Premium Noodle Makers – How To Keep More Profits At Home

Courtesy of The Financial Times, an interesting look at how emerging market consumers may think of brands as their wealth grows:

As China, India and Indonesia become more wealthy, more of their consumers hard-earned cash could find its way overseas.

This is not about the most wealthy fleeing their homelands or investing their money abroad – but about what the massed ranks of an emerging middle class will buy for fun.

Foreign brands dominate consumers’ minds when they think of satisfying their “aspirational needs”, according to Credit Suisse, which commissioned AC Neilsen to survey 12,000 consumer across emerging markets, including 6,600 people in China, India and Indonesia.

In China, for instance, people turn to foreign makers of watches, phones and perfume for more than 90 per cent of their purchases of such things. For cars, more than 86 per cent will be foreign. In Indonesia, 95 per cent or more of all branded clothes, phones, cars, perfume and watches are foreign. In India, the picture for many goods is more balanced, but perfume and handsets are exclusively foreign, while more than half the sportswear, watches and clothes bought are also foreign.

These kinds of findings are of huge importance both to investors and development economists. As consumers grow more wealthy, their discretionary spending shoots up rapidly. The companies that own the intellectual property behind or the brands in front of the aspirational goods they buy will start to make much greater profits on these higher margins.

Stock pickers are constantly looking for the next big thing in markets like China, which is a good part of what the Credit Suisse report is for. But for economists the interesting question is about the creation and retention of wealth within a country – if too much of the profits of economic activity leave a country, its overall development will suffer.

Karim Salamatian, one of the authors of the Credit Suisse report, reckons the stage is set for a “battle of the brands”. For domestic brands, there are two key issues. First, can they protect their market share in staple goods against large multinationals with their broader product portfolios and huge advertising budgets? Second, can they start to convince local consumers that they are also able to produce more desireable products – on a par with international brands?

“We talk about ‘premiumisation’, which is consumers trading up into higher value products,” Salamatian says.

Local brands are aware of these challenges, he says. “Across the region, the makers of diapers, noodles and coffee are all trying to make moves into more premium products.”

In China, the report highlights companies like Tingyi, a noodlemaker, drinks company and bakery; or Hengan International, a maker of sanitary napkins, diapers and other tissues. Both come among several examples of businesses where investors do not yet appreciate the potential long-term brand strength, Salamatian says.

Foreign brands he pointed to that are well placed at the start of the consumer awakening in Asia were Budweiser, Puma, Estee Lauder, Apple, Samsung and perhaps most surprisingly Tiffany. In China, more than 80 per cent of the jewellery business is taken by local names, Chow Tai Fook and Chow Sang Sang, for example. But in a business where the goods themselves are unbranded, it can be hard to establish a new name – but Tiffany “is making real inroads”, he says.

“Can foreign brands continue to leverage their premium name as consumer discretionary spending accelerates? Advertising and promotional spending is very easy for foreign brands, but distribution is the challenge.”

China is full of vast cities that most people have never heard of – the development teams of Tiffany and lot of other businesses will be getting increasingly familiar with their airports and glitzier malls in the next couple of years.

This entry was posted on Thursday, January 31st, 2013 at 6:17 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.