The BOP opportunity for paint companies
Mar 12 2012, 15:22 | By Infomedia18
A huge opportunity lies for paint manufacturers at the bottom of the pyramid
Image: SME Mentor
Dr Mosongo Moukwa
Recent research on business models that target the ‘Bottom of Pyramid’ (BOP), the vast untapped market potential made up of the world’s poorest people has emphasised the need for multinational companies (MNCs) to radically change their approach and to fundamentally rethink every step in their supply chains.
Companies are being advised to build new resources and capabilities to implement multiple strategies concomitantly, and to partner with multiple constituencies that often have different strategic objectives.
The complexities and potential costs involved in these recommendations for the paints and coatings industry constitute severe hurdles in practical decision-making and realizing the financial returns that would justify such investments.
The top three producers of paints and coatings represent around 30 percent of the industry’s value, and many operate in multiple segments and regions. Companies like AkzoNobel ($13.4 billion), Sherwin Williams ($6.5 billion) and PPG ($10.2 bilion) lead the pack. Their size gives them an added advantage in the market with respect to manufacturing, supply chain and research & development (R&D).
The organised sector comprises indigenous companies as well as subsidiaries of MNCs. The top four are Asian Paints, Kansai Nerolac Paints, Berger Paints and ICI Paints (now part of AkzoNobel). The other players in the segment are subsidiaries of MNCs.
The organised sector represents 57 percent of the volume. For large companies, the channel-to-market is through paint stores that sell many different brands, catering to several layers of customer segments, which have installed the necessary tinting systems for each brand. To support this system, the majors have established large manufacturing facilities in the four main regions within the country.
In their paper, ‘The Fortune at the Bottom of the Pyramid’, the late CK Prahalad and Stuart L Hart (2002) defined the target group at the BOP in terms of incomes of less than $1,500 per year. MNCs were thought to be best positioned to face the challenges of selling to the poor, and at the same time fighting poverty. This is because they could draw from a global resource base and superior technology to address local customer needs and to develop those markets, thus stimulating economic development in poor countries.
According to Prahalad and Hart, MNCs would be better off if they integrate in their economic model consumers, who are economically backward and are living in the emerging countries - four billion people living with less than $5-6 a day. The reason is that, even though margins may be weak with this group of consumers, the poor represent a significant latent penetration opportunity by virtue of their numbers - $13,000 billion - according to Prahalad and Hart.
Scale and brand
Markets for selling to the poor usually do not involve significant economies of scale. Markets of the rural poor are often geographically and culturally fragmented. This, combined with weak infrastructure, makes it hard to exploit economies of scale. Indeed, products sold to the poor are often less complex, reducing the economies of scale in technology and operations.
Products sold to the poor are also usually less marketing- and brand-intensive, further reducing economies of scale. Critics of Prahalad have made observations that all the examples cited in his work are from small or local organisations. Through their decades of on-the-ground experience in developing countries, MNCs have probably already realised that there is no competitive advantage at the bottom of the pyramid, and consequently, have avoided major investments in these markets.
Thus, to the extent there are opportunities to sell to the poor it is usually small to medium-sized local companies that are best suited for exploiting these opportunities. While SME paint manufacturers - 2,400 of them in India - may represent an entry point, the dichotomy is that paint manufacturers mostly want to move the market up the income ladder.
Dr Mosongo Moukwa is vice president of technology at Asian Paints Ltd.
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