The mistakes of foreign companies in India

Domestic competitors are either many (like in the OTT space, where more than 15 platforms fight for subscribers) or very large and powerful (like in the car manufacturing sector, with the likes of Tata and Mahindra). Either way, judging the strength of Indian competitors in India by the fact that they do not have much of a name globally is a really bad idea.

And then there are the pricing strategies for an Indian consumer that is extremely price sensitive no matter his/her wealth. Foreign companies often fail to be flexible with their pricing, forgetting that their product’s value is a perception that is fundamentally different across countries and invariably lower in India. Thus, even after adjusting a bit, Netflix found itself priced 7-8 times higher than the competition, which immediately boxed the company into a very small niche. That super-premium niche, speaking more generally, ends up being the fate of many foreign companies’ attempts to enter India.

First because the Indian customer, even though it looks thirstily at global brands and consumption patterns, still requires a lot of local tailoring. As one of the recent guests at our school said -I am paraphrasing- a European customer might look at a luxury watch and see design while an Indian customer might look at the same item and see gold purity instead. And second because “local content” is actually a very fragmented thing. Local preferences and needs vary a lot from region to region within India. For example, introducing local TV shows and movies on Netflix means producing not only in Hindi but also in Bengali, Tamil, Telugu, Malayalam, and Marathi, to name, among many others, just the top five regional language markets.

FMCG companies have long experienced India’s heterogeneity, with brands whose market shares vary enormously from state to state. The comparison between the stories of Procter & Gamble and Unilever in India is also illustrative of this phenomenon. Unilever entered India in 1930, as Hindustan Unilever (HUL), and over the decades became deeply entrenched as a domestic company, developing a wide portfolio of Indian brands fully adapted to the Indian consumer needs. P&G, on its part, entered India much later, in 1989, with a strategy that pushed its famous global brands in a relatively standard way. As expected, P&G found itself boxed into a limited segment of Indian consumers -mostly in large Tier-1 cities-, which resulted in lower revenues (about 1/4^th of HUL’s size) and more volatile profits.

More recently, though, P&G has changed its approach to India, introducing much more local adaptation. For example, the company has extended its distribution reach in the kirana store (for those not familiar, that is the Indian version of the mom-and-pop small store and the quintessential Indian consumer goods outlet), by going from 2 to 7 million out of the 13 million total kiranas in the country.

Moreover, to reach a larger market P&G has adapted their formats and prices, for example, by selling a packet of two Pampers diaper for 25 rupees or a small sachet of shampoo for 4 rupees (HUL and other domestic companies have been doing this for decades). As a result of this increased adaptation, P&G’s growth has picked up above 20%, with much healthier profits.

The mistakes by foreign companies in India that I have mentioned so far are about their approach to the market. There is also much to say about the organizational side (and not enough space in this post so we might return to this in future ones). For example, foreign companies are often surprised by the fluidity of the job market and the expectations of employees about compensation and career advancement. So, while as a foreign company entering India you might initially be attracted to a market with relative lower wages and thus feel good about the total cost of your local team, you will soon experience a breakneck pace of turnover, salary increase demands (also fueled by an average 7% annual inflation) and expectations of increased scope of work and responsibilities. The bottom-line, building a great local team is not easy at all.

As the narrative of India as “the next big thing” starts to take hold in many boardrooms across the world, we can expect a new gold rush of foreign companies entering India. Those companies will take no time to analyze things carefully, and instead are likely to reflexively follow broad indicators like market size, growing incomes and lowering of regulatory barriers, all accompanied with a good dose of FOMO.

Therefore, many of them will repeat the mistakes described above and find themselves all together locked in a tough fight in that relatively limited super-premium box, falling short of their lofty expectations. When that happens, it will be time to apply the best tool that foreign companies can use in a country like India: Patience. Rome was not built in a day and all that. Granted, for companies that are under enormous investor pressure, like Netflix, patience is not exactly a hot word. But I do not see any other way. What do you think?