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. Last Updated: 07/27/2016

Eastern Europe's Untapped Market

Go to almost any capital city in the former communist countries of Eastern Europe and the former Soviet Union and you will see a full range of international luxury brands. Mercedes-Benz, Cartier and Armani appear in even the remotest places.

These products appeal to the region's growing number of rich people. But they do nothing for those lower down the income scale. Multinational companies have been slow to reach out to these lower-middle-income consumers, who have often had to go without or make do with shoddy, old-fashioned or secondhand products.

The picture is now changing, most clearly in the car market, where the success of Renault's low-cost Logan model has taken the industry by surprise. Since it launched the Logan in Romania in 2004, Renault has sold about 600,000 of them. Inspired by success in Eastern Europe, it has expanded production around the world.

Promoted originally as the 5,000 euro ($6,900) car, the Logan has in fact been sold from 7,000 euro ($9,600) to 10,000 euro ($13,800). But even at this price, it has brought into the new car market buyers whom car producers had not previously considered as potential customers. The race is now on to build even cheaper vehicles.

Boston Consulting Group urges multinationals in other sectors to follow suit. In a report titled "Tapping into Central and Eastern Europe's 200 Million Neglected Consumers," the management consultancy says: "Lower-middle-income consumers in Eastern Europe have been largely neglected by Western marketers and represent a major opportunity for growth and shareholder value creation."

BCG calculates that 200 million of the region's 350 million people live on incomes above the poverty line and below median household income -- or $500 to $1,300 a month in central Europe, and $350 to $1,050 in the former Soviet Union. Together they account for half the region's disposable income, most of it concentrated in just three countries -- Poland, Ukraine and Russia. This is a much larger market than the 50 million high-income people that multinationals have already successfully reached.

The report urges companies to develop "affordable offerings" by using low-cost sourcing, efficient marketing and flexible pricing.

For some groups this is hardly news. BCG cites Coca-Cola as an example of a company that already carefully tailors prices to local incomes, with the standard 2-liter bottle costing 60 percent less in Russia than in Austria.

In other sectors, however, multinationals are much slower to adapt. BCG says that with washing machines, low-priced models are similar in price to those in Western Europe. It calculates that an entry-level machine costs the equivalent of 20 hours' average pay in Austria, 69 in Poland, 121 in Russia and 193 in Ukraine.

The report somewhat underplays what has been done already in developing low-cost goods and services. Gideon Richter, the Hungarian pharmaceuticals group; Podravka, the Croatian foods company; and Sandora, the Ukrainian juice maker are all local companies that have taken account of poorer customers.

Among multinationals, the brewers, including Heineken and South African Breweries, have developed cheap brands as well as premium beers. Low-cost airlines have opened up international travel. Metro, Auchan, Tesco and other retailers have rolled out cheap, own-label brands. Consumer-finance markets are booming, easing access to credit for those on lower incomes.

But there is undoubtedly much more that can be done. And there is scope for genuine -- and profitable -- surprises, as Renault has discovered.

More is at stake than simply meeting consumers' needs. Among the key political concerns are the yawning gaps between rich and poor, and between the region as a whole and Western Europe.

Economists forecast that the region's incomes will slowly catch up with the West's thanks to higher economic growth rates. As countries become wealthier, they will be able to finance educational, regional and social policies that can reduce the local gaps between rich and poor.

But companies can do their part to alleviate the effects of income gaps by developing more low-cost goods and services. Put simply, the poor will not feel so poor if their money goes further and the quality of what they buy improves. This is particularly true for products that act as gateways to other goods and services. A car is not just a convenient means of transport. It can provide access to a life-changing experience such as an easy commute to a better job. The Internet, low-cost airlines and cheap credit can play similar roles.

There are also political implications. A survey this year by the World Bank and the European Bank for Reconstruction and Development showed that only 30 percent of people in the region believe they are better off than in 1989.

Poverty is a powerful source of political alienation, and those who feel they have not benefited from the post-communist transition are often those prone to supporting radical and even anti-democratic political parties.

If such people can be brought closer to the economic mainstream, they may also be attracted to the political mainstream. Clearly, creating good jobs is the best way forward. But, at the margin, providing an attractive range of affordable products in the local store can also help.

Stefan Wagstyl is the Eastern Europe editor for the Financial Times, where this comment appeared.