Business Models in Bottom of Pyramid USA

[chris macrae]

My methods of national brand valuation have shown nation USA as one of faster decliners over a decade now. It doesnt need to be so unless USA continues to be ruled by macroeconomists. But there's no harm studying BOP models in USA either ...

 

MANAGEMENT gurus have rhapsodised about “the fortune at the bottom of the pyramid” in emerging markets ever since the late great C.K. Prahalad popularised the idea in 2006. They have filled books with stories of cut-price Indian hospitals and Chinese firms that make $100 computers. But when it comes to the bottom of the pyramid in the rich world, the gurus lose interest.

This is understandable. McDonald’s and Walmart do not have the same exotic ring as Aravind Eye Care and Tata Motors. The West’s bottom-of-the-pyramid companies are an unglamorous bunch. Many rely on poorly educated shift workers. Some inhabit the nether world of loan sharks and bail bondsmen.

But even in one of the world’s richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.

 

This is a challenge to the American dream. But it is also an opportunity for clever companies. Even the poorest Americans are rich by the standards of many other countries, so there is money to be made by serving them. McDonald’s, for example, is booming. Since 2006 its restaurants have generated an annual increase in sales of 4%, despite rising food prices. (This figure excludes restaurants that have been open for less than a year.) In April the firm hired an astonishing 50,000 full- and part-time staff in America, at a time when many others are shedding hands.

Frugal shops have been thriving, too. Walmart and Target are marching into new markets (such as basic medical care) and new places (such as inner cities). Aldi, a German discounter, has been doing surprisingly well in America, too. Unlike Walmart, it specialises in small stores—the size of a basketball court rather than a football pitch. More than 90% of its goods are its own unfancy brands. To keep its supply chain simple, Aldi stocks barely 1,000 products; some of its rivals stock 100,000. Yet Aldi is not a grotty place to shop. It has wide aisles and bright decorations, unlike some of the discount stores that disfigure American inner cities.

Aldi’s success highlights an interesting fact: that there is a lot of innovation in this market. Companies are reconfiguring themselves to appeal to the nouveaux pauvres as well as the old poor: middle-class people who enjoy lattes and salads but who are currently strapped for cash. Walmart has vastly expanded its grocery section. McDonald’s sells healthy fast food, such as fruit and walnut salad, as well as the usual slabs of meat and cheese in a bun. It also plans to remodel or rebuild 6,000 of its 14,000 American stores. And both McDonald’s and Dunkin’ Donuts are challenging Starbucks by offering drinkable coffee for less.

The rise of online pawn

Even that staple of the urban poor, the pawn shop, is being reinvented. Pawngo is putting pawn on the internet for the convenience of what it describes as “college-educated working professionals with temporary cashflow problems”. Customers can send their college-graduation presents (for example) to Pawngo by FedEx and get a loan in the form of a bank transfer.

Entrepreneurs are also adjusting their business models to deal with the age of austerity. One popular model is paying for things upfront (which appeals to consumers who have poor credit or who want to curb their splurging). Pre-paid wireless providers such as Leap Wireless and MetroPCS have captured 90% of the growth in the market for mobile telephony. Houston’s Direct Energy has just introduced a pre-paid plan for electricity. A second popular model is “collaborative consumption”, which allows people to share or rent rather than own. Swap.com enables you to swap DVDs and videos with other sofa spuds. ThredUp does the same for children’s clothes. Jobless students can hitch lifts via Craigslist (a website for classified ads), or doss down in someone else’s flat via CouchSurfing, another website.

Adjusting to this new world can be hard. Companies have long assumed that America would always be a land of mass affluence and upward mobility. But the American economy was undergoing a structural shift even before the 2007 financial crisis, with galloping rewards at the top and stagnation for many of the rest. Some economists expect the malaise to last for years. Few companies have thought much about the implications of this.

Wireless companies blithely assume that everyone will soon have smartphones and broadband connections, just as everyone now has a car and a television. But their confidence is probably misplaced, argues a new report on “The Poverty Problem” by BernsteinResearch, a consultancy. Broadband penetration may have plateaued, at nearly two-thirds of households. Pay-TV penetration is beginning to decline.

The optimists’ complacency creates opportunities for nimbler and gloomier competitors. It also creates an opening for companies from the emerging world, many of which have frugal innovation in their DNA. TracFone Wireless, a subsidiary of Carlos Slim’s América Móvil, has sold more than 3m phones in America since 2008 to pre-paying customers. MedicallHome, a Mexican company that provides medical advice over the phone for $5 a month, as well as access to its network of 6,000 doctors, is expanding north of the border. Emerging giants such as India’s Tata and China’s Haier regard America as a natural market for their frugal products. The bottom of the pyramid is wider than most people realise. Firms that offer ultra-low prices will find themselves as much in demand in Detroit as in Delhi.