Comment: Emerging markets remain key long-term play
A shopper outside a Dixy convenience store in Russia
There has been growing evidence of a slowdown in emerging markets, as we have reported in our two most recent management briefings - on Brazil and Russia - and Unilever's sales warning has put the issue firmly in the spotlight.
There is no question operating in important emerging markets like the BRICs has become more challenging. And the growth rates these markets enjoy and will enjoy will not be at the same rapid rate seen in the nineties and most of the noughties. However, consumer goods companies should stay focused and be confident in the long-term potential of these economies.
After a robust period, Brazil, Russia, India and China have seen growth slow. The cooling of the Chinese economy has hit demand for commodities, which has notably impacted Brazil and Russia. Currency devaluation has squeezed consumer incomes, particularly in Brazil and India. Lower oil prices and an easing in global trade has affected Russia, where internal investment has also fallen and inflation remains stubbornly high.
Growth in these key emerging markets is likely to remain sluggish and FMCG companies need to adapt to that slower growth. Manufacturers could look to offer "added value" while maintaining prices - as Nestle has done in Brazil. They should be more aware consumers, particularly in markets where inflation is high, are becoming more cautious and price sensitive, as in Russia.
However, all is not doom and gloom. There are opportunities for growth even in the short term. Analysts in Russia point to an increase in GDP per capita, even as national income slows. They also cite a type of Russian consumer that is "status oriented".
While Unilever's sales warning may have unnerved its investors and sent jitters through the market, not all large multinationals are seeing similar slowdowns in emerging markets. Sanford Bernstein analyst Ali Dibadj said Nestle and Danone, which both presented at the firm's Strategic Decisions conference today, "signalled no slowdown in emerging markets, suggesting company-specific issues will be at play".
Unilever CEO Paul Polman is said to have told analysts at Sanford Bernstein one-off items" had hit the consumer goods giant and indicated competition remained "tough" in emerging markets.
"Polman re-emphasised a message he has made in the past that the 10-12% growth seen in EMs in recent years was unsustainable and that this might fall to 8%...but that this growth, plus hopefully a little growth in the mature markets, would still lead to Unilever being able to grow at 5-6% in the medium term," Sanford Bernstein analyst Andrew Wood wrote today.
"Despite the poor news on Q3, we still consider that the emerging markets thesis has not changed. We continue to believe (as does Polman) that the emerging markets continue to offer a long and healthy runway for growth. We argue that it is too soon to assume that one quarter of lower growth at Unilever spells a significant downgrade in emerging markets expectation across the group. We do expect some slow-down in growth from the levels seen in 2010-2012, but we conclude that the headline fears that will inevitably come from the Q3 warning should not be extrapolated as a general and rapid deceleration in emerging markets growth."
And therein lies the point. Yes, there has been a slowdown in key emerging markets. Yes, the short-term outlook for economies like Brazil and Russia remains muted. However, focus further ahead, and the credentials of these markets - rising per capita income, rising middle class and so on - mean, even if growth will not be as stellar as ten to 15 years ago, investing in these markets is critical to consumers looking for growth.
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