Multinationals Turn To Smaller Markets To Avoid BRIC Restrictions

Poland, Mexico, South Korea and Indonesia all grew between 5% and 6.5% in 2011, and South Africa, Turkey, Vietnam, the “stans” countries and “fascinatingly” Iran, among others, also are likely areas for future expansion of the OTC and self-care market, consultant Nicholas Hall says.

Multinational OTC firms are focusing on developing markets like Poland and South Korea that are growing more slowly than the lucrative markets in Brazil, Russia, India and China, but could be easier to break into, said consultant Nicholas Hall.

Poland, Mexico, South Korea and Indonesia all grew between 5% and 6.5% in 2011, the Nicholas Hall & Co.’s CEO said. Turkey, Vietnam, South Africa, the “stans” countries and “fascinatingly” Iran, among others, also are likely areas for future expansion of the OTC and self-care market, he added at the consultancy’s INSIGHT 23rd European OTC Conference in Budapest, Hungary, April 19.

Many of these countries are appealing because they have strong, inward-facing economies that were not affected by the recent recession, and they have expanding populations and middle classes ready and willing to spend on self-care, Hall explained.

In addition, these markets are highly fragmented with no dominant local players, Hall said. Rather, they have a basket of top local players that split the majority share.

Likewise, there are no multinational frontrunners firmly rooted yet in these markets, adds Purvi Amin, associate director of consumer brands at HSBC Investment Banking. She noted most international players average only 20% to 40% of OTC sales in emerging markets, which leaves an open playing field.

Even though the fragmentation leaves space for newcomers, local firms should not be dismissed lightly, Amin cautioned. She noted that multinationals have captured only 37% of OTC market share in these emerging countries, compared to 57% in developed countries partly because emerging markets operate a very local model.

Local companies drive their position “by very, very heavy advertising, very large sales forces and very little investment in research and development and the like. So all the money goes on the front end to drive the business into the hands of the consumers,” Hall said.

This is the model that helped Genomma Lab Internacional SAB de CV achieve the highest compound annual growth rate in 2011 of all major players at 26.3% for a total of $261.1 million (€197.4 million), according to Hall’s presentation. He noted the firm aims to launch 10 new products a month, made 500 TV commercials and takes a dominant share of each of the markets in which it competes, most of which are niche markets.

The cash-rich firm hopes its marketing expertise and extensive reach in Latin American markets will help convince Prestige Brands Holdings Inc. to accept an unsolicited takeover bid of $16.60 a share (Also see "Genomma Targets Prestige’s Objections To Takeover" - Pink Sheet, 9 Apr, 2012.). In case that does not work, Genomma also nominated a full slate of board members to be considered at Prestige’s upcoming shareholder meeting in June.

Emerging Markets Show Strong Growth In 2011 Over Developed Markets
Data provided by Nicholas Hall & Co. Dollar figures based on a Jan. 1, 2012, exchange rate.
Country	2011 OTC Sales	Growth Over 2010
USA	$23.38 bil.(€17.67 bil.)	2.5%
China	$16.24 bil. (€12.27 bil.)	8.4%
Japan	$10.09 bil.(€8.25 bil.)	-0.7%
Brazil	$ 5.15 bil. (€3.89 bil.)	15.8%
Germany	$5.04 bil.(€3.81 bil.)	0.6%
France	$4.89 bil.(€3.7 bil.)	-0.1%
Russia	$4.24 bil. (€3.2 bil.)	6.9%
Italy	$3.17 bil. (€2.4 bil.)	6%
U.K.	$2.71 bil. (€2.05 bil.)	-0.1%
Canada	$2.58 bil. (€1.95 bil.)	3.9%
Australia	$2.39 bil.(€1.81 bil.)	3.4%
India	$1.98 bil. (€1.5 bil.)	11.4%
Poland	$1.79 bil. €1.36 billion	5.6%
Mexico	$1.61 bil. (€1.22 bil.)	5.5%
South Korea	$1.40 bil. (€1.06 bil.)	6.5%
Spain	$1.39 bil.(€1.05 bil.)	0.4%
Turkey	$1.30 bil. (€982 mil.)	5.2%
Indonesia	$930.28 mil. (€703 mil.)	6.3%
Belgium	$917.1 mil.(€693 mil.)	2.7%
Venezuela	$903.9 mil. (€683 mil.)	20.9%

BRIC Hurdles

Firms interested in entering these new markets will need to overcome many of the same barriers that currently hinder their success in the BRIC countries.

For example, they need to adapt products and their marketing approach to local tastes and spending, Hall said.

He explained “Western OTCs have generally failed [in emerging countries] except those launched many years ago, like Panadol and Vicks, which were launched in a very different environment. Today it is very hard to bring a Western brand, Western packaging and Western formulation and certainly Western pricing to these markets.”

To overcome this, firms need to remember that every market is different and within the countries the regions and provinces also are different, he said.

Multinationals also are at a disadvantage in emerging markets because they often are not indexed, and as a result do not receive the same kind of media, business and consumer attention necessary to elevate and sell brands.

Restrictive regulations are another main reason that many multinationals have failed to fully penetrate BRIC countries, and one that could hamper their efforts in new emerging markets, too.

In Russia, the government favors local manufacturers and wants foreign firms to produce locally, so it makes it more difficult to import. It also has a “fragile political and economic system,” Hall said. The leadership at the ministries of Healthcare and of Federal Services has a high turnover, which causes delays in new regulations and missed application review deadlines (Also see "Russia’s Emerging OTC Market Holds Problems As Well As Promise" - Pink Sheet, 1 Jun, 2009.).

China’s health authority also is slow to approve drugs and is hostile toward the retail drugstore sector, Hall said. The current health care reform process there is imposing price caps on drug makers and distributors, prompting some local drugstores to push their private labels rather than branded products to increase profits (Also see "Squeezed by Price Caps And Rising Costs, China's Nepstar Drugstore Chain Pushes Its Own Brands" - Scrip, 25 Nov, 2010.). The country also requires local clinical trials for new drug approvals, which significantly increases the cost of launching a new drug, Hall said.

Likewise, in Brazil, “we have crazy regulatory authority that wants to put everything behind the counter,” and a corrupt system that favors generics, Hall said. He said pharmacy assistants receive kickbacks for pushing generics and as a result private label is growing 40% in Brazil compared to only 8% to 12% growth for branded products.

New labeling rules in Brazil announced March 29 also require the drug’s active ingredient to be more prominent than the trade name, which regulators say will ease drug identification and reduce delivery mistakes of the products. The change also could boost generics by educating consumers about the difference between brands and ingredients.

Finally, firms are struggling in India because of very low pricing caps placed by the government. A new pricing proposal under consideration could extend price controls to 75% of the Indian retail market and has triggered wide criticism (Also see "Insider Analysis From Corporate Law Group New Delhi On India’s Drug Pricing Regulations" - Scrip, 23 Apr, 2012.).

BRIC Rewards

OTC firms should not give up on BRIC countries though. While difficult to navigate, they offer substantial reward.

BRIC country OTC sales grew significantly in 2011, with Brazil climbing 15.8% to $5.15 billion (€3.89 billion), India up 11.4% to $1.99 billion (€1.5 billion), China up 8.4% to $16.24 billion (€12.27 billion) and Russia increasing 6.9% to $4.24 billion (€3.2 billion), according to Hall.

This growth will continue in the next five years, Amin predicts. She notes during this time period emerging markets are set to deliver about $40 billion overall in OTC sales versus just $20 billion in the developed markets.

As if that were not enough, Hall predicts east and southeast Asia will capture 25% of the global OTC share by 2021, compared to a mere 19% in North America, 16% in Western Europe and 11% in Latin America.

The significantly lower projected shares for developed countries are symptomatic of why firms need to expand in emerging markets.

“You are seeing very little growth from the developed markets, while the emerging markets continue to do extremely well,” Hall said.

He noted OTC sales in Italy offered the best 2011 growth among developed markets at only 6% to $3.17 billion (€2.4 billion). The U.S. grew only 2.5% in the same period to $23.38 billion (€17.67 billion), while other markets were flat, like Germany, which increased 0.6% to $5.04 billion (€3.81 billion). Several fell: Japan’s sales fell 0.7% to $10.09 billion (€8.25 billion), and France and the U.K. also both fell 0.1% to $4.89 billion (€3.7 billion) and $2.71 billion (€2.05 billion), respectively.

Global OTC Market Share Forecast 2021
Asia, including China, soon will capture the majority of the global OTC market – outpacing developed nations, consultant Nicholas Hall predicts.
East and Southeast Asia	25%
North America	19%
Western Europe	16%
Latin America	11%
Central Eastern Europe	10%
Japan	7%
Indian Subcontinent	3%
Australasia	2%
Rest Of The World	8%

[Editor’s note: This story also appeared in “The Tan Sheet,” April 30, 2012.]