What Does Multinationals’ Consumer Goods Strategy Have To Do With Inclusive Real Estate?

Capturing the world’s emerging middle class in the McKinsey Quarterly looks at consumer goods in rapid growth emerging markets and doles out advice to multinationals wanting to compete in these markets, but there is much here for domestic and international real estate developers and homebuilders to consider. In particular, see not only the compelling but well-known statistics regarding the amount of unserved purchasing power in lower income segments in Exhibit 1, but also the lower left hand quadrant of the graph in Exhibit 2. This part of the graph where modern homebuilding has to exist for developing markets – where middle class consumer’s capacity to buy is low and middle class consumers’ needs are local.

Homebuyers’ tastes are extremely local – because of everything from climate to the size and location of windows to style of kitchen to community connectedness. Middle class consumers’ capacity to buy in these markets is challenged by affordability constraints (e.g. homes are a big purchase) and scarce financing (e.g. underdeveloped residential mortgage markets for low/middle income buyers).

The answer, says McKinsey, about this quadrant is that it requires reinventing the business model. The example, the low cost auto, is no less relevant than affordable housing. The major points of strategy recommended are similarly resonant.

1. Know the numbers. Data on housing construction and housing deficits in developing countries are a mess. Monitor Inclusive Markets has done a great job defining India’s numbers and drilling down different segments.

2. Penetrate low cost into every aspect of the business model. McKinsey points out capital expenditures, distribution and product features. Definitely. In housing, this should also include elevating design for sustainability from the beginning of the process, as part of a manufacturing approach. This also means managing risks by standardizing as much of the process as possible (not standardizing the homes/models necessarily). In other words, plan and design for low cost from the beginning.

3. Plan for scale. The size of the housing deficits in developing countries, especially in urban areas, is jaw-dropping. Any remake of the business model has to take into account not only the huge potential demand, but also the fact that these markets can entail thinner margins, hence the need for large scale and lowered risks. Emerging business models, such as those being developed at Smart Cities Advisors, may allow for some degree of customization to avoid the faraway house farms that have popped up in many developing countries and echo America’s suburban growth and to ensure that what’s being built are communities not new slums. Nonetheless, many housing business models have been inherently aimed at small sizes. These don’t work because the inevitable delays and surprises that these difficult operating environments entail can eat right through your capital cushion if there is no clear, replicable, risk-minimizing business model.

4. Be as local as possible throughout. This is a major stumbling block in building and real estate and architecture. Sheet rock from China. Construction engineers from Korea (happening in Ghana now). Architects from the US. Not only are local materials more sustainable, but local staffing is as well. If a beer producer can think local for inputs, so can a real estate developer. Building local capacity among professionals in these fragmented markets is a point of urgency.

From our perspective, this even means taking a heavily local and participatory approach. Nothing says local like consulting with your end buyers on product design and planning and securing solid local partnerships with experienced developers.

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