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Emerging Market Sizing Tips from Seasoned Experts

February 22, 2012. Change is constant within emerging markets. New competitors and suppliers emerge while others consolidate or exit the market. Regulations, tax systems and value chains are complex and fluid. New government initiatives are frequently introduced. Such volatility can make sizing emerging markets extremely challenging. Some seasoned emerging market experts share a few tips on how to overcome the obstacles.

1. Go beyond the usual methodologies

As a start, it is useful to note that traditional methodologies for market sizing simply don’t apply in emerging markets. Pete Read, Senior Vice President for Asia Pacific for Global Intelligence Alliance (GIA) says that in much of Asia, it is unacceptable to conduct interviews over the phone with someone you have never met, whereas this may be more acceptable in the west. So in places like Thailand and Indonesia for example, interviewers must travel across the country to conduct interviews face-to-face, driving up the cost of primary research.

Thomas Rideg, a Managing Director at GIA with experience in Latin America and Asia agrees that primary research is a given requirement in emerging economies. But that alone is not sufficient. “There will always be contradictions in information and market sizing estimates between different respondents across the value-chain and published sources, even when we run exhaustive secondary research through local language sources that are considered authoritative and reliable. You need to understand the unique local market structures to be able to get an accurate picture of the market,” said Rideg.

From Moscow in Russia, Alexander Pechersky, Managing Partner at ALT Research and Consulting, a GIA Member company, says that data from retail audits for example, cannot be used for sizing FMCG product markets, due to the existence of “non-organized” trade such as street and open-air markets in some regions. For reliable market sizing estimates, it is necessary to conduct interviews with distributors, retail purchasing managers and other experts along the value chain. Peter Read gave an example from Asia. “Understanding the market value for plasterboard wall and ceiling material in Thailand requires a solid understanding of actual, rather than the ‘list’, prices in the market. With retail distribution heavily dominated by a single company, and one that does not publish market statistics, it becomes essential to make use of connections with contacts in the company in order to come up with realistic estimates”.

As a result, market sizing in emerging markets often requires a bottom-up supply side approach. Where it is not feasible to obtain information directly from local companies, distributors and competitors can be a good source of information. This way, it is possible to combine available supply data and market estimates from a representative sample of external market players with available broad indicators, in order to derive estimated total or segment sizes.

2. Don’t rely on published reports

Data in emerging markets is often unavailable, outdated or exaggerated. “Most government or professional bodies in emerging markets will have a tendency to overstate market growth estimates; it is a natural phenomena when there is competitive pressure to attract investment. It may also be the same case with your own local sales managers, so it is advisable to view the data obtained from sales personnel with some healthy skepticism and always cross validate data with say, technical and production personnel,” says a manager of strategy for emerging markets at a chemical company based in a BRIC country.

To illustrate, Rideg says that even market figures in well respected business newspapers can be misleading. “Given our knowledge of the industry size, we once asked a national commercial director about some inflated figures he had been quoted as stating in a leading Latin American newspaper. He later admitted the figure was incorrect but was based on what he was reporting to his boss at global headquarters, so that he would not look like he was falling behind his competitors”.

From Johannesburg in South Africa, Stuart Maclachlan, Chief Executive at GIA Member company, Butterfly Effect Intelligence, gave an example of a global fast food company which had bought an “off-the-shelf” report on the local fast food industry only to find that their own sales were seven times that of the industry value stated in the report. They later found out that the report was compiled in Europe through a junior analyst who had no real insight into local market and who had relied on one telephone interview with a sales representative in Southern Africa.

Alexander Pechersky gave an example from Russia. “In a report on the government’s strategy of the development of the local textile industry, we found detailed descriptions of 20 planned investments projects, including the names of all the participants in the projects. However, when we attempted to interview the participants, they said that they had never heard of these projects”.

At times, there is simply no panel or industry data available, whether by segment, by product or by channel, which can be used to track market share. This also makes it difficult to forecast the market potential for new products where there is no historical data.

In China for example, GIA has developed panels to help clients monitor new markets where published reports are unavailable. Nicolas Pechet, Managing Director of China for GIA said, “We were recently tasked with studying a very nascent but rapidly growing therapeutic segment of the pharmaceutical industry. It is a very rapidly evolving market and there is virtually no published data available. So we have cultivated a diverse panel of leading industry experts whom we consult on a quarterly basis to understand and quantify market changes. This approach allows us to get a handle on industry growth, its underlying drivers and market sizing estimates based on a broad set of leading expert views. Moreover, we can very efficiently monitor the evolution of the industry’s size and other developments on a continuous basis, enabling our the pharmaceutical company to stay on top of the exploding market".

3. Don’t stinge on primary research

While it is true that primary research is critical in emerging markets, it is also much more expensive to conduct than in more mature markets. With the size and diversity of local market segments in emerging markets with a few hundreds of millions of people for example, consumer brand owners may easily conduct a few thousand interviews just to ensure there is sufficient breath and depth to the data collected. In the business-to-business space, a few hundred interviews may easily be required. Even here, fragmented or unstructured value chains and overlapping distribution systems mean that identifying the right decision-makers to interview can be very difficult. Brazil is one such example. It has five regions, 26 states and an economy that is not as entirely export dependent as many other emerging markets. New companies and pockets of wealth emerge across different areas of the country.

“Saving a few thousand on primary research can cost a few million with inaccurate investments due to bad market assessments,” warns Rideg.

The costs of conducting basic primary research should also take into account the costs of entertaining, travel and relationship building. In many countries in Africa for example, there are often only a few limited individuals who have real insight and knowledge of the subject under investigation. In many instances, market intelligence companies need to use senior level resources to build relationships with these individuals through a number of meetings, before one can gain any real insight into local market dynamics.

The manager for competitive intelligence at a global technology company says this about India. "Research in emerging markets such as India tends to be costly, complex and risky. Reliable intelligence vendors who will go that extra mile to validate their findings are hard to find. The good ones are very expensive. You will also find that vendors will also consolidate as the market matures, so you will need to constantly monitor the vendor pool to ensure you continue to have a good base to work with".

4. Be extra vigilant with cross validation

More than in other markets, information and assumptions about emerging markets must be verified and validated using multiple information sources. At times, may be mean calling upon equity analysts, internal sales and marketing leaders, industry or product specialists or even a government official or two.

“It is not unusual for us to use multiple independent sources for every important data point, sometimes as many as 40 different sources for a single sizing and forecasting model. This is the only way to produce highly reliable sizing estimates in a market where there is not only a lack of information but a lot of misinformation being shared,” said Nicholas Pechet about GIA's work in China.

Pete Read added; "In China, published estimates of computer sales that have been widely accepted by the IT industry have been shown to be heavily under-estimated, once you cross-check the numbers of computer chips being shipped into the country. The difference was accounted for by the unofficial production of unbranded ‘white box’ computers sold in the lower end of the market, especially in third and fourth tier cities”.

Alexander Pechersky gave an example from Russia. “Officially, there are certain machinery spare parts that are only imported into, not manufactured, in Russia. During interviews with leading distributors, we were given estimates for the spare parts market at 40-60 times that of the data obtained from the Customs database. One of the main reasons is grey-market imports.”

Kelvin Inn, Practice Head for Market Sizing at Global Intelligence Alliance, based in Hong Kong, said that in many emerging markets, relevant government statistics are either non-existent or outdated and irrelevant. “Few reliable sources are available, since there is usually a significant grey or black market for many goods. It may be essential to use logic-checks with other global regions for specialized products or identify the right individual in order to secure interviews to validate some numbers. Researchers need to try multiple approaches in order to cross validate market sizing figures in emerging markets”.

Thomas Rideg advises companies to “go deep”. “The deeper the assessments, the more insight will be found to enable critical analysis. At times, 80 to 100 deep and insightful interviews can extract much more value than 2,000 survey interviews. To do both is ideal, but if you have to pick one, choose to go narrow and deep. One of our clients wanted to invest in a specific market segment as a result of a purely customer-driven attractiveness analysis. When we conducted a full circle assessment, which included the competitor and regulatory environments, the initial strategy was deemed to be flawed and had to be entirely reformulated,” he said.

5. Don’t underestimate the influence of culture

In many emerging markets, factors such as local allegiances, social systems, official or clan connections, language and geographical differences can at times, influence businesses in ways you won’t see in mature markets. Identifying the stakeholders or key influencers along a value chain may require you to look outside the business.

Natan Rodeguero, who heads up the GIA office in Brazil, says one important aspect to consider is that most people in emerging markets, even senior level executives, will not know everything about their markets. "Either the information does not exist in aggregate numbers or the market changes so quickly that people lose their references. Business interviewees will therefore just guess any number that they think makes sense. This makes cross-verification and market analysis by local experts key to success".

Nicolas Pechet says that in China, business owners and leaders tend to be extremely enterprising and sales oriented. As a result, they will often project a distorted image of their company for their own advantage. “While conducting due diligence on acquisition targets in China for a larger industrial company, several of the potential acquisition targets’ CEOs presented their companies as having 50 percent more revenues than they actually had, or having far stronger distribution networks than the reality. Western culture views these distortions one way, but on occasion, such distortions in China can be viewed as good salesmanship. So it is important to approach every aspect of due diligence with this in mind,” said Pechet.

6. Be in the market

You can’t size emerging markets without being in-market or working with local partners who understand the reality on the ground, as they interact with people along the value chains on a day-to-day basis. Local partners will also know the right points of contact for gathering information. “Guanxi” or connections still count in many emerging markets.

In many emerging markets, the government still plays a large part in business. To identify the true market potential, one has to identify both the local market expert and the government official who will “decide” on the market growth potential. Only local in-market partners will have the insight into who are the real decision makers and how to gain access to them. “Demand for IT equipment bought by many local companies in China is heavily influenced by local city governments that ultimately control many state owned enterprises, and not by the needs of the companies or the company management, as you might expect. So for insights into future demand, ‘customer’ interviews provide little useful information, while conversations with city government officials can reveal much,” Pete Read explained.

Local market experts will also be able to advise on facts and figures that are not in line with reality. Natan Rodeguero gave an example. "Our analysts knew the exact import code for a certain product which could be used to filter the customs database and find out market volumes. But as always in emerging markets, official statistics are not always correct and accurate. There is extra legwork that needs to be done. Our local interviews confirmed that those products were being imported under another import code, to avoid taxation and benefit from a lower tariff. Knowing this, we derived market figures that were completely different from, but much more accurate than, the ‘official’ calculations".

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