucks approached his landlord and offered to pay nearly double the rate to put a coffee shop in the same building. The landlord stuck with Schomer, who says: “It’s a little disconcerting to know that someone is willing to pay twice the going rate.” Another time, Starbucks and Tully’s Coffee Corp., a Seattle-based coffee chain, were competing for a space in the city. Starbucks got the lease but vacated the premises before the term was up. Still, rather than let Tully’s get the space, Starbucks decided to pay the rent on the empty store so its competitor could not move in. Schultz makes no apologies for the hardball tactics. “The real estate business in America is a very, very tough game,” he says. “It’s not for the faint of heart.” Still, the company’s strategy could backfire. Not only will neigh- borhood activists and local businesses increasingly resent the tac- tics, but customers could also grow annoyed over having fewer choices. Moreover, analysts contend that Starbucks can maintain about 15 percent squarefootage growth in the United States— equivalent to 550 new stores—for only about two more years. After that, it will have to depend on overseas growth to maintain an an- nual 20 percent revenue growth. Starbucks was hoping to make up much of that growth with more sales of food and other noncoffee items but stumbled somewhat. In the late 1990s, Schultz thought that offering $8 sandwiches, desserts, and CDs in his stores and selling packaged coffee in supermarkets would significantly boost sales. The specialty business now accounts for about 16 percent of sales, but growth has been less than expected. What’s more important for the bottom line, though, is that Star- bucks has proven to be highly innovative in the way it sells its main course: coffee. In 800 locations it has installed automatic espresso machines to speed up service. And several years ago, it began offer- ing prepaid Starbucks cards, priced from $5 to $500, which clerks swipe through a reader to deduct a sale. That, says the company, cuts transaction times in half. Starbucks has sold $70 million of the cards. When Starbucks launched Starbucks Express, its boldest experiment yet, it blended java, web technology, and faster service. At about 60 stores in the Denver area, customers could pre-order and prepay for beverages and pastries via phone or on the Starbucks Express website. They just make the call or click the mouse before arriving at the store, and their beverage would be waiting—with their name printed on the cup. The company decided in 2003 that the innovation had not succeeded and eliminated the service.
And Starbucks continues to try other fundamental store changes. It announced expansion of a highspeed wireless Internet service to about 1,200 Starbucks locations in North America and Europe. Partners in the project—which Starbucks calls the world’s largest Wi-Fi network—include Mobile International, a wireless subsidiary of Deutsche Telekom, and Hewlett-Packard. Customers sit in a store and check e-mail, surf the web, or down- load multimedia presentations without looking for connections or tripping over cords. They start with 24 hours of free wireless broadband before choosing from a variety of monthly subscrip- tion plans. Starbucks executives hope such innovations will help surmount their toughest challenge in the home market: attracting the next generation of customers. Younger coffee drinkers already feel uncomfortable in the stores. The company knows that because it once had a group of twenty somethings hypnotized for a market study. When their defenses were down, out came the bad news. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Barden, who conducted the research for the Hal Riney & Partners ad agency (now part of Publicis Worldwide) in San Francisco. One of the recurring themes the hypnosis brought out was a sense that “people like me aren’t welcome here except to serve the yuppies,” he says. Then there are those who just find the whole Starbucks scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian terminology of grande and venti for coffee sizes. She goes to Dunkin’ Donuts, saying: “Small, medium, and large is fine for me.”
As it expands, Starbucks faces another big risk: that of becoming a far less special place for its employees. For a company modeled around enthusiastic service, that could have dire consequences for both image and sales. During its growth spurt of the mid- to late- 1990s, Starbucks had the lowest employee turnover rate of any restaurant or fast-food company, largely thanks to its then unheard-of policy of giving health insurance and modest stock options to parttimers making barely more than minimum wage. Such perks are no longer enough to keep all the workers happy. Starbucks’ pay doesn’t come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former store manager in West Hollywood, California: “If I were making a de- cent living, I’d still be there.” Shay, one of the plaintiffs in the suit against the company, says she earned $32,000 a year to run a store with 10 to 15 part-time employees. She hired employees, managed their schedules, and monitored the store’s weekly profit-and-loss statement. But she was also expected to put in significant time be- hind the counter and had to sign an affidavit pledging to work up to 20 hours of overtime a week without extra pay—a requirement the company has dropped since the settlement. For sure, employee discontent is far from the image Starbucks wants to project of relaxed workers cheerfully making cappucci- nos. But perhaps it is inevitable. The business model calls for lots of low-wage workers. And the more people who are hired as Starbucks expands, the less they are apt to feel connected to the original mis- sion of high service—bantering with customers and treating them like family. Robert J. Thompson, a professor of popular culture at Syracuse University, says of Starbucks: “It’s turning out to be one of the great 21st century American success stories— complete with all the ambiguities.” Overseas, though, the whole Starbucks package seems new and, to many young people, still very cool. In Vienna, where Starbucks had a gala opening for its first Austrian store, Helmut Spudich, a business editor for the paper Der Standard, predicted that Star- bucks would attract a younger crowd than the established cafés. “The coffeehouses in Vienna are nice, but they are old. Starbucks is considered hip,” he says. But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on indefinitely. In Japan, the company beat even its own bullish expectations, growing to over 900 stores after opening its first in Tokyo in 1996. Affluent young Japanese women like Anna Kato, a 22-year- old Toyota Motor Corp. worker, loved the place. “I don’t care if it costs more, as long as it tastes sweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s Shibuya district. Yet same-store sales growth has fallen in Japan, Starbucks’ top foreign market, as rivals offer similar fare. Meanwhile in England, Starbucks’ second-biggest overseas market, with over 400 stores, imitators are popping up left and right to steal market share. Entering other big markets may be tougher yet. The French seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch, cofounder of Columbus Cafe, a Starbucks-like chain. But he won- ders if the company can profitably cope with France’s arcane regulations and generous labor benefits. And in Italy, the epicenter of European coffee culture, the notion that the locals will abandon their own 200,000 coffee bars en masse for Starbucks strikes many as ludicrous. For one, Italian coffee bars prosper by serving food as well as coffee, an area where Starbucks still struggles. Also, Ital- ian coffee is cheaper than U.S. java and, say Italian purists, much better. Americans pay about $1.50 for an espresso. In northern Italy, the price is 67 cents; in the south, just 55 cents. Schultz in- sists that Starbucks will eventually come to Italy. It’ll have a lot to prove when it does. Carlo Petrini, founder of the antiglobalization movement Slow Food, sniffs that Starbucks’ “substances served in styrofoam” won’t cut it. The cups are paper, of course. But the skepticism is real. As Starbucks spreads out, Schultz will have to be increasingly sensitive to those cultural challenges. For instance, he flew to Israel several years ago to meet with then Foreign Secretary Shimon Peres and other Israeli officials to discuss the Middle East crisis. He won’t divulge the nature of his discussions. But subsequently, at a Seattle synagogue, Schultz let the Palestinians have it. With Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and Saudi Arabia, he created a mild uproar among Palestinian supporters. Schultz quickly backpedaled, saying that his words were taken out of context and asserting that he is “pro-peace” for both sides. There are plenty more minefields ahead. So far, the Seattle cof- fee company has compiled an envious record of growth. But the giddy buzz of that initial expansion is wearing off. Now, Starbucks is waking up to the grande challenges faced by any corporation bent on becoming a global powerhouse. In a 2005 bid to boost sales in its largest international market, Starbucks Corp. expanded its business in Japan, beyond cafés and into convenience stores, with a line of chilled coffee in plastic cups. The move gives the Seattle-based company a chance to grab a chunk of Japan’s $10 billion market for coffee sold in cans, bot- tles, or vending machines rather than made-to-order at cafés. It is a lucrative but fiercely competitive sector, but Starbucks, which has become a household name since opening its first Japanese store, is betting on the power of its brand to propel sales of the new drinks. Starbucks is working with Japanese beverage maker and dis- tributor Suntory Ltd. The “Discoveries” and “Doubleshot” lines are the company’s first forays into the ready-to-drink market outside North America, where it sells a line of bottled and canned coffee. It also underscores Starbucks’ determination to expand its presence in Asia by catering to local tastes. For instance, the new product comes in two variations—espresso and latte—that are less sweet than their U.S. counterparts, as the coffee maker developed them to suit Asian palates. Starbucks officials said they hope to establish their product as the premium chilled cup brand, which, at 210 yen ($1.87), will be priced at the upper end of the category. Starbucks faces steep competition. Japan’s “chilled cup” market is teeming with rival products, including Starbucks lookalikes. One of the most popular brands, called Mt. Rainier, is emblazoned with a green circle logo that closely resembles that of Starbucks. Convenience stores also are packed with canned coffee drinks, including Coca-Cola Co.’s Georgia brand and brews with extra caffeine or made with gourmet coffee beans. Schultz declined to speculate on exactly how much coffee Starbucks might sell through Japan’s convenience stores. “We wouldn’t be doing this if it wasn’t important both strategically and economically,” he said. The company has no immediate plans to introduce the beverage in the United States, though it has in the past brought home products launched in Asia. A green tea frappuccino, first launched in Asia, was later introduced in the United States and Canada, where company officials say it was well received. Starbucks has done well in Japan, although the road hasn’t always been smooth. After cutting the ribbon on its first Japan store in 1996, the company began opening stores at a furious pace. New shops attracted large crowds, but the effect wore off as the market became saturated. The company returned to profitability, and net profits jumped more than sixfold to 3.6 billion yen in 2007, but declined again to 2.7 billion yen in 2009.
Most recently in Japan, the firm has successfully developed a broader menu for its stores, including customized products— smaller sandwiches and less-sweet desserts. The strategy increased same store sales and overall profits. The firm also added 175 new stores since 2006, including some drive-through service. But McDonald’s also is attacking the Japanese market with the introduction of its McCafé coffee shops.
1. Discuss the concept of perceived quality and its importance for foreign market analysis.
2. Why and how was globalization criticized in this case? Provide your support towards globalization.
3. Explain diversification in the case of Starbucks.
CASE 2: Marketing to the Bottom of the Pyramid
Professor C. K. Prahalad’s seminal publication, The Fortune at the Bottom of the Pyramid, suggests an enormous market at the “bottom of the pyramid” (BOP)—a group of some 4 billion people who subsist on less than $2 a day. By some estimates, these “aspirational poor,” who make up threefourths of the world’s population, represent $14 trillion in purchasing power, more than Germany, the United Kingdom, Italy, France, and Japan put together. Demographically, it is young and growing at 6 percent a year or more.
Traditionally, the poor have not been considered an important market segment. “The poor can’t afford most products”; “they will not accept new technologies”; and “except for the most basic products, they have little or no use for most products sold to higher income market segments”— these are some of the assumptions that have, until recently, caused most multinational firms to pay little or no attention to those at the bottom of the pyramid. Typical market analysis is limited to urban areas, thereby ignoring rural villages where, in markets like India, the majority of the population lives. However, as major markets become more competitive and in some cases saturated—with the resulting ever-thinning profit margins— marketing to the bottom of the pyramid may have real potential and be worthy of exploration
One researcher suggested that American and European businesses should go back and look at their own roots. Sears, Roebuck was created to serve the lower-income, sparsely settled rural market. Singer sewing machines fashioned a scheme to make consumption possible by allowing customers to pay $5 a month instead of $100 at once. The world’s largest company today, Walmart, was created to serve the lower-income market. Here are a few examples of multinational company efforts to overcome the challenges in marketing to the BOP
Designing products for the BOP is not about making cheap stuff but about making technologically advanced products affordable. For example, one company was inspired to invent the Freeplay, a windup self-power–generating radio, when it learned that isolated, impoverished people in South Africa were not getting information about AIDS because they had no electricity for radios and could not afford replacement batteries.
BOP MARKETING REQUIRES ADVANCED TECHNOLOGY
The BOP market has a need for advanced technology, but to be usable, infrastructure support must often accompany the technology. For example, ITC, a $2.6 billion a year Indian conglomerate, decided to create a network of PC kiosks in villages. For years, ITC conducted its business with farmers through a maze of intermediaries, from brokers to traders. The company wanted farmers to be able to connect directly to information sources to check ITC’s offer price for produce, as well as prices in the closest village market, in the state capital, and on the Chicago commodities exchange. With direct access to information, farmers got the best price for their product, hordes of intermediaries were bypassed, and ITC gained a direct contact with the farmers, thus improving the efficiency of ITC’s soybean acquisition. To achieve this goal, it had to do much more than just distribute PCs. It had to provide equipment for managing power outages, solar panels for extra electricity, and a satellite-based telephone hookup, and it had to train farmers to use the PCs. Without these steps, the PCs would never have worked. The complex solution serves ITC very well. Now more than 10,000 villages and more than 1 million farmers are covered by its system.
ITC is able to pay more to farmers and at the same time cut its costs because it has dramatically reduced the inefficiencies in logistics. The vast market for cell phones among those at the BOP is not for phones costing $200 or even $100 but for phones costing less than $50. Such a phone cannot simply be a cutdown version of an existing handset. It must be very reliable and have lots of battery capacity, as it will be used by people who do not have reliable access to electricity. Motorola went thorough four redesigns to develop a low-cost cell phone with battery life as long as 500 hours for villagers without regular electricity and an extra-loud volume for use in noisy markets. Motorola’s low- cost phone, a nofrills cell phone priced at $40, has a standby time of two weeks and conforms to local languages and customs. The cell-phone manufacturer says it expects to sell 6 million cell phones in six months in markets including China, India, and Turkey.
BOP MARKETING REQUIRES CREATIVE FINANCING
There is also demand for personal computers but again, at very low prices. To meet the needs of this market, Advanced Micro Devices markets a $185 Personal Internet communicator—a basic computer for developing countries—and a Taiwan Company offers a similar device costing just $100
For most products, demand is contingent on the customer having sufficient purchasing power. Companies have to devise creative ways to assist those at the BOP to finance larger purchases. For example, Cemex, the world’s third-largest cement company, recognized an opportunity for profit by enabling lower-income Mexicans to build their own homes. The company’s Patrimonio Hoy Programme, a combination builder’s “club” and financing plan that targets homeowners who make less than $5 a day, markets building kits using its premium- grade cement. It recruited 510 promoters to persuade new customers to commit to building additions to their homes. The customers paid Cemex $11.50 a week and received building materials every 10 weeks until the room was finished (about 70 weeks—customers were on their own for the actual building). Although poor, 99.6 percent of the 150,000 Patrimonio Hoy participants have paid their bills in full. Patrimonio Hoy attracted 42,000 new customers and is expected to turn a $1.5 million profit next year.
One customer, Diega Chavero, thought the scheme was a scam when she first heard of it, but after eight years of being unable to save enough to expand the one-room home where her family of six lived, she was willing to try anything. Four years later, she has five bedrooms. “Now I have a palace.”
Another deterrent to the development of small enterprises at the BOP is available sources of adequate financing for microdis- tributors and budding entrepreneurs. For years, those at the bottom of the pyramid needing loans in India had to depend on local moneylenders, at interest rates up to 500 percent a year. ICICI Bank, the second-largest banking institution in India, saw these people as a potential market and critical to its future. To convert them into customers in a cost-effective way, ICICI turned to village self-help groups.
ICICI Bank met with microfinance-aid groups working with the poor and decided to give them capital to start making small loans to the poor—at rates that run from 10 percent to 30 percent. This sounds usurious, but it is lower than the 10 percent daily rate that some Indian loan sharks charge. Each group was composed of 20 women who were taught about saving, borrowing, investing, and so on. Each woman contributes to a joint savings account with the other members, and based on the self-help group’s track re- cord of savings, the bank then lends money to the group, which in turn lends money to its individual members. ICICI has developed 10,000 of these groups reaching 200,000 women. ICICI’s money has helped 1 million households get loans that average $120 to $140. The bank’s executive directory says the venture has been “very profitable.” ICICI is working with local communities and NGOs to enlarge its reach.
BOP MARKETING REQUIRES EFFECTIVE DISTRIBUTION
When Unilever saw that dozens of agencies were lending micro- credit loans funds to poor women all over India, it thought that these would-be microentrepreneurs needed businesses to run. Unilever realized it could not sell to the bottom of the pyramid unless it found low-cost ways to distribute its product, so it created a network of hundreds of thousands of Shakti Amma (“empowered mothers”) who sell Lever’s products in their villages through an Indian version of Tupperware parties. Startup loans enabled the women to buy stocks of goods to sell to local villagers. In one case, a woman who received a small loan was able to repay her start-up loan and has not needed to take another one. She now sells regularly to about 50 homes and even serves as a miniwholesaler, stocking tiny shops in outlying villages a short bus ride from her own. She sells about 10,000 rupees ($230) of goods each month, keeps about $26 profit, and ploughs the rest back into new stock. While the $26 a month she earns is less than the average $40 monthly income in the area, she now has income, whereas before she had nothing
Whereas before she had nothing. Today about 1,300 poor women are selling Unilever’s products in 50,000 villages in 12 states in India and account for about 15 percent of the company’s rural sales in those states. Overall, rural markets account for about 30 percent of the company’s revenue.
In another example, Nguyen Van Hon operates a floating sundries distributorship along the Ke Sat River in Vietnam’s Me- kong Delta—a maze of rivers and canals dotted with villages. His boat is filled with boxes containing small bars of Lifebuoy soap and single-use sachets of Sunsilk shampoo and Omo laundry detergent, which he sells to riverside shopkeepers for as little as 2.5 cents each. At his first stop he makes deliveries to a half dozen small shops. He sells hundred of thousands of soap and shampoo packets a month, enough to earn about $125—five times his previous monthly salary as a junior Communist party official. “It’s a hard life, but its getting better.” Now, he “has enough to pay his daughter’s schools fees and soon . . . will have saved enough to buy a bigger boat, so I can sell to more villages.” Because of aggressive efforts to reach remote parts of the country through an extensive network of more than 100,000 independent sales representatives such as Hon, the Vietnam subsidiary of Unilever realized a 23 percent increase in sales last year to more than $300 million.
BOP MARKETING REQUIRES AFFORDABLE PACKAGING
As one observer noted, “the poor cannot be Walmartized.” Consumers in rich nations use money to stockpile convenience. We go to Sam’s Club, Costco, Kmart, and so on, to get bargain prices and the convenience of buying shampoos and paper towels by the case. Selling to the poor requires just the opposite approach. They do not have the cash to stockpile convenience, and they do not mind frequent trips to the village store. Products have to be made available locally and in affordable units; fully 60 percent of the value of all shampoo sold in India is in single-serve packets.
Nestlé is targeting China with a blitz of 29 new ice cream brands, many selling for as little as 12 cents with take-home and multipack products ranging from 72 cents to $2.30. It also features products specially designed for local tastes and preferences of Chinese consumers, such as Nestlé Snow Moji, a rice pastry filled with vanilla ice cream that resembles dim sum, and other ice cream flavors like red bean and green tea. The ice cream products are distributed through a group of small independent saleswomen, which the company aims to expand to 4,000 women by next year. The project is expected to account for as much as 24 percent of the company’s total rural sales within the next few years.
BOP MARKETING CREATES HEALTH BENEFITS
Albeit a promotion to sell products, marketing to BOP does help improve personal hygiene. The World Health Organization (WHO) estimates that diarrhearelated diseases kill 1.8 million people a year and noted that better hand-washing habits—using soap—is one way to prevent their spread. In response to WHO urging, Hindustan Lever Company introduced a campaign called “Swasthya Chetna” or “Glowing Health,” which argues that even clean-looking hands may carry dangerous germs, so use more soap. It began a concentrated effort to take this message into the tens of thousands of villages where the rural poor reside, often with little access to media. “Lifebuoy teams visit each village several times,” using a “Glo Germ” kit to show schoolchildren that soap-washed hands are cleaner. This program has reached “around 80 million rural folk,” and sales of Lifebuoy in small affordable sizes have risen sharply. The small bar has become the brand’s top seller.
- As a junior member of your company’s committee to explore new markets, you have received a memo from the chairper- son telling you to be prepared at the next meeting to discuss key questions that need to be addressed if the company decides to look further into the possibility of marketing to the BOP segment. The ultimate goal of this meeting will be to establish a set of general guidelines to use in developing a market strategy for any one of the company’s products to be marketed to the “aspirational poor.” These guidelines need not be company or product specific at this time. In fact, think of the final guideline as a checklist—a series of questions that a company could use as a start in evaluating the potential of a specific BOP market segment for one of its products.
- Marketing to the BOP raises a number of issues revolving around the social responsibility of marketing efforts. Write a position paper either pro or con on one of the following:
- Is it exploitation for a company to profit from selling soaps, shampoo, personal computers, and ice cream, and so on, to people with little disposable income?
- Can making loans to customers whose income is less than $100 monthly at interest rates of 20 percent to purchase TVs, cell phones, and other consumer durables be justified?
- One authority argues that squeezing profits from people with little disposable income and often not enough to eat is not capitalist exploitation but rather that it stimulates economic growth.