Chinas economic blip does not detract from market potential for FMCG companies

China's economic blip does not detract from market potential for FMCG companies

The impact of the global economic crisis can be seen in consumer behaviour the world over and last week it was announced that - as expected - China's economic growth rate slipped once again. This has raised concerns that companies attempting to offset weakness in developed economies by tapping into the potential of this emerging world powerhouse could be in for a tough time. Nevertheless, Katy Askew suggests, the underlying growth drivers in China mean that the "sleeping giant's" potential remains vast. 

China's economy cooled in the July-September quarter to its slowest pace of growth since the beginning of 2009. The country's GDP grew by 7.4% in the period, data from the National Bureau of Statistics data revealed last week. This represents a slowdown from the previous quarter's GDP growth rate of 7.6%. 

However, economic indicators turned increasingly positive as the three months progressed. Significantly for those operating in the FMCG space, retail sales picked up towards the end of the three months - increasing by 14.2% in September, compared to August's expansion of 13.2%. This has prompted economists to suggest the Chinese economy will rebound slightly in the final quarter of the year, with GDP growth expected to total a still relatively depressed 8%. 

China's slowdown this year is indicative of the immense strain the financial crisis has placed on global economies. And the news has raised investor concerns high-growth markets such as China and India might not be the growth engine for multinational FMCG companies they had once been thought. 

So, when Nestle announced a lacklustre set of results yesterday, many commentators focused on the company's slowing growth in its Asia, Oceania and Africa region. Sales growth in the AOA region slowed to 9.4% in the first nine months of the year from an 11.6% pace in the first half. 

To some, the weakening performance comes as evidence that a poor consumer environment in markets like China will dampen the growth prospects of international food giants. 

Nestle management would beg to differ and the firm insisted it is maintaining, and even increasing, its commitment to China with plans to double its research and development capabilities in the country next year. 

The company revealed it will open two R&D centres, located in Xiamen and Dongguan. The facilities will support the development of Nestle brands in the region as well as its joint venture businesses in the country, Yinlu and Hsu Fu Chi. The centres will also work with R&D institutes based in other countries in the Nestle group, the company revealed. 

"The two planned R&D centres in China will be part of Nestlé's R&D network and therefore supporting all brands/products on which the corresponding research may be applicable," a spokesperson for the company told just-food. 

Speaking during a conference call following the release of Nestle's third-quarter results, Nestle China chief Roland Decorvet emphasised the importance Nestle attaches to the development of products designed to meet local tastes. "Switzerland never had any colonies and we are certainly not going to behave as colonists now," he said. 

Decorvet emphasised Nestle remains fully-focused on expanding its business in China and continues to believe in the underlying demographic factors and consumption trends driving the country's growth story. 

"Some people wonder how sustainable is China's growth, especially in the food sector," Decorvet observed. "The average consumption per capita in China is one of the lowest of any country and if you assume that the future growth of the whole food and beverage sector will be 12% over the next three years - which is by the way substantially lower than it has been over the last three years - than in three years time the average food and beverage consumption in China per cap will still be less than half what it is today in Mexico or Russia."

He added: "With 1.3bn stomachs the potential for China is tremendous. We are going to keep investing in this country."

Likewise, fellow food major PepsiCo reported mixed third-quarter results in the region. The ending of franchise agreements in China hit net sales, which were down 21% in the group's Asia, Middle East and Africa region.

Nevertheless, PepsiCo CEO Indra Nooyi was bullish on longer-term potential of the country and PepsiCo's ability to take advantage of this opportunity. 

"If you are on the ground in China, you don't really sense the slowdown. If GDP slows down from 9-10% to 7-8%, from a country's perspective, when you're trying to get more and more people out of unemployment into employment and then trying to address underemployment, it matters a lot. But from a consumer product perspective, especially on small ticket items, which are very basic food and beverage products, you don't really see the impact in our categories," Nooyi said during a conference call with investors. 

Nooyi emphasised that, on her visits to China, she noted an air of "buoyancy" and "optimism".

"Of course, everybody would like the growth to go back to 9% or 10% in China, but at 7-7.8%, I still think China is performing at the peak of its game versus all of the other countries in the region or in the world today," she commented. 

Torsten Stocker, head of the Greater China consumer and retail practice at consulting firm Monitor Group, concurs with Nooyi's assessment the food sector is somewhat isolated from the slowdown hitting the Chinese economy. 

"It is quite natural that daily goods are not as affected as luxury items for example," Stocker tells just-food. "Most food and beverage brand owners in China that we work with or speak to are seeing lower year-on-year growth rates, but are still growing at a level that is the envy of their colleagues in other markets."

However, Stocker concedes Chinese consumption patterns for food products are not immune to the effects of the economic slowdown. For example, Chinese consumers are less willing to trade up to premium products or trial new products, he suggests. 

"Consumers are less keen to trade-up to improved versions of a familiar product, or try out a completely new product, making launches more difficult. This is often also impacted by brands adjusting their marketing spend to reflect lower sales," he observes. 

However, even as some of the largest and - certainly in Nestle's case - strongest performing food multinationals report slowdowns in the country, it is clear they intend to continue to pour investment into China as they battle for a share of what still looks set to become the world's largest grocery market.