A gold mine for marketers through the past decade, developing economies have lost some of their shimmer. The past year has shaved two to three percentage points off growth rates for countries such as China and India. By most projections, emerging markets are never again likely to grow as fast as they have the past two decades.
That's leading some marketers and agency executives to shift their gold-rush mentality to a more measured one where they're placing bets on the most-profitable markets and doubling down in the U.S.
"The easy growing is done," said Sanford C. Bernstein consumer-goods analyst Ali Dibadj. "Now comes the hard part."
In the third quarter, China was a sore spot for companies from McDonald's to Mondelez; Pernod Ricard and Remy Cointreau also reported weaker sales in the country for the quarter. Heineken posted volume growth in Asia, but saw declines in Africa and the Middle East that it blamed on social unrest in Egypt and economic softness in Nigeria. India, Brazil and Mexico also dented results for many.
"With all the excitement in recent years about the potential for growth in emerging markets," said Nestlé Chief Financial Officer Wan Ling Martello in the company's most recent earnings call, "it is sometimes forgotten that developed markets account for around 50% of the world economy."
Consumer Edge Research CEO Bill Pecoriello said concerns about slowing developing-market growth have been weighing on stocks of the heaviest players there, including Unilever and Avon Products. The companies still finding substantial growth in developing markets, such as L'Oréal, Estée Lauder and Kimberly-Clark Corp., have been doing so through distribution gains, said Mr. Dibadj, but lapping those results can make growth targets harder to reach the following year.
Even so, developing markets remain the most-promising prospects for marketers. "When emerging markets still represent 81% of the growth potential, what other choice do you have?" asked Mr. Pecoriello.
Emerging markets are still such a big opportunity that it's impossible to divert resources, even though they likely won't deliver the same bang for the buck as in years past. The solution for marketers may be to trim more aggressive growth plans and concentrate on the most-profitable opportunities within those markets while renewing focus on the U.S.
Taking on Unilever
P&G made that step last year to prioritize its 40 category-country combinations, which are heavy on the U.S. and China. The plan shows some signs of working. A year ago, P&G saw essentially flat growth in the U.S. and double-digit growth in developing markets as it lagged its key competitors globally in growth. Last quarter, P&G had 2% growth in the U.S., 8% growth in developing markets, and 4% organic sales growth overall, which was good enough to beat Unilever and tie L'Oréal, two companies P&G has been trailing for years.
P&G has far from given up on developing markets. It recently launched Old Spice in India and laundry initiatives in Brazil, taking on Unilever in two of its strongholds. Even so, fixing the troubled Pantene and Olay brands in the U.S. remains a top priority.
"Our strongest business units and total company positions are in the U.S.," P&G Chairman-CEO A.G. Lafley said at the company's annual shareholder meeting last month. "We need to ensure our home market stays strong and stays growing." That said, "developing markets driven by demographic and household income growth will continue to be a significant growth driver for our company."
Similarly, Walmart is scaling back growth plans in Mexico and India and closing some stores to focus on profitability in China and Brazil. It's also exploring prospects in the U.S., stepping up store growth in recent years, particularly with smaller stores.
Walmart dissolved a joint venture in India last month because of regulations that would inhibit growth, Walmart International CEO Doug McMillon told analysts, though it retains 20 cash-and-carry stores there. He said the company still believes in India.
The company also downsized its global growth plans for the coming fiscal year to 14 million square feet from as much as 22 million square feet to reflect those store closings in China and Brazil.
Walmart, meanwhile, has been banking more on the U.S. It held a summit in August aimed at getting suppliers to open more manufacturing facilities in the U.S. both as a way to shorten supply chains and save money and help strengthen the U.S. middle class, as Walmart U.S. CEO Bill Simon put it.
Those moves could position Walmart for what Boston Consulting Group sees as a key factor that will reshape the global economy in the back half of this decade -- "re-shoring" of manufacturing to the U.S. that could ultimately add 2.5 million to 5 million jobs and shave 1.5 percentage points off the unemployment rate, though it will also inhibit growth in some developing markets.
The economics of manufacturing have shifted so much in recent years in computers and electronics, home appliances, plastics and car parts that it's getting to be cost effective to manufacture in the U.S. again. Among the factors contributing to that: rising wages in China; the cost of shipping and supply-chain disruptions; and cheaper energy in the U.S. due to rising domestic oil and gas production.
Even so, Harold Sirkin, senior partner of Boston Consulting, said this is no time to abandon China. "The reality is that China will not be closing plants as part of this," he said. "While China may not build as many plants as before, the economy will still grow 5% to 7.5% annually as it shifts toward domestic production and consumption," he said. "But even 5% to 7.5% gets you a lot of growth from a large base."
The re-shoring issue is one reason for the slowdown in developing markets that began last year and could be more than a temporary blip.
The gross domestic product growth gap between the U.S. and developing markets in Asia, for example, more than doubled to 7.8 points between 2005 to 2011 from 3.7 percentage points between 1995 and 2004. But last year, the gap narrowed to 3.6 points, a level the International Monetary Fund projects by 2018 as well.
The narrative about slower emerging-market growth is spilling over to the agency world, where Publicis Groupe CEO Maurice Levy acknowledged in an earnings release last month that emerging markets had slowed while developed ones had picked up over the last quarter, though he expected developing markets to pick up the pace this quarter.
Still, while the party had to get quieter, it's not entirely over. "We've been warning of a slowdown in emerging markets for a while," Unilever CEO Paul Polman said on the company's Oct. 24 sales-update call, adding that while Unilever is growing ahead of its markets, the slowdown is finally taking a toll on a company that gets close to an industry-leading 57% of sales from emerging markets.
But developing markets are still where 80% of the world population is, Mr. Polman noted in an email to Advertising Age. "Growth rates will slow down, because the base is getting higher," he said. But he added: "There is still plenty of growth if we figure out how to do it sustainably and equitably."