To tap the thirst of emergent consumers
Saturday, 23 February 2008
Jenny Wiggins
When Jørgen Buhl Rasmussen, Carlsberg's chief executive, last month declared that the Danish brewer was finally in "full control" of its destiny, he was not thinking of western Europe, where it had been selling beer for 160 years. He was thinking of Russia.
Carlsberg had just won a £7.8bn ($15.4bn, €10.5bn) takeover battle that gave it full ownership of Baltika, Russia's biggest beer brand. A few years back, it would have been hard to imagine such sums being spent on a consumer company in Russia. "It wasn't that long ago that economic crises in emerging markets were a source of grief for many companies," says Julian Hardwick, an analyst at ABN Amro.
But today, Russia and other big emerging markets such as India and China are the countries that brewers, as well as chocolatiers, distillers and dairy producers, care most about.
Big multinationals including Unilever and Nestlé have been selling food and household products around the world for decades. What is new is that more and more companies, including Carlsberg, that have traditionally focused on North America, western Europe and Australasia are joining them.
Russia is the market capturing much attention. "The interest of international strategic buyers in Russia consumer goods companies has been increasing," says one Moscow-based investment banker. "People are taking the Russian consumer market seriously."
This month, Unilever bought Inmarko, Russian's biggest ice cream brand, while Campbell Soup of the US announced plans to team up with a Russian meat supplier called Joosten Products-JP to make bouillon soups for the Russian market. These follow other Russian deals including Nestlé's purchase of Ruzskaya Confectionery Factory; the acquisition of Nidan, Russia's third biggest juice producer, by Lion Capital, a London-based private equity firm; and Wrigley's purchase of A. Korkunov, a maker of premium chocolate.
As incomes rise for Russia's 140m-plus population, local companies are becoming more attractive to foreign buyers. Jens Welter, head of European consumer and retail investment banking at Credit Suisse, says: "The valuations of companies across a wide range of emerging markets are very much underpinned by domestic consumption."
Companies are also increasingly confident in the stability of Russia's economy. Economists at Goldman Sachs forecast economic growth in Russia at 7 per cent this year and say the country should remain largely "decoupled" from a global economic downturn. Sandra Lawson, senior global economist, says: "We think that domestic demand will accelerate modestly this year in Russia." Ms Lawson also expects domestic demand to rise in China this year but slow slightly in India and Brazil.
Expanding emerging market economies are adding notably to food demand, with western consumers feeling the effects at the supermarket check-out as food prices soar.
Rice is the most recent staple food to rise sharply in price - a 1kg packet of basmati rice from Tilda, Britain's biggest rice importer, now costs about £3.35, up from £2.70 last spring - as rice producers, including India, Vietnam and Thailand, limit exports in order to satisfy domestic demand.
Tilda attributes higher wholesale prices of basmati rice to the industrialisation of India, the world's leading producer of basmati. It says this has created greater local affluence as well as shortages of land, adding: "These are things which are beyond our control."
Economists say the price inflation under way in food could spread to other kinds of goods bought by households, from clothes to refrigerators, as emerging market manufacturers, particularly in Asia, run their plants at full stretch and start to increase prices. Tim Drayson, senior international economist at ABN Amro, says: "The global economy is basically running out of capacity."
Over the past decade, the price of clothes, white goods and electronics has fallen for western consumers because the cost of making them abroad has been cheaper than making them at home. But that is likely to change. Mr Drayson says that while prices are not actually rising for most of these goods, the rate of decline has slowed. "We haven't got inflation yet . . . but that could be the next step."
The US price index of imports from China (mostly clothes, household appliances, furniture, toys and electronics) rose 2.4 per cent last year, the highest since the index was created in 2003.
Emerging market demand for goods and services is expected to continue to rise along with incomes. There are already close to 300m middle-class people (defined as those who earn more than $3,000 per head annually) in the so-called Bric economies of Brazil, Russia, India and China, according to Goldman Sachs. The bank forecasts that this middle class will grow to more than 500m by the end of the decade and to some 1.4bn by 2020.
Within the next few years, several of the world's leading consumer goods producers are likely to depend on emerging economies for more than half their sales. Danone, the French dairy group, already receives about 47 per cent of its revenues from emerging markets, The proportion for the Anglo-Dutch Unilever is 43 per cent and for Britain's Cadbury Schweppes it is 32 per cent, while L'Oréal, the French cosmetics maker, derives 25 per cent from such regions.
When Jørgen Buhl Rasmussen, Carlsberg's chief executive, last month declared that the Danish brewer was finally in "full control" of its destiny, he was not thinking of western Europe, where it had been selling beer for 160 years. He was thinking of Russia.
Carlsberg had just won a £7.8bn ($15.4bn, €10.5bn) takeover battle that gave it full ownership of Baltika, Russia's biggest beer brand. A few years back, it would have been hard to imagine such sums being spent on a consumer company in Russia. "It wasn't that long ago that economic crises in emerging markets were a source of grief for many companies," says Julian Hardwick, an analyst at ABN Amro.
But today, Russia and other big emerging markets such as India and China are the countries that brewers, as well as chocolatiers, distillers and dairy producers, care most about.
Big multinationals including Unilever and Nestlé have been selling food and household products around the world for decades. What is new is that more and more companies, including Carlsberg, that have traditionally focused on North America, western Europe and Australasia are joining them.
Russia is the market capturing much attention. "The interest of international strategic buyers in Russia consumer goods companies has been increasing," says one Moscow-based investment banker. "People are taking the Russian consumer market seriously."
This month, Unilever bought Inmarko, Russian's biggest ice cream brand, while Campbell Soup of the US announced plans to team up with a Russian meat supplier called Joosten Products-JP to make bouillon soups for the Russian market. These follow other Russian deals including Nestlé's purchase of Ruzskaya Confectionery Factory; the acquisition of Nidan, Russia's third biggest juice producer, by Lion Capital, a London-based private equity firm; and Wrigley's purchase of A. Korkunov, a maker of premium chocolate.
As incomes rise for Russia's 140m-plus population, local companies are becoming more attractive to foreign buyers. Jens Welter, head of European consumer and retail investment banking at Credit Suisse, says: "The valuations of companies across a wide range of emerging markets are very much underpinned by domestic consumption."
Companies are also increasingly confident in the stability of Russia's economy. Economists at Goldman Sachs forecast economic growth in Russia at 7 per cent this year and say the country should remain largely "decoupled" from a global economic downturn. Sandra Lawson, senior global economist, says: "We think that domestic demand will accelerate modestly this year in Russia." Ms Lawson also expects domestic demand to rise in China this year but slow slightly in India and Brazil.
Expanding emerging market economies are adding notably to food demand, with western consumers feeling the effects at the supermarket check-out as food prices soar.
Rice is the most recent staple food to rise sharply in price - a 1kg packet of basmati rice from Tilda, Britain's biggest rice importer, now costs about £3.35, up from £2.70 last spring - as rice producers, including India, Vietnam and Thailand, limit exports in order to satisfy domestic demand.
Tilda attributes higher wholesale prices of basmati rice to the industrialisation of India, the world's leading producer of basmati. It says this has created greater local affluence as well as shortages of land, adding: "These are things which are beyond our control."
Economists say the price inflation under way in food could spread to other kinds of goods bought by households, from clothes to refrigerators, as emerging market manufacturers, particularly in Asia, run their plants at full stretch and start to increase prices. Tim Drayson, senior international economist at ABN Amro, says: "The global economy is basically running out of capacity."
Over the past decade, the price of clothes, white goods and electronics has fallen for western consumers because the cost of making them abroad has been cheaper than making them at home. But that is likely to change. Mr Drayson says that while prices are not actually rising for most of these goods, the rate of decline has slowed. "We haven't got inflation yet . . . but that could be the next step."
The US price index of imports from China (mostly clothes, household appliances, furniture, toys and electronics) rose 2.4 per cent last year, the highest since the index was created in 2003.
Emerging market demand for goods and services is expected to continue to rise along with incomes. There are already close to 300m middle-class people (defined as those who earn more than $3,000 per head annually) in the so-called Bric economies of Brazil, Russia, India and China, according to Goldman Sachs. The bank forecasts that this middle class will grow to more than 500m by the end of the decade and to some 1.4bn by 2020.
Within the next few years, several of the world's leading consumer goods producers are likely to depend on emerging economies for more than half their sales. Danone, the French dairy group, already receives about 47 per cent of its revenues from emerging markets, The proportion for the Anglo-Dutch Unilever is 43 per cent and for Britain's Cadbury Schweppes it is 32 per cent, while L'Oréal, the French cosmetics maker, derives 25 per cent from such regions.