Sales growth in rapid-growth markets three times higher than developed markets
London, 14 July 2011 – Over the last five years, the average annual sales growth rate of companies from rapid-growth markets has been almost three times higher than a developed market benchmark, 16% versus 5%, according to new report Globalization 3.0 from Ernst & Young. The report compared the performance of 150 enterprises from rapid-growth markets with 80 leading US and European companies.
Nearly one-third of the world’s 1000 largest public companies, by market capitalization, are now based in rapid-growth markets. This compares to only 10% coming from rapid growth companies just 10 years ago. Their growth is outpacing their domestic GDP growth. Of these, BRIC (Brazil, Russia, India, and China) companies represent 70% of the value.
Alexis Karklins-Marchay, Ernst & Young EMEIA Capital Transformation leader, comments: “World-class companies are now found everywhere and business leaders need to adjust to this new reality. If growth continues at present rates, half of the world’s GDP will be produced in these rapid growth markets by 2015.”
Sales growth – not just the “BRICs”
Overall, the biggest performers in sales growth have been India, where sales have climbed by a compounded annual average of 27%; Brazil, where sales have climbed by 22%: Russia, where they have grown by 17%; and China, where they have grown by 17%. But the high performers are not just from the BRICs. Sales growth over the past five years in Indonesia and Malaysia was 16%; 14% for Poland and 13% for South Africa. Some of these gains are due to the exceptional growth of their domestic economies. Others have benefitted from rising raw material prices, particularly mining and oil and gas companies.
Profitability better for rapid-growth markets
The return on sales for companies from rapid-growth markets is better than developed market companies. Average operating margins of the rapid-growth market sample reached 24% of sales, compared with 18% for the companies from developed markets. The operating margin of the Russian companies in the study rose particularly well, to 27%. Lower labor costs and a lighter regulatory hand are still the biggest contributors to margins in the rapid-growth economies but the margins are being driven increasingly by the fact that many of these companies are now world-class operators that command real intellectual property.
Stock price – rate of increase slowing
The stock price of the rapid growth market companies tracked in this study has increased by 132% over the last five years, compared to just 6% for companies from developed markets. However, the rate of increase seems to be slowing, as these economies become larger.
Acquisitions critical to growth strategy
Acquisitions continue to play a critical role in a company’s growth strategy and we are now seeing transactions moving in every direction. Alongside the typical mature to rapid-growth deals, we are seeing deals between companies from rapid-growth markets and from rapid- growth markets to mature markets. In 2010, roughly one-third of the transactions were in North America, one-third in Europe and one-third in rapid-growth markets.
Karklins-Marchay concludes: “The strong growth in sales and profit in rapid-growth market companies in our study suggests that their growth is based on genuine economic gains. This is not to say that risks are banished but we believe the longer term trend will be for large rapid-growth market companies to continue to grow stronger and more numerous.
“This creates a complex new challenge for Western companies, as competitors now can, and do emerge from anywhere in the world. Finding enduring competitive advantage will not be easy.”
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