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The growth-opportunity-that-lies-next-door

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    The growth-opportunity-that-lies-next-door The growth-opportunity-that-lies-next-door Document Transcript

    • HBR.ORG July–August 2012reprinT R1207PThe GlobeThe GrowthOpportunity ThatLies Next DoorHow a Brazilian cosmetics giant saw the beautyin neighboring markets by Geoffrey Jones
    • The Growth OpportunityThat Lies Next DoorHow a Brazilian cosmeticsgiant saw the beauty inneighboring marketsby Geoffrey JonesThe GlobeWhat will the continued stag-nation of the United Statesand developed economies inEurope mean for aspiring multinationalsbased in booming emerging markets?Traditionally, developed markets havehelped these emerging giants learn to fightdeveloped-nation multinationals on theirhome turf, tap into the growth potentialpromised by prosperous economies, gainaccess to the latest technologies, attractthe best talent at home, and validate them-selves as truly global players.But how will the logic of globalizationchange for corporations from countriessuch as India, China, Indonesia, Brazil,ABOVE Fragrance development atNatura Cosméticos.Photography:Cajamar/SPand Turkey if the growth opportunities inemerging markets continue to far outpacethose in developed economies?One company that has considerableexperience with that question is NaturaCosméticos, the Brazilian beauty giant thatfor some 30 years has been attempting tomove, with decidedly mixed results, intodeveloped markets even as the opportuni-ties in its region have grown stronger andstronger. Along the way it has discoveredjust what a double-edged sword a robust re-gional base can be for an emerging-marketmultinational.In successive attempts to move beyondits borders, Natura has found itself havingJuly–August 2012 Harvard Business Review 2For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgCopyright © 2012 Harvard Business School Publishing Corporation. All rights reserved.This article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
    • to weigh the pressure to devote scarce man-agerial resources to challenging adventuresabroad against the imperative of focusingon burgeoning opportunities close to home.Ultimately,itdiscovered,asitscounterpartsin Latin America and Asia may increasinglyfind, that the payoff from slow and patientinvestments in its neighbors was not a con-solation prize for failing to reap sufficientreturns in developed markets but was it-self a successful globalization strategy. Torealize that, Natura had to stop equating“the world” with “the developed world”—a fundamental change in mind-set that wasdecades in the making.Growing Up in BrazilJust 20 years ago, the U.S., Western Europe,and Japan accounted for two-thirds of theworld’s market for cosmetics, fragrances,and toiletries. Today Brazil is the third-largest segment of the $308 billion globalbeauty market, China is the fourth, Russiathe eighth, and India the 14th. This growthhas not, however, translated into successfor most domestic firms. The Chinese, Rus-sian, and Indian markets are dominatedby Western and Japanese giants such asFrance’s L’Oréal and LVMH; U.S. behe-moths Procter & Gamble, Avon, and EstéeLauder; the Anglo-Dutch Unilever; and Ja-pan’s Shiseido, all of which are ever on thelookout to acquire emerging-market firmswith attractive brands.Against that background, Natura’s suc-cess is exceptional. By any measure it is agiant in the industry: Its 2010 net revenuesof R$5.1 billion ($2.8 billion) rank it amongthe world’s top 20 beauty companies. ItsR$1.2 billion ($660 million) in pretax prof-its, which represents a stunning margin of24.5%, puts it among the most profitable(wellaboveAvon’s12%,EstéeLauder’s18%,and L’Oréal’s 19%).Unusual among emerging-marketmultinationals, Natura sells not low-endbut premium mass-market cosmetics andpersonal-care products to middle- andupper-class consumers. It does so througha direct-sales network of more than 1 mil-lion independent, mainly female salesconsultants, about one-quarter of whomsell Avon and other competitors’ productsas well. Natura has been the market leaderin Brazil since overtaking Unilever in 2004,holding fully 14% of the highly competitivemarket in 2010 (Unilever, at number two,held 9.7%, and Avon, number three, 9.1%).Like so many emerging giants, Naturaevolved in a way that took advantage of itshome market’s economic experience. In1969, 27-year-old Antonio Luiz da CunhaSeabra founded Natura as a small lab andcosmetics shop in São Paulo. Five yearslater, after experimenting with various dis-tribution models, he followed the exampleof Avon, which had been successfully oper-ating in Brazil for nearly a decade throughdoor-to-door sales. Such direct-selling net-works are costly and time-consuming toestablish because relationships have to beforged one by one. But once in place, thesenetworks allow a company to expand atlow marginal cost even in times of eco-nomic adversity.Natura found itself at a distinct advan-tage, then, when most of the departmentstores and pharmacies where so many ofits competitors’ beauty products were soldsuccumbed to the rampant inflation of the1980s. Rising prices and tight exchangecontrols prompted most international com-panies to leave Brazil or halt investmentsBeyond BrazilA Regional Pattern of ExpansionAs opportunities in Latin America continue to be moreattractive for Natura than those in developed economies,the company has steadily expanded its distribution andproduction centers in its home region. The one departurefrom this regional focus is its store in Paris, the capital ofthe world’s beauty market.1969Natura is founded inSão Paulo, Brazil2007Colombia1992Peru1988Bolivia1994Argentina2006Mexico1982ChileNatura CosmÉticosTotal Revenue2008 R$3.57 billion2009 R$4.24 billion2010 R$5.13 billionArgentina,Chile, Peru2008 R$164 million2009 R$219 million2010 R$256 millionMexico andColombia2008 R$44 million2009 R$66 million2010 R$98 millionSource Natura CosmÉticos3 Harvard Business Review July–August 2012The GlobeThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
    • during what many referred to as the “lostdecade.”Yet Brazilian culture continued to placea premium on self-image. Rather than de-press demand, the rising prices spurredlarge numbers of Brazilian women to en-ter the workforce, swelling Natura’s ranks.With the stars aligned, Natura’s revenuesgrew at a breathtaking 43% compoundannual rate from 1979 to 1989. That year,Seabra and two Natura executives—Gui-lherme Leal and Pedro Passos—boughtout the other shareholders to form NaturaCosméticos. The trio articulated a vi-sion for the company that has informedits competitive advantage but has posedsome fundamental challenges to its globalambitions.In an industry that has for decades beencriticized for creating—and then preyingon—women’s insecurities, promoting rac-ist stereotypes of beauty, instilling the fearof aging, and overselling the (sometimesentirely nonexistent) functional attributesof its products, Natura’s founders wantedto foster a company ethos and operatingmodel based on healthier relationships—between the company and its customers,its customers and its million-plus salesconsultants, the company and its suppli-ers, and, more broadly, society and theenvironment.Following this ethos, Natura becamea pioneer in the natural cosmetics mar-ket, a determined opponent of animaltesting, and the first Brazilian companyto adopt the Global Reporting Initiative’ssustainability reporting framework. In2012 Natura ranked second (behind NovoNordisk) on Corporate Knights magazine’sannual list of the 100 most sustainablecorporations in the world. The Ekos lineof cosmetics Natura launched in 2000 isemblematic: The products are made fromraw materials gathered through sustain-able methods from the Brazilian rain forest.A decade before Unilever launched Dove’siconic Real Beauty campaign, Natura in itsTruly Beautiful Woman campaign, whichfeatured ordinary women over 30, had al-ready moved to equate beauty not with theanxious pursuit of youth but with increas-ing self-esteem.Beyond Soccer and SambaNatura’s first move outside Brazil, though,was not destined to fulfill or even advanceany of its goals. Back in 1980, Seabra wasalready entertaining notions of global ex-pansion. Walking down New York’s FifthAvenue that year, he was struck not only bythe immense competition in the cosmeticsmarket but also by the feeling that “therewas a place for Natura in the world.”But where to start? Go after the richesof the U.S. market? Enter a wealthy market,such as Portugal, where consumers speakyour language? Stay close to home?Like many emerging-market power-houses, Natura tried all three approaches.But having found success at home with avalue proposition that was in many waysahead of its time and a sales network thatwas very time-consuming to start up innew markets, Natura was at a disadvantagein moving beyond Brazil. With no compel-ling economic reason to venture abroadand limited managerial talent to spare asthey were building the business at home,Seabra and his cofounders approached in-ternationalmarketshalfheartedly,intentonprotecting their core operations.Natura entered Chile in 1982 by formingapartnershipwithalocaldistributor,whichsold Natura’s products less than enthusias-tically through its own direct-selling net-work. A year later, the company allocated$100,000 to create Numina—a brand ofcosmetics for export to Florida and Portu-gal—and hired people the company knewor who had previously worked for Naturato run the local operations.In beauty, as in wine and cheese, coun-try of origin matters. If Paris and New Yorkwere the globe’s beauty capitals, Brazil wasequated in much of the world not with rainforests and biodiversity but with hyperin-flation, deforestation, soccer, and samba.This competitive handicap, combined withinsufficientmanagementattention,provedtoo great to overcome. The Florida and Por-tugal operations were entirely abandoned,while the Chilean business limped alongunprofitably even as Natura attempted tostart developing its own network in con-junction with a second Chilean partner.Some five years later, as inflation abated,economies all over Latin America werebeginning to grow. As they did so, manyneighbors sought to scale up commercialtieswithBrazil,whichenjoyedareputationin the region for being big, powerful, and in-novative.ConsumersinmanypartsofLatinAmerica shared Brazilians’ emphasis onbeauty, and, propelled by mass advertising,they were becoming more sophisticated intheir use of beauty products.But with its home market heating up,Natura was loath to devote resources toestablishing and building sales networksabroad, and so it moved into Bolivia, Peru,and Argentina with the same model it wasusing to ill effect in Chile—setting up net-works through partnerships with localdistributors.ItsoonbecameapparentthatNaturahadunderestimated the differences not onlyamong Brazil’s neighbors but also betweenBrazil and those countries—differencesthat went well beyond the fact that Spanish,not Portuguese, is the mother tongue of allother countries in the region. In Chile, forexample, consumers were more inclined touse the country’s strong retail channel thanto shop through direct-sales representa-tives. Product formulas and labels neededtobeadaptedtolocalregulationsandtastesin all four countries, and some entirely newproduct lines were launched. But with-out direct management, relationships be-tween Natura and the sales reps remainedtoo shallow for them to forge strong bondswith the brand or to allow enough informa-tion about local preferences to flow backto the production facilities in Brazil. Thebrandidentitybecamediffuse.Foradecadenone of Natura’s foreign operations turneda profit.Finding Success inLatin AmericaIncreasing revenues at home simultane-ously made the prospect of investing in2005FranceJuly–August 2012 Harvard Business Review 4For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
    • other markets less attractive and allowedNatura to bear the cost of unprofitable oper-ations for years. And so it was that the com-pany did not devote serious managementattention to its international operations un-til 1999. Alessandro Carlucci, then Natura’ssales director and now its CEO, was sent toArgentina with the resources and author-ity to build a sales network that was trulycommitted to the brand and the company’svalues. To keep turnover low, the companybuilt strong relationships with its salesconsultants in Argentina. It also improvedlogistics by opening a distribution centerthere. Revenues from the Argentine busi-ness grew by about 30% a year from 1999to 2001.The company quickly transferred thelessons learned in Argentina to other mar-kets in the region and took steps to ensurethat its sales networks became fully com-mitted to the brand and the company’s val-ues. Investments in marketing shored upbrand awareness in Peru. Seasoned man-agers from Brazil replaced local managersin Chile. Natura’s executives closely moni-tored the distribution network in Bolivia.Logistics were improved and local ware-houses established. Revenues increased30% in Chile from 2001 to 2003 and 85% inPeru in the same period.With its confidence growing and its cof-fers brimming from an oversubscribed IPOon Brazil’s Novo Mercado in 2004, Naturaparabens in cosmetics until a visitor to theParis shop asked about them. The companysubsequently removed the preservativesfrom its products. It also began to considerinternet sales.Bolstered by their forays into foreignmarkets, Natura’s leaders felt they had de-veloped sufficient managerial expertiseto enter Mexico, a country they had longrecognized as a more natural fit with thecompany’s business model. Mexico sharedBrazil’s passion for cosmetics and strongdirect-sales tradition, and it had a similareconomy and demographic structure. ButNatura was a latecomer: Avon had beenoperating there since 1956. In fact, Avon’slargest market outside the U.S. was Mexico,where it sold not just beauty products butalso jewelry, toys, and cooking utensils.Drawing on its experience in Paris,Natura not only began establishing a direct-selling network but also opened a store itdubbed Casa Natura in the upscale Polanconeighborhood of Mexico City. Unlike theParis shop, though, the store sold no goods.It was less a shop than a clubhouse—aplace for sales representatives to meet oneanother and exchange experiences, testproducts, and receive training. Natura sawthis as a hybrid of the direct-selling andretail models, which could be replicated ata fraction of the cost of building a compre-hensive retail-store channel. This hybridmodel—whichthecompanybegantouseinBrazil in 2007—helped Mexico become thecompany’sbiggestinternationalmarket(by2012 Natura had opened five Casa Naturasthere).ItssuccessinMexicoseemedtopavethe way to the U.S. market.The Decline of the West?Now,fiveyearslater,Naturahasnotgonetothe U.S. or, in fact, to any other new marketoutsideLatinAmerica.TheFrenchbusinessremains small, unprofitable, and the onlyone in the developed world (see the exhibit“Beyond Brazil: A Regional Pattern of Ex-pansion”). Finding markets elsewhere thatare compatible with the company’s direct-selling system, its community values, andits focus on sustainability has proved tricky.Finding markets outside Latin Americathat are compatible with Natura’sdirect-selling system, its communityvalues, and its focus on sustainabilityhas proved tricky.Then, at the end of 2001, Argentinaplunged into recession after devaluingits currency by 40%, and Natura learneda vivid lesson about the wisdom of stick-ing to its values and vision. In response tothe devaluation, most competitors raisedprices. But Natura chose to keep its pricessteady and forgo short-term profits, focus-ing instead on reducing costs through effi-ciencies gained from the $110 million state-of-the-art integrated logistics, production,andR&Dfacilityithadbuiltontheoutskirtsof São Paulo the previous year. “The idea,”Carlucci says, “was to create a social pactamong suppliers, employees, and custom-ers, showing the Argentine market that wewerethereforgoodandweexpectedprofits[only] in the long run.”Thestrategypaidoff.From2002to2005,revenues increased sixfold, and the num-ber of sales consultants grew from 7,000to 20,000.followed the path of other successful Bra-zilian firms in setting its sights once againon developed markets. In 2005—whichhappened to be a year of celebration ofBrazilian culture in Paris—Natura openeda two-story flagship store in the elegantneighborhood of Saint-Germain-des-Prés.Although France was not as open to directsellingasneighboringGreatBritainandGer-many, Natura had long-standing ties withFrance as a source of packaging, some rawmaterials, and knowledge. Moreover, Pariswas the capital of the beauty world.TheParisstoreofferedonlytheEkoslineandwasviewedasachancetotestdifferentsales models. The second floor functionedas a space where customers could sampleNatura’s products and learn about Brazil-ian culture, and Natura in turn could learnfrom highly sophisticated consumers. Noone at Natura, for example, had been awareof the controversy surrounding the use of5 Harvard Business Review July–August 2012The GlobeThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.
    • In 2005, for instance, the founders trav-eled to Russia, where the fast-growing mar-ket for cosmetics and toiletries had topped$6 billion. Direct sellers Avon and Oriflamewere thriving, as the market share of direct-sales beauty companies there soared from5% in 1999 to 19% in 2004. But as the threefounders watched focus groups of Rus-sian consumers from behind one-way mir-rors, it quickly became apparent that thesepeople not only knew virtually nothingabout Natura, or even Brazil, but also werenot much concerned about environmentalsustainability. A poor fit, the founders con-cluded, and they pursued the opportunityno further.The firm’s commitment to environmen-tal sustainability also played into the deci-sion not to enter China, where regulationsrequired cosmetics to be tested on animals.Natura’s commitment to sustainability andthe highest ethical standards also figuredinto its walking away—sometimes aftermonths of negotiations—from acquisitionsthat might have greatly extended its reachin developed markets. At the same time,mainstream beauty companies were ener-getically acquiring leading natural cosmet-ics businesses around the world: L’OréalboughtBritain’sBodyShopin2006,Colgateacquired Tom’s of Maine in 2009, and theJapanese direct seller Pola Orbis purchasedAustralia’s Jurlique in 2011.Did Natura’s decisions limit its growth?A case can be made either way, thoughAvon’s recent problems in China—whereallegations of bribery of local officials havetarnisheditsbrand,damagedrelationswithsales representatives, and made possible atakeover bid by Coty—lend some weightto the founders’ insistence that the com-pany’svaluesremainafundamentalsourceof competitive advantage.Meanwhile, recognizing that Natura’slack of management expertise has been acontinuing impediment to regional expan-sion, the company steadily worked to buildup its international management ranks inLatin America. It established the NaturaManagement System to capture and dis-seminate lessons learned. It began recruit-parts.) In 2010 Natura engaged in manufac-turing outside its home country for the firsttime, through a partnership in Argentina,and in 2011 it entered into manufacturingagreements with partners in Colombia andMexico.These investments are a reflection ofthe slowly changing economic equationof globalization. Even as the U.S. beautymarket grew by an anemic 1.1% in 2010 andJapanese demand by a microscopic 0.2%,demand in Mexico grew by a healthy 7.5%;in Argentina, Chile, Colombia, and Peruby 10.9%; and in Brazil by 13.3%. Natura’snet revenues from its operations in Ar-gentina, Chile, and Peru, while small com-pared with those from Brazil, grew a hefty27.7% to R$256 million ($139 million) from2009 to 2010, as EBITA ballooned 44% toR$13 million ($7.1 million). Although Co-lombia and Mexico, where the sales net-works have had less time to develop, arenot yet profitable, 2010 revenues from thetwo countries jumped 69.9% to R$98 mil-lion ($53 million).As Natura negotiates a world in whichthe economic importance of the West mayhave reached a plateau while the commit-ment to environmental and ethical issuesis rising, it is finding itself in a positionthat Seabra never envisioned as he walkeddownFifthAvenue30yearsago.Inthelongrun, Carlucci says, although the companyhas not abandoned plans to enter the U.S.or expand in Europe, the goal isn’t to goto any particular place but to have a globalportfolio that can be constantly adjusted toreflect the knowledge acquired in differentmarkets. Just as its customers are movingbeyond stereotypes of youth, straight hair,and light skin, Natura is moving beyond ste-reotypes of globalization, recognizing thatwinning in Chile, Argentina, and Mexicocan be an entry onto the world stage everybit as effective as conquering Paris or NewYork.   HBR Reprint R1207Ping Brazilians and other Latin Americansfrom top MBA programs in the U.S. And itworked to balance its predominantly Bra-zilian management with executives fromother countries in the region. Even so, thecompany’s 2007 annual report announcedits intentions of entering the U.S. market—a testament to the hold developed marketshaveontheaspirationsofemerging-marketmultinationals.In 2008 the financial meltdown con-spired to make developed markets far lessalluring and Natura’s home market andregion even more lucrative. Since then,the company has stopped talking aboutU.S. markets in its annual reports. Insteadit has focused squarely on Latin America,entering Colombia in 2007, increasing theefficiency of its logistics, and tailoring itsproducts and communications to localconditions. (Perfumes evaporate morequickly in the higher altitudes of Chile, forexample, and Mexican consumers preferdrier products than their Brazilian counter-Geoffrey Jones is the Isidor StrausProfessor of Business History at HarvardBusiness School and faculty chair of the school’sBusiness History Initiative.While 2010 growth in the beautymarket was anemic indeveloped economies…The Changing Equation10.9%13.3%7.5%Source Global Market Information Database0.2%Japan1.1%United StatesMexico…the category took off inLatin America.Argentina, Chile,Colombia, and PeruBrazilJuly–August 2012 Harvard Business Review 6For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.orgThis article is made available to you with compliments of FM Global Insurance.Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.