Avoiding The Most Common Pitfalls When Entering ‘Emerging Markets’

By Mikkel B. Rasmussen, Mads Holme & Filip Lau

Even though many Western companies have been present in “emerging markets” for decades a more dedicated approach to these markets holds likely substantial commercial opportunities for many multinationals. Western companies are already experimenting with approaching emerging markets with an operating model deriving from their well-known global/universal approach. But across industries companies often face the same three challenges: (1) a too-simplistic perception of consumer segments, (2) a lack of understanding of what emerging middle class citizens believe in and strive for, and (3) too-high expectations of being successful fast.

Many Western companies have been present in so-called “emerging markets” for decades. They have used more or less the same value proposition, product range, price structure, etc. around the world with great results. At the same time, many companies have failed in capitalizing on emerging markets because they have underestimated the importance of local culture and social behavior. Such companies also tend to rely on the assumption that the same global operating model will work in emerging market X because, at the end of the day, emerging middle-class citizens in market X aspire to become Western-like consumers with Western preferences.

In recent years it has been well documented that if a company perceives emerging markets as a kind of special breed that requires a different approach from the company norm it can pay off handsomely. But what qualifies a given market for the “special breed” label? And what exactly does it mean to treat that market as such? Multinationals face three key challenges that need to be addressed to better grasp the emerging market opportunity:

Challenge #1: Multinationals often have a too-simplistic perception of consumer segments in emerging markets.

Challenge #2: Multinationals often lack an understanding of what emerging middle class citizens believe in and strive for.

Challenge #3: Multinationals often have too-high expectations of being successful fast.

1. A too-simplistic perception of consumer segments

A recent article in McKinsey Quarterly[1] labeled multinationals’ attempt to make sense of the diversity of emerging-market consumers “polar caricatures.” At one extreme, we have the “nouveau riche, eager to flaunt their wealth and emulate the West; at the other, the penny-pinching poor at the bottom of the pyramid.” But such a black-and-white image is obviously far from reality. The rising wealth in emerging markets will expand the middle-class segments between the poor and the mass affluent. These segments have enough money to put their newfound purchasing power to use, by going beyond covering their most basic human needs and have sbeginning to develop a consumer lifestyle. As an illustrative example, estimates show that between 25 and 30 percent[2] of the developing world’s 1.9 billion kids are in the emerging middle class.[3] In China, it is possible to identify a wide palette of consumer typologies between the poor and the upper- middle class. It is also clear that successful multinationals have used sophisticated segmentation when adapting their global concepts to reach the emerging middle class. An example of this approach is Yum!, the Chinese license partner of KFC and Pizza Hut. Pizza Hut offers a slow- dining experience with waiters and silverware while KFC offers a Chinese menu: dark chicken, congee, and youtian. Currently, Yum! has 4,200 KFC and Pizza Hut stores in China and 36 percent of the company’s global revenue is generated in China.[4]

2. A lack of understanding of what emerging middle-class citizens believe in and strive for

According to statistical definitions, common demographic and financial brackets, many consumers in the emerging markets can be labeled middle class. Interestingly, they do not see themselves as part of that class, and they do not have the routines, shared values, terms, or vocabulary that in sociological terms would allow them to be categorized as such. Also, it is far from certain that they aspire towards Western brands and middle-class lifestyles. Our studies here at ReD have shown that in China, people that were on the journey from being “affluent poor” to becoming “emerging middle class” had laptops and high-speed internet connections in their homes, but not necessarily kitchens or bathrooms. They simply prioritized their new disposable income in different ways than social climbers in other markets.

3. Too-high expectations of being successful fast

In the West, many brands and categories have been inherited generation after generation. Sports shoes, breakfast cereals, and Disney characters are woven into our culture and are socially accepted and appreciated by a majority of the population. That might also be the case in emerging markets, but for many brands and categories that is not the case. A good example of this is the cereal company Kellogg’s entry to the Indian market in the early 1990s. The company sought to expand its U.S. ready-to-eat-cereal market position. However, Kellogg’s overlooked several crucial features about the Indian market, one of them being that Indians prefer a warm breakfast. By offering only products that go with cold milk, Kellogg’s found itself struggling in India. Sixteen years after entering the Indian market, their market share was less than one percent, generating only $70 million in annual revenues, compared with the $65 million it invested in the first year alone. Maybe Kellogg’s should have asked itself: are we here to rapidly change the culturally rooted breakfast habits of Indians or should we adjust our global model slightly and take a longer view?[5]

It is possible for multinationals to address the three challenges listed above through a common approach to emerging markets. It can be done by:

  • Creating a rich and relevant segmentation of the new middle-class consumers in these emerging markets

  • Learning what drives behavior and value-making in these emerging markets by gaining a deeper understanding of the context and culture of the product category in question in the new middle classes

  • Choosing a number of Big Bets that will develop a preference for your offerings in the long term

The best starting point for building a consistent emerging-market approach and evidence of its impact is through an Emerging Markets Program. In such a program companies create blueprints through pilot projects in selected emerging markets. The pilots inform emerging markets consumer segmentation, create a scalable framework for obtaining critical insights about local culture, and act as a tool for selecting which initiatives with long-term impact your company should invest in.


  1. Yuval Atsmon (eds.), “Winning the $30 trillion decathlon: Going for gold in emerging markets,” McKinsey Quarterly, August 2012.

  2. ReD Associates estimate based on numbers from the National Bureau of Statistics in India, U.K., USA.

  3. Earth Child Institute, “United Nations Framework on Climate Change Convention. Article 6 stakeholder group inputs under the Amended New Delhi Work Programme,” February 2012.

  4. David E. Bell and Mary L. Shelman, “KFC’s radical approach to China,” Harvard Business Review, November 2011.

  5. Robyn Bolton, “Are you targeting a phantom market?” HBR Blog Network, May 8, 2012.


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