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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
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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.
Related articles
on mckinseyquarterly.com
What is the business of business?
2005 Number 3
In
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 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.
Brazil, China, India, Indonesia, Malaysia, Mexico, the Philippines, Russia, Thailand, and Turkey. GDPs are
calculated on a purchasing-power-parity basis.
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exhibit 1
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
High
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
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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
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
Business
Capital, labor
employment
Key workers
Suppliers
Investments
Micromarket traffic
(economic activity in
local market)
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Bringing
Increasing
Making
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
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
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Business
model
Core issue
addressed
Community-based
intervention
Collective
accountability
Relevant
industries
Sample
businesses
Utilities, eg,
water, electricity
Finance
Scalable,
embedded
distribution
Fast-moving
consumer goods
Telecom
Low-value consumer
goods
Livelihood
partnership
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)
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.
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