Big food in emerging markets: overview
- Big Food growth shifts to emerging markets as developed regions stagnate
- Companies report higher revenue growth in Asia and Latin America versus Europe
- Rising incomes, urbanisation and population growth drive strong consumer demand
- Lower private label competition and expanding consumer base improve market opportunities
- Risks include currency volatility economic instability, infrastructure challenges and poor localisation
As sales slow and stagnate in Europe and North America, Big Food is seeing stronger sales and more significant profits elsewhere.
In emerging markets, growth is far more substantial for many of the largest FMCGs, including Nestlé, Kraft Heinz and Mondelēz International.
Why is growth so much stronger in these regions? What are the risks and rewards of full-throated investment in emerging markets?
Which companies have been seeing growth in emerging markets?
For many of the major FMCGs, emerging markets are providing more substantial growth than developed ones.
In its Q1 earnings report this year, Mondelēz International reported net revenue growth of 12.1% in Latin America compared with the previous year, and 14.3% in Asia, Middle East and Africa. This contrasts with 9% in Europe and only 0.5% in its heartland of North America.
In emerging markets, Kraft Heinz’s net sales saw a 7.6% year-over-year increase in its Q1, compared to 3.2% in international developed markets.
For Nestlé, too, growth in emerging markets “stood out”, according to CEO Philipp Navratil, in its own Q1, outperforming developed markets.
Pet food in particular performs well in emerging markets. Due to rising incomes, more people can afford pets than in times past.
It is clear that emerging markets are a key area of growth for many of the world’s foremost food giants.
Why is food flourishing in emerging markets?
In Europe, growth for many food majors remains slow, with high food prices and private label competition creating significant headwinds for FMCG giants.
Yet growth in food and drink has not vanished, says Filiberto Amati, advisor at FMCG consultancy Amati and Associates – it has “relocated”.
Rising prices in developed markets have driven down volumes in developed markets, with many consumers struggling to afford food. However, in the context of emerging markets, demand is still there.
Several factors are spurring growth in emerging markets, explains Russ Mould, investment director at investment platform AJ Bell.
First off, the affluence of consumers in these markets is increasing, meaning they can afford to buy more food.
Demographics are also a major factor. “Emerging markets tend to show greater increases in population and their economies often show better trend towards economic growth too,” says Mould. “As a result, both headcount and GDP per capita are rising, and taking demand for food with them.”
The shift of populations to more urban areas within emerging markets drives growth for food, with convenience foods and processed products in particular seeing advantages from this.
Some more affluent consumers are just as focused on quality as quantity, driving demand for healthy snacks and natural and organic locally-sourced ingredients.
Companies have put in a lot of effort into embedding themselves in these regions, Mould explains, through brand development, marketing and product positioning. They are aiming to take advantage of trends in these regions, such as the rise of convenience stores and new nutritional choices.
There is significant headroom for volume expansion in emerging markets, Amati and Associates’ Amati explains.
In Western Europe, food companies fight for market share in categories that are not growing, while also competing with the substantial popularity of private label.
In emerging markets, the consumer base is still growing. Instead of fighting for the limited attention of existing consumers, brands are “recruiting consumers who have not yet formed brand loyalty”, says Amati.
Private label is a particular differentiator. The presence of private label in emerging markets is substantially lower, says Amati, and the consolidated retail infrastructure that enables private label to grab so much market share in Europe doesn’t exist in these regions.
Which emerging markets are the biggest growth areas?
One particular market to watch is sub-Saharan Africa, says Amati. This is largely due to demographics.
“It is the only major region where the population is young, urbanising fast and still forming its food consumption habits.”
Latin America is also a key growth region, especially in Mexico and Brazil, with its growing urban middle class offering opportunities for food companies.
In Asia-Pacific, the consumer health and nutrition segment is doing particularly well.
“Oral health and vitamins are not glamorous categories,” says Amati. “But in markets where the middle class is forming, and health awareness is rising, they are exactly what consumers are reaching for.”
The risks of investing in emerging markets
What are the biggest risks for food companies investing in emerging markets?
The first and most persistent risk, suggests Amati, is currency exposure – the vulnerability to fluctuations in exchange rates. This is the risk that while revenue often looks strong in the local currency, companies will be disappointed once it is seen in the context of the firm at large, and its overall profit and loss.
On a broader level, the potential of economic instability is also a risk businesses should keep in mind, says AJ Bell’s Mould. Some emerging markets can be economically volatile, he suggests, and prone to boom-and-bust cycles, currency devaluations and inflation.
Furthermore, distribution in markets such as South and Southeast Asia and sub-Saharan Africa, “requires a fundamentally different operating model” from Europe, says Amati. Companies must adapt to different kinds of infrastructure.
Companies that make the assumption product will move through existing infrastructure the way it does in European or North American markets “will burn cash waiting for volume that never arrives”.
Beyond distribution, companies must also adapt to local regulatory and religious requirements, says Mould. This can mean “products, packaging or ingredients must be produced, sourced, distributed or sold differently“.
Finally, there is a risk that businesses will apply the “wrong strategic logic”, suggests Amati. For example, introducing premiumisation too early can be a mistake – businesses must build an affordable volume base first, and only then move on to the sale of premium products.
Linked to this is the risk that making decisions from a faraway European or North American HQ could put a business out of touch with the reality it faces on the ground – how local supply chains work, for instance.
Is growth in emerging markets sustainable?
The remaining question is whether such growth can last. Amati is confident that, if Big Food makes the right decisions, such growth can continue.
The demographic trends there are here to stay, he says. The consumer class in Asia is growing, for example – in the next decade, India will add more food consumers than Western Europe has today.
So the opportunity is there. Where brands are more likely to fail, Amati suggests, is in strategy.
FMCGs must be able to adapt to the market they operate in and to cater for consumers in this market.
“Companies that offer SKUs built for German supermarkets, priced for German consumers and supported by global campaigns not tailored to local occasions won’t see the same results,” he says.
Many FMCGs lack the patience to firmly establish themselves in new markets, he continues. It takes focus and local embedding to develop a business model that works in a new place.
Yet large companies measure results in quarters, not years. A single bad quarter can turn both investment and strategy in a different direction.
Investment in emerging markets offers food companies many advantages. Yet in order to reap all the benefits from this, they must exercise patience, understand the markets they are expanding into and adapt both their offerings and operations to suit these regions.
