WHY NOT TO MAKE ASSUMPTIONS ABOUT DELIVERY IN MEGACITIES
Adapting existing distribution models is not enough and can be a costly mistake.
In many developing countries, economic growth has created a sizeable middle class with money to spend on items beyond the first necessities of living. For brands that have proved successful in mature markets, the urban areas of these countries in particular are attractive targets for expansion and growth. But one would be wrong to think that logistical solutions for megacities can be found by upscaling existing models. Mumbai is not the Indian version of New York City.
Attractive potential markets for global brands
The global trend of urbanisation is reflected in the growing number of megacities (usually defined as urban areas with a population over 10 million). In 2015 the world counted 34 megacities, and 26 of them were to be found in developing countries.
While the average income in emerging market countries is still much lower than in mature markets, there also is a segment of the population benefiting from the economic development and eager to show it by buying luxury goods from global brands. In a city of many millions, even a few percent of the population represents a large number of potential customers. It is no wonder, then, that Western brands are eager to gain a foothold in this environment.
Adapting existing distribution models is not enough
For marketeers entering a new market it is routine to develop a marketing strategy adapted to the situation, even for an existing, unmodified product. Supply chain managers may be tempted to take an easy approach by starting from existing distribution models and tweaking them a bit to fit the characteristics of the particular location. After all, delivery remains delivery and a distribution centre is a distribution centre.
Unfortunately we have never seen this approach meet with success. It comes closer to a recipe for disaster, because it doesnt take into account the multitude of large and small differences that can wreak havoc on the supply chain if not addressed properly.
Population density and infrastructure
To illustrate how divergent urban distribution environments can be, we will focus on two major characteristics: population density and traffic infrastructure. In emerging market cities, population densities can be much higher than in mature markets consider Mumbai, with over 29,000 people per square kilometre, and New York City, with just over 2000. Also, because the average store is much smaller in emerging markets, the number of stores is higher and the average shipment size considerably smaller, so that the scale of logistics operations in emerging markets is fragmented when compared to mature markets. This explains why, for example, roughly 25% of the cost of goods must be attributed to transportation in Latin America and only 5% in North America.
Urban authorities in emerging market countries have many problems to deal with, and creating a transportation-friendly environment is usually not a top priority. Even if it were, realising infrastructure changes is a matter of several years if not decades. Todays reality is one of congestion and delays.
Shred all assumptions
Developing a distribution network based on invalid parameters can be a costly mistake. One way to avoid that mistake is to start from scratch and rigorously check every single assumption. For companies that dont want to take the time and to devote the resources required for this process, there also is the option to team up with a logistics provider who already has a local presence, knows the challenges, and is experienced in dealing with them.
If you are considering an expansion into emerging markets and have any questions about your distribution network, our experts will be happy to support you. Please get in touch with your local Damco office here.
Are you interested in more ways to avoid risks and reduce your supply chain costs? Then you can download our recent white paper Six ways to lower your logistics costs (without compromising on speed or quality)here.
