Easier said than done

UNILEVER'S Concept Centre in midtown Shanghai attracts hundreds of human guinea-pigs every day, ranging from housewives with time on their hands to migrant labourers looking for easy work. The centre is a consumer's paradise. There are salons where people can get their hair done. There is a living room and a bedroom—called “the chatting room”—where they can make themselves at home. There is a shop where they can browse the company's latest products. Researchers discreetly monitor consumers' reactions from behind one-way mirrors.

The Concept Centre is just a small part of Unilever's growing R&D effort in China, where it has struggled in the past and where it is now determined to catch up with its perennial rival, Procter & Gamble. Half an hour's drive away, in one of the city's sprawling office parks, the company has a huge new R&D centre where it does everything from conducting basic research to producing three-dimensional mock-ups of new packaging.

Emerging markets are far more varied and volatile than mature ones. There is little money around: the average income per person in China is around $3,500 and in India $1,000. Cultural complexities are confounding and tastes are extraordinarily fluid. People who are not used to brands flit easily from one to another.

This has turned great metropolises such as Shanghai into vast laboratories of consumer research. Companies are always coming up with new products, or tweaking old ones, to suit local tastes and meet idiosyncratic preferences. Unilever makes its soaps and shampoos foamier than their Western equivalents. P&G produces toothpaste in herbal and green-tea flavours. PepsiCo adds spice to its potato chips. Adidas has created two kinds of shops—“local” ones that specialise in sportswear designed for Asian bodies and “global” ones that sell the same products as in the West. The shopping mall beneath the company's regional headquarters in Shanghai has one of each kind.

Innovation extends to changing entire business models. Yum! Brands, which owns KFC and Pizza Hut, has repositioned itself as an upmarket company in China, offering comfortable dining for middle-class families rather than fast food for the masses. It has also launched a new chain of restaurants, East Dawning, serving Chinese dishes. Levi Strauss has introduced a pay-as-you-wear model for its most fashionable jeans in India to preserve their upmarket status while broadening its customer base. Dell sells its PCs in China through shops as well as to order.

Because of the lack of brand loyalty, companies have to put even more thought into marketing than they do in the West. Shanghai is plastered with advertisements on everything from airport trolleys to lavatory walls. Companies project giant logos onto the sides of skyscrapers. Many lifts and cabs have televisions that pour out a constant stream of commercials. Mobile phones are bombarded with texts advertising holidays, massages and much more.

Emerging-market companies are particularly adept at adding the human touch. Most consumer-goods firms, and a growing number of electronics ones, use sales representatives to demonstrate their products to customers. Unilever employs an army of “Pond Girls” who show department-store customers how to use the eponymous face cream.

Bottom-fishing

As companies work their way down the income pyramid, the problems proliferate. Distribution is tricky: modern retail chains account for only a third of consumer goods sold in China and a fifth in India. Branding can have pitfalls: the locals may be suspicious of foreign products. Companies may find themselves up against feisty rivals that they have never heard of, not to mention unscrupulous pirates. And China's rural areas account for 54% of its population but produce a much lower share of its GDP.

Companies in search of the much-vaunted fortune at the bottom of the pyramid have to start not with consumers but with non-consumers. They need to get inside poor people's heads to develop new markets, shaping people's tastes and establishing habits. The techniques they use include “embedding” employees with local families in order to study their day-to-day behaviour. P&G sends young marketing people to live with Chinese peasants for months on end. They hand out their products free (sometimes through local NGOs) to see what people make of them. GE donates medical equipment to rural health-care centres and keeps a careful watch on how they are used.

Some companies even employ corporate anthropologists. Jan Chipchase, who until recently worked for Nokia, uses ethnographic techniques to study the way people use mobile phones, particularly in emerging markets, where the devices make a much bigger difference to people's everyday lives than in the rich world. Mr Chipchase's discovery that poor people often share their phones prompted the company to make handsets with multiple address books.

Heavy investment in education is also essential. Unilever has teamed up with various NGOs to teach people about the importance of washing their hands and other aspects of personal hygiene. So far more than 130m people have undergone such instruction, which makes it perhaps the biggest educational exercise in human history. This has helped not only to create a market for the company's soaps and detergents but also to forge a bond of trust with potential consumers. Metro Cash and Carry, a German wholesaler that sells to hotels and restaurants, trains farmers in looking after their crops, encouraging them to store their vegetables in boxes rather than leaving them to spoil on the ground.

Yet it is no use educating consumers unless they can get hold of the products. Even the most sophisticated companies have to fall back on established distribution systems. That might mean working with local “mom and pop” shops. P&G puts products into packages small enough to fit on crowded shelves and uses a network of local representatives to keep the shops stocked. Or it might mean using local women to sell things to their friends and neighbours. In India Unilever employs an army of shakti entrepreneurs who sell goods from their homes and educate their friends in health and hygiene. In Brazil Nestlé sends its comestibles to local entrepreneurs who sell them to their neighbours. Some companies provide locals with bicycles so they can cover a wider geographical range.

East African Breweries, a division of Diageo, launched a cut-price beer, Senator Keg, to help reduce demand for illicit alcohol, which is cheap but is frequently contaminated with methanol, fertilisers and battery acid. The company reduced the cost of the beer by negotiating a tax waiver with the government and by distributing it in kegs rather than bottles. The company made use of the shadow economy to get the beer delivered to the outlets. It also trained bar staff to understand the importance of rotating kegs to make sure the beer was fresh, and of washing glasses. Senator Keg is now ubiquitous in Kenya, sold in every makeshift roadside bar, and is affectionately known as “Obama”.

Dealing with distribution problems can lead to some surprising innovations and even generate entirely new businesses. The Future Group, India's largest retailer, has introduced “organised chaos” into its shops to make consumers feel at home, breaking up long aisles with untidy-looking displays. Grupo Elektra, a Mexican retailer, started offering credit to consumers who did not have a bank account, and ended up holding so much financial information on its customers that it decided to take the next step and go into banking. The company now has one of the country's biggest network of bank branches as well as one of its most popular retail chains.

New technology can also work wonders for distribution. The India Tobacco Company, one of the country's biggest conglomerates, has created a network of more than 5,000 internet kiosks known as e-choupals to help farmers communicate with both the supply and the distribution chains. Farmers can bring their goods for sale and ITC will display their products.

Tata Consultancy Services has installed sensors in some rural areas to gather information about local soil and weather conditions. Farmers can call helplines on their mobile phones and receive advice about the best products to use in those conditions, which in effect creates a market. And recall the Indian entrepreneur who distilled an ATM into a smart-phone and a fingerprint scanner: local bank clerks now bicycle out to villages and set up shop under a tree, using the scanner to identify savers and taking in or handing out money. The transactions are recorded over the mobile phone and the banker-on-wheels returns to the local bank branch with the money.

Learning to play the price piano

The most difficult trick of all is what some call “straddling the pyramid” or “playing the piano”: serving both the people at the bottom of the pyramid and those at the top. The acknowledged masters of this are consumer-goods giants such as P&G and Unilever. These companies not only rigorously segment their markets by income level, they also lead consumers up the value chain as they become richer. A couple of decades ago Unilever noted that rural Indians were in the habit of washing their clothes with bars of soap, so it first offered detergents in a bar and then began to introduce its customers to washing powder. The company is now trying to pull off a similar trick with tea in the Middle East. Most people in the region prepare their tea from leaves, but Unilever has introduced tea bags that appeal to local tastes and has started selling them in trendy cafés.

China's Haier has proved particularly good at market segmentation. It produces a line of extremely robust washing machines for rural users, having discovered that older models frequently got clogged with mud because farmers were using them to clean vegetables as well as clothes. It also makes small washing machines that are just right for young urban professionals, many of whom live in tiny apartments.

But the masters of pyramid-straddling are mobile-handset makers. Nokia produces phones for every market, from rural models designed to cope with monsoons to fashion accessories that will look cool in a Shanghai nightclub. The cheap phones are sold through a vast network of local outlets, such as mom-and-pop stores and rural markets, and the upmarket models through shops in fashionable city centres. The aim is to create a brand that is at once universal and aspirational.