If all goes well, Second Denim Co.’s jeans – beloved by customers because of their body-hugging fit yet good-enough-for-yoga comfort – will soon be covering the bottoms of the fashionable set in Russia.
“We’ve had a lot of e-mail from Russians asking where they can buy our jeans and we’re in talks now with a local distributor,” says Eric Wazana, founder of the Montreal-based company, which currently sells its jeans in North America, Taiwan, Japan, Dubai and Australia. “If this works out, it will be a great opportunity for us.”
Like its counterparts in the emerging-markets power quad known as BRIC – an acronym for Brazil, Russia, India and China – Russia has emerged in recent years as one of the next frontiers for dramatic economic expansion. These emerging markets, which extend beyond BRIC countries to include places such as Indonesia, Nigeria, Turkey and Sri Lanka, will account for nearly 60 per cent of the global increase in household income between 2010 and 2020, according to a recent report by business consulting firm Accenture.
Incomes in these emerging economies are expected to jump by more than $8.5-trillion (U.S.) during this period, notes the report, titled Fast Forward to Growth: Seizing Opportunities in High-Growth Markets. Not surprisingly, Accenture’s recent global survey of about 600 business leaders found 80 per cent were focusing their growth strategies on emerging markets.
“Emerging markets are growing really fast,” says Josh Ault, assistant professor at the University of Victoria’s Peter B. Gustavson School of Business. “They’re outstripping developed countries, which are only growing at a rate of about 3 per cent a year, even in really great years.”
Companies such as Second Denim that want to tap these markets have the right idea, Dr. Ault says. Competition is likely to be lower and the cost of doing business in these countries would generally be less than in developed markets, he says.
But emerging market opportunities also come with challenges, says Dr. Ault. He points to factors that make it harder for companies to enter and operate in emerging economies: geographic distance, differences in social and corporate cultures, and local systems and regulations that can make it difficult for foreign-owned businesses to operate.
Adding to these challenges is the general lack of knowledge and skills needed to penetrate these markets. Of the 600 business leaders interviewed by Accenture, 40 per cent said they did not have a strategy or the operational capabilities to seize opportunities in emerging markets.
Michael Denham, managing director for Accenture in Canada, says it’s important for companies to know when and how to enter emerging markets. This requires, among other things, a good understanding of how household incomes are evolving in target countries and the types of products or services their citizens are most likely to buy.
“For example, in India and China, when incomes exceed $15,000 a year, you see people buying more cars, computers and leisure products,” Mr. Denham says. “You need to link the products and services you’re providing to the ‘sweet categories of growth’ in the countries and areas you’re targeting.”
Getting a good read of growth rates is also key, Mr. Denham says. China, for instance, lags behind 27 other economies in terms of the number households with annual incomes over $30,000 (U.S.). But give it 10 years or so and China will be right up there, next in ranking only to the United States, Japan and Germany.
Companies that want to do business in emerging markets also must be flexible, Mr. Denham adds. For instance, instead of coming in with a national strategy, they may be better off limiting their operations to one city, expanding only after they’ve gained a secure foothold in that smaller market.
Setting up shop in another country requires a significant investment of time and money. Willy Kruh, partner-in-charge of Canada’s high-growth-markets practice at KPMG LLP, says a multi-country strategy could help companies realize economies of scale in emerging markets.
While this generally makes sense in countries that share borders and speak the same language, these criteria are not the only ones that should be considered, Mr. Kruh says. Companies should also look at markets with similar consumption patterns and business environments.
“Many companies that have been successful have had a multi-country strategy,” Mr. Kruh says. “They launch in more than one market and drive those businesses forward along parallel paths.”
Whether they’re launching in one or more markets, it’s critical for businesses to know what local operating conditions are really like, says Bhim Asdhir, president and CEO of Toronto-based Excel Funds Management Inc., a mutual funds management firm focusing on investments in developing markets. In most cases, this knowledge can best be obtained by working with a consultant based in the target country.
“You want to have a good local partner – someone who speaks the local language, knows the regulatory and tax system, and has contacts with the appropriate politicians and bureaucrats,” he says.
Emerging market countries are often viewed as places rife with corruption and tangled bureaucracies. This isn’t always the case, Mr. Asdhir says. “As these countries get richer, we see the emergence of a highly educated middle class, and they are demanding that their politicians do the right thing,” he says.
In Brazil, Excel Funds received its licence to operate in 21 days, notes Mr. Asdhir. It took about 18 months in Canada.
Before making the move into an emerging market, business owners need to sit down with their accountant and find out how their change in strategy will affect accounting and reporting.
Mohammad Kureshi, a Toronto chartered accountant at M&K Chartered Accountants LLP, says companies that sell their products and services through a local distributor will not need to report earnings and payments to the foreign country’s revenue agency. But those planning to open their own offices in emerging market countries should immediately find a good local accountant.
“Get referrals from people you know and trust in those countries – like your local lawyer or a supplier,” he says. “You can also talk to Canadian companies that do business in the same region and ask them who they’re dealing with.”
Patience is a necessary virtue for any business entering an emerging market, say the experts.
“Lay out an investment and growth plan that is long-term in nature,” Mr. Denham says. “Success doesn’t happen quickly, but when it does, the results can be quite significant.”
Special to The Globe and Mail