Capturing Emerging Market growth via multinationals
Between 2015 and 2030, consumer spending in emerging markets is projected to grow three times faster than in developed markets—the result of rapid population growth, increasing urbanization and an expanding middle class.
These demographics shifts present a compelling opportunity for companies that can effectively tap into the emerging world’s changing preferences and lifestyles. However, the opportunity is not confined to firms domiciled in emerging economies. We’ve identified a number of multinational firms in developed markets that are leveraging their scale, brand strength and first-mover advantages to penetrate these markets across a variety of industries—including food and consumer products, insurance and wealth protection, and health care.
Food and Consumer Products
As incomes rise, food consumption patterns also change. New entrants to the middle class often buy more snack foods outside of what had been their standard staple fare, driving demand for items such as coffee and tea, dairy foods and candy. And as populations embrace urban lifestyles, they increasingly demand convenient, on-the-go eating options and packaged foods.
Switzerland-based Nestle, the world’s largest food company, has long capitalized on these dynamics. The company generates 43% of sales in emerging markets, with leading positions in areas such as coffee—where its popular Nescafe brand holds 47% market share in China. Scale and brand strength are key to Nestle’s success in these markets—the company has a portfolio of 34 “billionaire” brands across dairy, coffee, baby foods, cereals, chocolate and other categories. Strong brands, such as those Nestle owns, can often solidify a company’s market dominance by attracting new customers, sustaining pricing premiums over competitors, creating barriers to entry for new competitors and generating customer loyalty capable of withstanding soft economic environments.
A lesser-known company benefiting from these same catalysts is Finland-based Huhtamaki, a global consumer goods packaging company. In emerging markets, Huhtamaki has tapped into the shift to modern retail—and the resulting demand for flexible packaging that is lighter, cheaper and more efficient—as well as rapid growth of fast food and coffee chains. With an extensive list of multinational customers such as McDonalds, Unilever and Nestle itself, Huhtamaki generates roughly 40% of sales from emerging markets and is the developing world’s market-share leader in flexible packaging. The company has also risen to the increasing global emphasis on environmental concerns, creating multiple products from recycled materials.
Insurance and Wealth Protection
Explosive population growth, urbanization and rising wealth in developing Asia has created a surge in demand for insurance and wealth protection products. In China alone, the number of high-net-worth individuals (those with investable assets greater than 10 million RMB) exceeded one million in 2014—more than doubling since 2010. At the same time, insurance penetration rates in markets such as China, India, Thailand and Malaysia still significantly trail those in the developed world—offering a long growth runway.
Hong Kong-based AIA Group, operating in 18 emerging and developed Asian markets, has been a clear beneficiary of this demand. When the pan-Asian life insurer—once a part of US-based AIG—listed publicly in 2010, mainland China was one of its smallest markets. Yet after explosive growth in recent years, China is now AIA’s second-largest market, behind only Hong Kong, where mainlanders also often buy insurance. Despite its outsider status, the company’s success in the mainland is largely attributable to its brand strength, scale and regional distribution infrastructure. AIA has built top-notch agent training and education programs, resulting in exceptional agent productivity levels. These high-quality programs have afforded AIA a significant competitive advantage over local players—one we see continuing to support the company’s growing presence in the high-growth Chinese market.
The combination of urbanization, a rising middle class and heightened government awareness is driving increasing health care demand and access across the developing world. In particular, a surge in hospital construction projects is fueling demand for medical devices and surgical equipment. And in markets such as China and India, the majority of these products are imported from abroad.
These demographic shifts have also come with new disease burdens. In China, growing affluence and urbanization—where populations adapt to a more sedentary lifestyle of office work—has led to increasing levels of obesity. Partly as a consequence, the country now has 114 million people living with diabetes, equivalent to roughly one-fourth of the world’s diabetes cases.
Penetrating emerging health care markets can be highly complex, requiring intimate knowledge of local regulatory frameworks and treatment preferences, as well as highly developed distribution networks. Yet global companies with the scale to navigate these large and underserved markets are capable of accessing an explosive growth opportunity. We see global medical device company Medtronic as strongly positioned in this area. Comprising about 13% of company revenues, emerging markets are still a relatively small component of Medtronic’s business—but a fast-growing one nonetheless. Bolstered by its early 2015 merger with Covidien, Medtronic’s unique scale has allowed it to establish R&D centers and public-private partnerships in these high-growth markets, often providing it with a first-mover advantage.
As global investors, our quest for sustainable growth has led us to all corners of the world. Medtronic, AIA, Huhtamaki and Nestle provide select examples of developed-market domiciled companies offering attractive exposure to fast-growing emerging markets, while also avoiding some of the volatility risks posed by directly investing in these markets.
Charles Hamker, portfolio manager, Artisan Partners Global Equity Team