The Red Queen in the classic book, Alice in Wonderland, would have recognised today’s financial markets when she boasted “Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Fellow blogger Doris de Guzman noted one great example last week, when questioning whether Facebook could really be worth the combined value of Dow, DuPont and ADM.
Another is the widespread myth that says China is now a ‘middle-class’ country, and can easily replace any loss of demand in the West. Unfortunately, 96% of its population has an income of less than $20/day, well below the poverty line in the West.
Readers can no doubt compile their own lists of myths very easily. And as we are seeing with Facebook, those who invest of the basis of them can easily lose a lot of money.
Belief in such myths can also blind us to what is happening in reality. Convergence is indeed taking place between Western and emerging markets, but in the opposite direction.
As the blog noted in March, automakers such as Renault, Ford and Datsun are all focusing on the low-cost market in the West. Renault are the most successful, with low-cost models such as the Dacia now seeing more sales in Europe than in their original Indian target market.
Equally, as Unilever’s European marketing head notes in the Wall Street Journal:
“With around one in five people now officially living beneath the poverty line in countries like Spain and Greece, it’s critical that we find new solutions to ensure that people across the region continue to enjoy our brands, while keeping in control of their household budget.”
Similarly, food giant Nestlé is seeing strong growth in sales of cheap, smaller package-sized products. One example is packs of 25 single-serve Nescafé instant coffee sticks, which sell for €2 in France – less than the price of an espresso in Starbucks.
These examples are further evidence for our argument in Boom, Gloom and the New Normal that affordability, not value-in-use, will be the key to future profitability.