A simple but powerful business strategy exists within developing markets. Investors who can identify the companies that successfully implement this strategy have the opportunity to achieve multibagger returns.
When effectively executed, most business strategies that are successful in the U.S. can work just as well, if not better, within developing markets. The reasoning is simple: Although cultures are different, people within developing markets have similar needs, ambitions, and desires as people within the U.S.
A perfect example is the diversified Internet search engine model. Google (GOOG +1.28%) was created in 1998 and quickly became the world's leading Internet search company. Baidu (BIDU +2.29%) was created shortly afterward in 2000 and has proven that this business model can also be extremely successful in developing markets.
Mind-boggling growth
The number of Internet users in China has skyrocketed from 111 million in 2005 to 618 million currently. Because of this rapid growth, Baidu has achieved a ninefold increase in annual revenue over the last five years to $28.8 billion, and its net income has increased impressively to more than $10 billion per year.
The growth of Internet users in China has slowed significantly to about 10% per year, but Baidu still has the potential to achieve impressive growth by expanding beyond its core Internet search business in a similar manner as Google.
Google has had phenomenal success with its noncore businesses, including YouTube, Android, and Google Play. Expanding beyond its core Internet search business has helped Google significantly enhance its advertising capabilities.
Baidu has the chance again to prove that it can match Google's success by successfully expanding beyond its core Internet search businesses. Its extensive mix of platforms include social sites, music products, location-based services, PC software, knowledge products, online recruitment sites, online travel services, mobile products, and a payment processing service called BaiduPay. Baidu will continue its mind-boggling growth if it can attract advertisers with these platforms as it has done with its core business.
A compelling "follow the leader" opportunity in its early stages
If you would rather find a "follow the leader" opportunity that is still in its early stages, you're in luck. PriceSmart (PSMT 0.85%), a membership-based warehouse store operating in Latin America, has the opportunity to become a premier global retailer similar to Costco (COST +1.02%).
The membership-based warehouse business model has been proven to work and is extremely profitable when successfully implemented. Costco has been the clear leader in this industry due to its efficient distribution operations and its excellent customer service. As a result, Costco's investors have been well rewarded with big returns and a growing dividend.
Costco has achieved significant and consistent store growth for decades and currently operates more than 600 stores worldwide. PriceSmart, on the other hand, currently only operates 32 stores in Latin America, mostly in Central America and the Caribbean, and as a result, it has the potential to achieve much higher growth levels than Costco going forward.
PriceSmart's CEO Robert Price has been involved with this industry for decades and is an effective and well-known leader. Due to a struggling global economy, he has grown the store base at a measured pace. This has allowed the company to maximize the profitability of each store by ensuring that it meets the needs of its local customers. Each store is sized appropriately to meet customer demand and has products that are tailored to local retail preferences.
As a result of Robert Price's superb management, the company has excelled in some important metrics, boasting a 13% year-over-year growth in its membership base and an 85% member renewal rate. Currently, PriceSmart is the only membership-based warehouse company operating in Central America and the Caribbean. Its experience in operating successful stores in Latin America will prove to be invaluable if extensive competition develops.
PriceSmart's revenue has doubled over the last five years to $2.3 billion, and its earnings have more than doubled to $84 million. In addition, PriceSmart pays a modest but growing dividend that has doubled over the last five years.
Now that the global economy is improving, the company is poised to accelerate its store growth. Its recent expansion into a new area of operation, South America, appears to be taking off. The company opened its first store in South America in 2011, and the recent announcement of two new stores in Columbia will bring the total to six.
The bottom line
Baidu and PriceSmart have both shown how it can be fruitful to implement powerful and proven business models in new, fertile regions.
Although Baidu has already grown impressively, I believe its ability to attract advertisers in China will result in tremendous growth beyond its core Internet search business. If PriceSmart can boost its store growth while maintaining the high customer satisfaction and profitability of each store, I believe its investors will be handsomely rewarded.
