Mintels Brockman said companies had only "scratched surface" of China

Mintel's Brockman said companies had only "scratched surface" of China

just-food's Confidence Survey asked for your views on the emerging markets and, in particular, which of the BRIC economies you expected to offer the greatest opportunity in 2013. While the BRICs continued to offer opportunity for most multi-nationals, other markets such as Indonesia and Vietnam are emerging as focus markets for the future.

As a topic of interest for most multinationals, emerging markets was inevitably a focus of our survey. We asked which of the BRIC markets you in the food industry expect to offer the greatest opportunities for growth during 2013. China remained the most popular market of choice for 33% of respondents.

Answer Options Response Percent
Brazil 26.7%
Russia 19.8%
India 20.8%
China 32.7%

Brazil and India were second and third choice, with 21% and 27% of respondents opting for these markets, respectively, above Russia.

Western FMCG companies continued to expand in developing markets in 2012 through acquisition and organic investment.

A desire to build in emerging markets was central to both Kellogg's move to buy Pringles and Nestle's deal to acquire Pfizer's baby food business. PepsiCo and Mondelez International were among those companies expanding production and R&D plants in markets like China and India.

However, towards the end of 2012, there were some murmurs of concern in the FMCG industry about slowing economic growth in China. GDP in China increased by 7.8% in 2012, much stronger than many markets in the West but slower than in previous years.

Slowing economic growth, combined with increased competition as foreign investment poured in and domestic companies grew, puts into question the future potential of China to remain the number one choice for investors. Does China still present the opportunity it once did?

With economic growth having slowed somewhat, many foreign players that poured into the country looking to capitalise on the growing middle class, have struggled to find a niche and found themselves doing a u-turn.

"It has become a much more difficult country to operate in," Chris Brockman, senior global food and drink analyst at Mintel, told the webinar just-food held to discuss the results. "Local companies have upped their game and forced out the Western more international brands."

Brockman insists China is still very much the leading candidate of the four BRIC economies. He says that, although in the longer term the market will face competition from a growing interest in Africa and emerging Asian countries like Indonesia and Vietnam, there is still opportunity in China.

"There are high levels of growth seen in those countries but they are a long, long way behind the situation China is in at the moment in terms of consumer base and their relative wealth. And also, most Western players haven't even scratched the surface with China, there are dozens of major cities in China that have massive populations that are relatively untouched."

With the BRICs remaining clear focus markets for most multi-nationals, the competition in these economies has, not unexpectedly, ramped up in recent years. As a result, it has become increasingly important for Western food manufacturers to offer something that will allow them to stand out from the competition.

The competition in question, however, is not only from major foreign players but from an emergence of local players. If Western companies are to make an impact in such a crowded and intensely competitive market such as China, they may need to look at areas such as food safety, provenance and product history if they are to win over the consumer base they desire. China has had its fair share of safety scares and it would be a wise foreign investor that looks to capitalise on these. Leveraging the strengths and product quality of Western brands is where these markets could have an advantage over domestic rivals when targeting the affluent consumers in emerging economies.

Domestic firms, however, are investing heavily in their supply chain and food safety. And interestingly there have been one or two examples of major companies from the emerging markets buying businesses in the West to support that investment back home - Bright Foods' acquisition of a majority stake in Weetabix last year being a prime example.

According to Mintel, in key emerging markets, per capita spend on food and drink products is growing fastest in China, with expenditure reaching $500 in 2012. This is still way below the average spend in developed markets such as the UK and the US but it is being driven by the steady growth of a middle class with a greater disposable income. Mintel predicts this consumer base will have increased by around 80% between 2010 and 2015.

Should Western companies focus on the premium end of the market if they are to win over consumers?  Brockman suggested this is where a lot of the success has been had to date, but points out that some of the major companies, such as Nestle and Unilever, have struggled in some of the more mainstream markets to gain traction with their higher-end brands.

"Nestle and Unilever in the ice cream market have come up against some strong local competition. A couple of major dairy producers in China are very active in ice cream and so [Nestle and Unilever] have really struggled to cater to the local interests of consumers in terms of flavour and format."

In Brazil, which will be in the spotlight in the next few years with next year's football World Cup and the 2016 Olympics being held in the country, the food sector is less sophisticated than its drinks market, which offers a more premium end. In food, manufacturers are finding the focus is on trading up to what the Western consumer would consider standard offerings.

The same is true in India, according to Mintel, where consumers are trading up from low cost premium oil to the more premium olive oil, for example. "In some of these markets we're seeing a real strong shift from commodity foodstuffs to prepared food formats. Often Western-style prepared food formats. In India, prepared foods are forecast to overtake that of commodity formats between 2013-2016, with average growth of almost 14% per annum," Brockman said.

For those companies that have been operating in emerging markets for years, if not decades, more attention is being put on whether their businesses in those countries are now contributing to their profits.

Andrew Cosgrove, global consumer products lead analyst for Ernst & Young, says, in some cases, emerging markets can now account for half a company's sales, meaning they now play a significant role in profitability.

"Ten or 15 years ago, emerging markets were 10-20% of these companies - now they're 40-60% of these companies. You can't just chase growth you have to chase profit as well. They have a material impact on the bottom line," Cosgrove told the Consumer Analyst Group of Europe conference last month. "At the same time, the economic fragility in mature markets which is really pushing companies to need their emerging markets units to perform in a way they haven't had that pressure in the past."

The emerging markets are proving central to companies' international strategies. FMCG businesses in the West that perhaps were unsure about investing in markets like China are being urged to tap into the country's growth.

Broadly, as domestic markets mature and growth becomes hard to come by, FMCG companies continue to place importance on international growth. In the just-food confidence survey, we asked whether companies are looking to increase exports during 2013.

Answer Options Response Percent
Yes 50%
No 21.2%
Remain the same as 2012 28.8%

The results indicated 50% of companies said they would increase their investments in growing exports this year. And, for industry watchers, emerging markets will be a key destination.