Understanding informal markets means remembering the past

The poor make purchases only when they can afford to and then spend as little as possible. In India Procter & Gamble and Unilever have responded by creating single-serving sachets for all their products. Shampoo penetration into the Indian market is 90%.

The Amafongkong - products from India and China - are already gaining significant market-share. Cheap biscuits produced in China are being sold in SA and are growing the market at about 15% per year as the lower prices lead to increased distribution into rural and peri-urban markets.

Large and competitive markets like India and China are exceptional. The poverty there is infinitely worse than anything you will see in South Africa, yet companies are responding to the challenge of investing in these informal markets and developing products that are cheap, of high quality, easy to distribute and very profitable. India's rules and regulations are like something from a Stalinist comedy; limits on employment, limits on production, limits on marketing. It is impossible, even for Chinese firms, to enforce a contract at home. South Africa's economy is more stable and better regulated than either of India or China and the informal market is right on our doorstep.

Many of todays largest multinational corporations began by aiming their products at the informal sector. Cadbury's was started in 1824 by John Cadbury, a quaker, who believed in 'campaigns for justice, equality and social reform, putting an end to poverty and deprivation'. Henry Ford, founding his motor company in 1903, believed not only that his assembly line would create employment for anyone of moderate ability, but also that the future lay in the production of affordable cars for the mass market. In the 1850s Isaac Singer invented the Singer Sewing Machine ... and then didn't have enough money to manufacture or distribute it; and his customers couldn't afford to buy them - so he invented the world's first licensing and franchise system in order to distribute costs.

Long before there was a fashionable rich/poor divide, these entrepeneurs understood that not only could wealth be generated by supplying the needs of the poor, but that the poor were a viable market that could be engaged.

What these entrepreneurs instinctively knew has been forgotten as their own economies benefited from the ideas they implemented. Now new entrepreneurs in developing economies are realising the same thing and are giving sedate rich-world businesses a thunderclap wake-up call. For products developed to cater for the poor are taking advantage of dramatic changes in technology and distributed business strategy to create efficient supply-chains, high-quality products and powerful new brands. These products are now so cost-effective that the poor are buying them in quantities vast enough to make their manufacturers wealthy. That wealth is being used to enter markets previously unthinkable for a developing economy product.

Lakshmi Mittal is on an aqcuisition spree, buying up steel companies across the world. Infosys and Wipro are giving IBM, Accenture, EDS and Hewlett-Packard a beating in technology services. Lenovo, a Chinese firm, bought IBM's personal computer business in 2005 and is competing directly with Dell, triggering their recent instability.

How long before an Indian accounting firm competes with the big four? What happens when Tata introduces their R 15 000 car? Or when Haier sells a R 100 fridge? Or Infosys offers a dedicated online bookkeeper for R 10 an hour?

Anyone can reduce their prices by 5 to 10% if pushed. What do you have to do to compete with quality products entering your market at 50 times lower prices than you can offer?

You need to take very definite steps to position your company to engage with the informal economy, rationalise your products and supply-chains, and profit by unlocking the fortune at the bottom of the pyramid. But first you have to understand what your market looks like and how it works.

You probably remember this from your childhood, you sitting at the dinner table refusing to eat your broccoli and your mom saying, "There are starving children in the townships, you must eat your food." And so you grew up believing that the starvation in the townships was somehow connected to your dinner.

There was an awful experiment performed on dogs called "learned helplessness". Two groups of dogs were placed on an electric floor in a room. In the first room the dogs learned to push a button that stopped the current and stopped hurting them. In the second the button did nothing and the dogs could do nothing to stop their pain. A second experiment followed the first in which the dogs were grouped and placed on an electric floor yet again. This time there was a low wall that the dogs could jump over to "escape". The dogs that had been part of the second group, unable to turn off the current, lay on the floor and accepted the pain. They had learned helplessness.

This unfortunate experiment has many lessons for us. We have "learned" that poverty is insoluble. Government empowerment policies give further credence to this by declaring that poverty can only end by the rich giving up some of their share. The question for companies has been, "How much of our share do we give up through our social responsibility programs?" And, since social programs have such poor results both the poor and the rich have come to accept that charity achieves next to nothing.

It is now time to rethink and realise that poverty is not insoluble and the people living in the informal sector may have less disposable income, but they still have plenty to spend.