“Business as usual” is a contradiction in developing countries or, at least that’s what I keep reading from (HBR), throughout the years companies have been adapting their business models to such markets forgetting the most important rule of all :Keep your market segment the same.
Huge companies like Starbucks, Dunkin Donuts, McDonald’s, and such are based on one primary basic target marketing concept. To sell their product to the masses. So they target the middle classes in developed countries. Because that segment is the sweet spot of the population, right there is where they start building up their corporate empires.
Foreign Brands in developing countries like Colombia have a strong reputation not only for their aggressive brand awareness campaigns that reach as far as here, but because they are blessed with a strong aspirational value just for the fact of being foreign and successful. When one of these brands arrives here, disruption hits everywhere, long lines of people wanting to purchase the product are usual and… hold on, Did I just said “disruption hits everywhere?”
The target market for such products in Colombia is not the middle class they were created for in their country of origin. Instead they aim for the top 1 or 2% of the population who have the means and resources to buy from them. Their value target changes from middle class in developed countries to the richest part of the population on the developing ones. In Colombia rich people are the ones who drink coffee at Starbucks and eats at McDonald’s.
The “Cafe Latte” Index.
There’s a Big Mac Index to measure the purchasing power parity between currencies. I will take a shot and do a “Cafe Latte” index.
The price of a Starbucks Cafe Latte (Grande) in Colombia is nearly US$2.50 , now hear this, the colombian minimum wage is about US$2.50. Now hear this, the Colombian minimum wage is about US$250 per month. 10 Lattes a month (2-3 Lattes per week) takes nearly 10% of that salary. If you add a croissant half the time you buy that latte, it will be 15 to 18% of your monthly income. So much for Starbucks’ goal to become “The third place” to be besides your home or office right?
“The target market for such products in Colombia is not the middle class they were created for in their country of origin. Instead they aim for the top 1 or 2% of the population who have the means and resources to buy from them.”
In Colombia we have been drinking coffee our whole lives. First in small coffee shops called “Cafeterías”. Then in Juan Valdez coffee shops, which basically targeted the same audience as Starbucks. So they use the same strategy I’ve been describing.
So why do foreign companies (and local copycats) keep repeating this “exclusive” business model in developing countries over and over? Well, because this has been a viable model hitherto.
The Democratization of Coffee
Now, there’s this company called Tostao in Bogota (Colombia) who basically took ideas from these business models and created a product for basically… everyone. Here’s the deal, a cup of coffee starts at US$0.30, a Latte (Grande) is about US$0.84, and the equivalent of a Ham and Cheese Croissant is nearly US$0.85, so 10 lattes a month, will only cut 2.1% of the minimum wage salary. Compare this with Starbucks 10%. How they did they do this? They started by having the same basic business model Starbucks had in their country of origin but for Colombian middle class commuters.
Tostao in a nutshell
A typical Tostao store has a limited budget for rental expenses. Depending on the location the size of the store varies. In order to be profitable they need to open an significant number of stores. There are nearly 100 of them in Bogota. They plan to finish 2017 with 130 more. All the pastry is imported (frozen) from Spain and baked right at the store. The design is simple yet nice. Prices and products are described on chalkboards. Forget about fancy backlighted or digital menus. Remembering the famous quote from Mies Van der Rohe: “Less is More”, Tostao in delivering a simple yet good looking store to buy from.
People can buy quick lunch options like sandwiches and salads for pretty low prices as well. The stores even have a few small-but-not-laptop-friendly tables as a subtle suggestion to drink your coffee and keep walking. You can expect long lines first time in the morning for every soul going to work. Yet the lines moves as fast as the Starbucks at Picadilly near Earls court at 8AM, nothing to envy those Brits there.
Tostao is democratizing coffee stores in Colombia, I like to think about the “YMCA song line scenario”, any given day you see a worker, a policeman, a business man and myself at any Tostao store line waiting for our coffee, seeing that in a country like mine is one of the most mesmerizing experiences you could ever have. It put us all in the same place at the same time looking to enjoy the same product, if you are from a developing country you will know what I’m talking about, for the first time in my life I’m buying something here that not only almost everyone CAN but WANT to buy along with me. That scenario in a mostly-non-inclusive country is a magnificent moment for the mind-set change we need so badly.
The HUAWEI Dance
It’s not the first time we see this. Huawei technologies had the same patron as “the Economist” mentioned “The rise of domestic firms such as Huawei is a disaster for the Multinationals”. Established in 1988 Huawei basically focused on markets that western companies ignored for years. Nowadays it is a main competitor of huge multinationals like Cisco Systems.
Huawei strategy started by producing very simple mobile phones that provided the basic functionalities the average costumer asked for. This is how they managed to penetrate markets of developing countries like Zimbabwe, Nigeria, Pakistan, Kazakhstan and Turkmenistan that no one was interested in, aiming for the underdogs you could say.
At a major mobile phone event held in 2007 at Johannesburg, they presented one of the models they were marketing in Africa, the basic mobile phones were in most of the attendees hands. How come? Well, they gave free phones to every person at the event, daring their western competitors to follow suit. That’s how aggressive Huawei marketing tactics became a company standard. (1)
Both Huawei and Tostao understand how to develop strategies to place their products and value in developing countries for masses who are unexplored by most western corporations. The problem is once the western corporations realize the jeopardy represented by the upstarts it’s too late to react. The usual “too little too late” scenario has taken effect.
“…for the first time in my life I’m buying something here that not only almost everyone CAN but WANT to buy along with me, that scenario in a mostly-non-inclusive country is a magnificent moment for the mind-set change we need so badly.”
The business model inception is right there, it’s just a matter of time until more and more companies understand this and put in motion this whole concept of inclusiveness in developing countries corporate DNA.
So how about doing this for Hamburgers, Tacos, arepas (4) or even Financial services? (Read my Blog about Blockchain) anyone?
Update: Starbucks surely is getting short in their stores projection, according to their 2013-14 plan (2), they will be opening 50 stores in Colombia by 2019, it’s late 2017 and they have openened 13 stores so far (3), their projections were before Tostao opened their first store in mid 2016.
Killing is not the same as DEATH, I do believe Starbucks is not going to die, for sure as an industry incumbent company is looking ways to digitize their business model and/or evolve and innovate, but that doesn’t change the share-shifting factor I believe is taking place.
I’m Phillip Stolen, which is Felipe Hurtado in Spanish: What say you?
(1) “Billions of Entrepreneurs: How China and India Are Reshaping Their Futures—and Yours.”Tarun Khanna, Publisher: Harvard Business School Press.
(4) Michael loves arepas, thanks for you kind help!