The bottom of the pyramid

MANAGEMENT gurus have rhapsodised about the fortune at the bottom of the pyramid in emerging markets ever since C.K. Prahalad popularised the idea in 2006. They have filled books with stories of cut-price Indian hospitals and Chinese firms that make $100 computers. But when it comes to the bottom of the pyramid in the rich world, the gurus lose interest. This is understandable. McDonalds and Walmart do not have the same exotic ring as Aravind Eye Care and Tata Motors. The Wests bottom-of-the-pyramid companies are an unglamorous bunch. Many rely on poorly educated shift workers. Some inhabit the nether world of loan sharks and bail bondsmen. But even in one of the worlds richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to downshift, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984. This is a challenge to the American dream. But it is also an opportunity for clever companies. Even the poorest Americans are rich by the standards of many other countries, so there is money to be made by serving them. McDonalds, for example, is booming. Since 2006 its restaurants have generated an annual increase in sales of 4%, despite rising food prices. (This figure excludes restaurants that have been open for less than a year.) In April the firm hired an astonishing 50,000 full- and part-time staff in America, at a time when many others are shedding hands. Frugal shops have been thriving, too. Walmart and Target are marching into new markets (such as basic medical care) and new places (such as inner cities). Aldi, a German discounter, has been doing surprisingly well in America, too. Unlike Walmart, it specialises in small storesthe size of a basketball court rather than a football pitch. More than 90% of its goods are its own unfancy brands. To keep its supply chain simple, Aldi stocks barely 1,000 products; some of its rivals stock 100,000. Yet Aldi is not a grotty place to shop. It has wide aisles and bright decorations, unlike some of the discount stores that disfigure American inner cities. Aldis success highlights an interesting fact: that there is a lot of innovation in this market. Companies are reconfiguring themselves to appeal to the nouveaux pauvres as well as the old poor: middle-class people who enjoy lattes and salads but who are currently strapped for cash. Walmart has vastly expanded its grocery section. McDonalds sells healthy fast food, such as fruit and walnut salad, as well as the usual slabs of meat and cheese in a bun. It also plans to remodel or rebuild 6,000 of its 14,000 American stores. And both McDonalds and Dunkin Donuts are challenging Starbucks by offering drinkable coffee for less.

The rise of online pawn Even that staple of the urban poor, the pawn shop, is being reinvented. Pawngo is putting pawn on the internet for the convenience of what it describes as collegeeducated working professionals with temporary cashflow problems. Customers can send their college-graduation presents (for example) to Pawngo by FedEx and get a loan in the form of a bank transfer. Entrepreneurs are also adjusting their business models to deal with the age of austerity. One popular model is paying for things upfront (which appeals to consumers who have poor credit or who want to curb their splurging). Pre-paid wireless providers such as Leap Wireless and MetroPCS have captured 90% of the growth in the market for mobile telephony. Houstons Direct Energy has just introduced a pre-paid plan for electricity. A second popular model is collaborative consumption, which allows people to share or rent rather than own. Swap.com enables you to swap DVDs and videos with other sofa spuds. ThredUp does the same for childrens clothes. Jobless students can hitch lifts via Craigslist (a website for classified ads), or doss down in someone elses flat via CouchSurfing, another website. Adjusting to this new world can be hard. Companies have long assumed that America would always be a land of mass affluence and upward mobility. But the American economy was undergoing a structural shift even before the 2007 financial crisis, with galloping rewards at the top and stagnation for many of the rest. Some economists expect the malaise to last for years. Few companies have thought much about the implications of this. Wireless companies blithely assume that everyone will soon have smartphones and broadband connections, just as everyone now has a car and a television. But their confidence is probably misplaced, argues a new report on The Poverty Problem by BernsteinResearch, a consultancy. Broadband penetration may have plateaued, at nearly two-thirds of households. Pay-TV penetration is beginning to decline. The optimists complacency creates opportunities for nimbler and gloomier competitors. It also creates an opening for companies from the emerging world, many of which have frugal innovation in their DNA. TracFone Wireless, a subsidiary of Carlos Slims Amrica Mvil, has sold more than 3m phones in America since 2008 to pre-paying customers. MedicallHome, a Mexican company that provides medical advice over the phone for $5 a month, as well as access to its network of 6,000 doctors, is expanding north of the border. Emerging giants such as Indias Tata and Chinas Haier regard America as a natural market for their frugal products. The bottom of the pyramid is wider than most people realise. Firms that offer ultra-low prices will find themselves as much in demand in Detroit as in Delhi.
Economist.com/blogs/schumpeter

Difficult words: Rhapsodise Cut-price Nether Inhabit Loan shark speak or write about someone or something with great enthusiasm and delight for sale at a reduced or unusually low price lower in position live in or occupy a moneylender who charges extremely high rates of interest, typically under illegal conditions broke slow down; slacken off increase rapidly above the usual level simple and plain and costing little sparing or economical as regards money or food prosperous and growing; flourishing unpleasant and of poor quality a passage between cabinets and shelves of goods in a supermarket or other building a drink made by adding a shot of espresso coffee to a glass or cup of frothy steamed milk a large, thick slice or piece of cake, bread, chocolate, etc. a pawnbrokers shop restrain or keep in check an act of spending money freely or extravagantly a main item of trade or production a couch potatoe sleep in rough accommodation or on an improvised bed he state of having a great deal of money; wealth showing a casual and cheerful indifference considered to be callous or improper / casual reach a state of little or no change after a period of activity or progress a feeling of smug or uncritical satisfaction with oneself or ones achievements quick and light in movement or action; agile causing or feeling depression or despondency

Hard-up Downshift Soar Frugal Thriving Grotty Aisle Latte A slab of Pawn shop Curb Splurging Staple Sofa spud Doss down Affluence Blithely Plateau Complacency Nimble Gloomy

Summary: Management gurus tend to lose interest in companies that are situated at the bottom of the pyramid. Nevertheless, these companies represent a big share of the market, which managers should not forget about. Since the start of the financial crisis in 2007, many people have seen their income decline. The companies who are part of the bottom of the pyramid, seem to be smart, and exploit this fact. Stores like Aldi have become very popular, because they offer many products, and not from fancy (and expensive) brands. The most important thing to do, is to innovate. McDonalds now offers healthy salads whereas Walmart expanded its grocery section. A trend that became very popular is paying for products upfront. Some companies, like TracFone, have booked enormous results using this technique. The marketers of today dont realize how wide the bottom of the pyramid actually is. And even worse, they dont realize that cheap stores are as popular in the US as they are in India, where people are poorer in general. My opinion: I think this article deals with a strange phenomenon. Marketers are trained to see whats happening to the markets and how to resolve such a problems. They know how to play the market in order to increase the sales of their products, brand, etc. The fact that many marketers forget about both the old and the new poor, upsets me. Due to the financial crisis, many American households lost lots of their purchasing power. This makes them flee towards cheaper stores, which seem to have gained an increased popularity. Marketers should be aware of these trends, and try to sell products in a way that is interesting for both the company as the client. Monthly payments, paying upfront, etc. are some ways to approach customers who possess less. Another topic that concerns me, is the fact that approximately 44 million people live below the poverty line. Knowing that the North-American population consists of about 300 million people, 44 million is a lot. This is 14,25% of the American population. In Belgium, in 2001, 13,46% of the people live below the official poverty line. If we generalize these percentages, that means that we have 910 million people in the whole world who live below the poverty line. This is shocking. One of my fellow students and me had a nice argument about the election of Barrack Obama and the European-a-like healthcare system he wishes to implement in America. Pieter-Jan thinks that Obama wont be elected anymore, because Mr. Obama hasnt kept his promise. The healthcare system should have solved the problems of poverty, or at least reduce the number of poor people. Due to the fact that he didnt succeed, PJ thinks that he wont be elected for a second term. Personally I think he will be elected again. Not only is Barack Obamas Facebook page nr. 3 on the pages with the most likes, but he also did many efforts to practice what he preaches. When he started implementing the healthcare system, it was already too late, and that is not his fault. It will take a lot longer to get the system on track.