With the global economic downturn continuing to weigh on emerging markets, consumers there have been increasingly trading down, prompting some western premium brands to pull out of mid-range product segments. Yet, what may seem commercially sensible now, could cost them down the line, as it is harder to re-enter these markets once conditions improve.

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Post-Covid inflation in developing economies  has changed purchasing  habits significantly, especially in two of the main emerging markets, sub-Saharan Africa and Latin America, where consumers, with a few exceptions, have been turning away from mid-range premium brands for cheaper, essential options. Or, in the case of certain southern African markets, opting for less expensive, good quality, locally-produced products and similar imports from other emerging markets like Turkey, India and China.

In Latin America, in the last couple of years,  the trading down phenomenon has been particularly prevalent in the mass market FMCG and non-essential goods sectors. Many western companies have decided that they are not going to play in the former sector at all any more, and have mostly chosen to premiumize in the latter. That is to say, focus on consumers who have more money and ignore anything that’s mid-tier. 

But changing tack doesn’t get western brands very far revenue wise. Even though premium segments are more resilient (consumers having more discretionary income to spend and not so sensitive to inflation), mass market segments are so much bigger.  Indeed, some who’ve tried to maintain a presence in mid-range, non-essential goods categories – primarily apparel,  cosmetics and electronic and home appliances – have gone for aggressive discounting, bringing to the region  US-style price holidays (like Black Friday) to create buzz and offload inventory.

In sub-Saharan Africa, multinationals are concentrating all brand development in premium markets.  In effect, this means refreshing brands and product portfolios, which may appear stale and dated – essentially a bit too pre-Covid.  So, what we’ve seen, then, is these companies doubling down in key markets, such as South Africa, Nigeria and Kenya, to the extent that you still have consumers there purchasing premium goods. 

The trend has been particularly evident in the confectionary, non-alcohol drinks and food ingredient segments. Though not all have given up on mass markets, some exploring those of high-growth economies like Tanzania, Ethiopia, Côte d’Ivoire, and Ghana to offset weak growth elsewhere. 

The pressure to exit a mid-range segment 

The decision to pull out of mid-range segments is driven by significant commercial pressure, particularly over margins. Western brands have seen input costs go up just as consumers start turning their backs on their mass market products. Amid rising shareholder concern, the sales sides of  these businesses are being urged to improve performance, which has seen them switching their attention to premium segments. Yet in emerging markets, exiting a market can leave companies facing higher costs down the line if they later seek to re-enter it. 

In sub-Saharan Africa, it takes a lot longer for companies to build scale. The return-on-investment period after launching a product is much longer than in western countries. That’s  because the operating and financing costs are higher; logistically its very complex; the regulatory landscape is different; and there’s greater currency volatility. Moreover, shoppers have different preferences and differing behaviours, so it takes a lot longer to tailor your marketing strategy and your brand-building strategy to the local consumer. Put simply, it just takes longer to build brand and customer loyalty in sub-Saharan Africa.

And what this means is that if companies pull out of a market, they will inevitably have to spend a number of years trying to build back their business if they choose to re-enter it. And it will be expensive. Companies have told us that they struggle to justify the capital or budget allocations to return to segments they left – such is the cost of hiring new head count, conducting  market-entry studies, as well as the assessment of their supply chains and the suitability of the local workforce. It’s a very heavy lift. 

In sub-Saharan Africa, outside of South Africa, the reasons why pulling out and re-entering is so tough is because most companies operate an indirect model, working through local partners and distributors. And so, if you sever a relationship, trying to establish one with a  new distributor is incredibly difficult. Building up  trust and reliability is something that takes years.

There are similar challenges in Latin America. But things are slightly different from a brand-loyalty perspective because the region is so westernised. The closer you get to the US, the more western brands are recognised and desired, even if they are not present in the market. The key problem, though, is the relatively small pool of distributors, such as grocery chains and department stores. The market for partners locally tends to be very closed off.  There just aren’t that many players. And at the same time, other American brands are competing for them. So relationship building takes a long time in the region.

The added difficulty is the regulatory piece, notably in Brazil.  Here, it is extremely difficult to establish yourself  because the tax system is so complicated, varying state by state, municipality to municipality. A great deal of budget is required to understand local regulations and nuances. If you exit even one segment, and then try to return, the initial upfront costs can be prohibitive. The amount of people infrastructure you need to rebuild is quite high and, a lot of the time, the talent you need, particularly legal, is in short supply, with the market very competitive.

How to keep up a presence in a market hit by trading down 

So in both regions, pulling out of mid-range segments when consumers trade down can be costlier in the long run than maintaining a presence  in these markets – albeit scaled back – when times are tough. There are several ways of maintaining a competitive foothold: enhanced competitor monitoring and being much more responsive to rivals’ behaviour, especially when it comes to pricing strategies. 

A few cents or a dollar off a product can be a critical sales determinant when consumers are thinking of trading down or resisting trading up. Offering smaller package sizes is additionally worth considering. So, basically, selling the same product but half the volume or size, and cheaper. In fast-growing markets, with relatively high social media penetration, investing in ecommerce and digital marketing can also be an effective way of maintaining a foothold. 

In essence, western brands need to be more strategic in emerging markets when economic downturns change consumer purchasing habits, in particular trading down.  Better, arguably, to offset low growth in an established mass market with more investment in a fast-growing premium market, than to exit the former and only pursue the latter.  A more balanced approach might seem riskier at the outset. But in the long term, as economies rebound and consumer confidence returns, it could prove to be a commercially wise course of action. 

Auhtor Bio

Mariana Zepeda leads FrontierView’s Latin America macroeconomic research team. She guides the firm’s market intelligence and strategic advisory for Latin American markets. Mariana holds a master’s degree in International Economics and Latin American Studies from the Johns Hopkins School of Advanced International Studies

Matthew Kindinger leads FrontierView’s Sub-Saharan Africa macroeconomic research team. He  advises multinationals on the impact of economic, political, and regulatory developments on their businesses across the region. Matthew attained a master’s degree in international economic law from the University of Warwick.