The world faces a conundrum: Even as the food supply expands every year—theoretically, already providing enough to feed every person on the planet—the number of hungry people has grown over the last decade. Today, nearly 1 billion people are undernourished.
Achieving universal food security will require every bit of agricultural, technological, and economic innovation possible. Among the many actors working to solve this challenge, businesses will need to play a key role.
While businesses are traditionally engaged on the production side of food security to ensure the basic availability of sufficient food, they can typically do much more on the consumption side as well to ensure that the world’s hungry have sufficient access to an adequate, nutritious diet. To this end, taking a differentiated view of the world’s hungry provides the basis for devising tailored strategies that can adequately address the needs of people with diverse income levels.
With upper-income consumers, businesses can rely on traditional for-profit models featuring high-margin products and using brands similar to those that global consumers demand. Different strategies typically work with the middle class, as well as with the so-called “next billion”—people who do not yet have the incomes of global consumers but who still possess considerable purchasing power. For these segments, companies can still sell products profitably, but organizations often need to customize and target the offerings to the specific needs and abilities of these customers.
For consumers in the bottom billion, however, companies can generally not expect to immediately realize the full margins they generate from their typical business activities. The prices that the very poor can afford are often equal to or below full product costs, so the forgone profit must be “subsidized” to achieve a viable business model.
Three hybrid models, which draw on business principles but require additional subsidies, can help tailor marketing and pricing approaches to the bottom-billion segment. The forgone profit can be covered by external sources such as governments and social-sector organizations, other consumers, or the company itself.
The External Subsidy. In the simplest case, governments, foundations, or other social-sector organizations can provide external subsidies, in such forms as cash transfers or vouchers to people in need through existing or new social-welfare programs. Alternatively, these organizations can buy the products directly and distribute them for free to those most in need, while the companies can sell the products to consumers who can afford it.
The France-based company Nutriset, for example, produces ready-to-use foods, branded as Plumpy’Doz, which are specifically formulated to address the needs of young, undernourished children at a critical stage of their development. The company sells the product, for example, to U.N. agencies and other social-sector organizations, which in turn distribute it to the most needy, generally free of charge.
The Cross-Consumer Subsidy. Under this model, the subsidy is provided by consumers with higher incomes, such as global customers or the middle- and upper-income consumers in a developing country. Wealthier consumers subsidize poorer ones by paying either an implicit or an explicit premium. Companies can achieve this form of price discrimination through a variety of measures, such as by selling separate brands or package sizes marketed to different income levels or by selling lower-priced goods through retail channels where poorer people shop. Alternatively, if made explicit, companies can charge a “social premium” to wealthier customers, so that they knowingly cover the subsidy for lower-income consumers.
For example, the US-based organization Two Degrees gives a nutrient-rich meal to a hungry child for every nutrition bar it sells at roughly $2 each. Using this model, the company provided about 250,000 meals in 2011 to people in such countries as Haiti, India, Kenya, Malawi, and Somalia.
The Social Business Model. With this approach, the company itself accepts a lower profit and thus covers the required subsidy. Social businesses, as for example proposed by Grameen Bank founder Muhammad Yunus, are nondividend companies created solely to solve societal or environmental problems, rather than to maximize profits.
Grameen Danone Foods offers an illustration of the social business approach. The company was founded in February 2006 in Bangladesh as a joint-venture between Danone and Grameen, with a mission of reducing poverty and bringing healthy nutrition to the poor. The company has developed a fortified yogurt enriched with nutrients typically missing from the diets of undernourished children. More than 80,000 units of the yogurt are sold daily, both by door-to-door “Grameen ladies” and through more than 12,000 shops. Once the company repays the initial investments, it does not expect to return a profit to investors. Instead, it will direct any profits it may generate into growing the social business.
The models described above can also be combined. In fact, Grameen Danone mixes a social business model with a cross-consumer subsidy approach, selling its yogurt in rural areas at much lower prices than in cities. For example, in 2012 one package of yogurt sells for 7 taka (US$0.08) in rural markets, while an only slightly larger package sells for 15 taka (US $0.17) in megastores in Dhaka, Bangladesh’s largest city.
Creating Social Advantage
Although these hybrid models are still emerging around the world, the approaches offer an innovative and promising way for companies to help the poor meet their basic survival needs through sustainable, market-based solutions. Compared with purely philanthropic activities or donations in the context of corporate social responsibility, these hybrid approaches present an opportunity to achieve both greater social impact as well as greater business benefits.
Greater Social Impact. The customer segments that can afford to pay for the products and services at typical market prices enable a higher share of the available subsidy to be directed toward the very poor. The models also empower the poor, since they offer choices rather than charity. And they present a clear path to sustainability. As the share of consumers in higher-income groups rises over time—due to economic development, as well as the stronger economic growth that typically goes along with increased food security—the overall required subsidy will gradually decline.
Greater Business Impact. Hybrid models offer an opportunity to better understand the needs and purchasing behaviors of the poor, as well as to develop ways of reaching lower-income consumers. When companies enter a new region, the hybrid models also represent a viable way to gain insight into another legal, regulatory, and political environment. And since products can also be marketed to customers in higher-income groups as well as the poor, companies can use these approaches to open up markets that may eventually grow into fully profitable businesses as the share commanded by wealthier segments grows over time.
Ultimately, hybrid models that serve the poor are not only a smart social-engagement strategy but also a potentially powerful way to build a stronger market position over the long term.