Developing Existing Markets
Regional tastes and cultural differences have dictated in the past where multinational food manufacturers and retailers aimed to grow, with many companies purposely overlooking markets deemed too foreign.
But all that is changing as increasingly the world becomes a melting pot, with consumers in all regions developing a healthy appetite for new tastes and flavors. Along with it has come a blending of trends in retail formats and technological innovation.
"Now these barriers are breaking down. There's much more of an inclination to look at products like Kombucha that's now getting legs in the United States," says Kevin Burke, founder of Trinity Capital, with offices in Los Angeles and Boston.
Food sales in general are growing slowly worldwide due to demographic trends, such as smaller household sizes in Europe and Asia and the aging of the population in many areas. Yet organic and natural foods are outpacing other food categories, and ethnic products are gaining in the U.S. and Europe.
For companies like Mondelez International, which markets primarily cookies, chocolate and snack products, such as Cadbury, Chips Ahoy and Tang, in Europe and emerging markets, the trends mean greater uncertainty. The company's full-year 2013 results failed to meet analysts' forecasts, with operating income declining 26 percent in Latin America, 22 percent in Asia Pacific, 25 percent in Eastern Europe, the Middle East and Africa and 4 percent in Europe from the prior year, Mondelez reported. The company's total revenue rose 0.8 percent to $35.3 billion. Mondelez is now forecasting sales growth of 4 percent this year, due in part to a cooling of the economy in China. The company's stock price fell 5.3 percent in mid-February on the news, after rising 40 percent in 2013, Crain's Chicago Business said.
But Mondelez is hardly giving up. It plans to spend $350 million to construct a cookie plant in Mexico and $190 million in India for a new chocolate factory. The company is basing its investments on strong underlying momentum in many emerging markets.
While CEOs are more optimistic about the global economy than they were in 2012, they "are also challenged to decipher some very mixed signals about the global economy," according to PricewaterhouseCooper's 17th Annual Global CEO Survey. The confusion stems from an uptick in the growth of advanced economies and a slowing of growth in some emerging markets. What's more, three out of four CEOs are concerned about government "overregulation," according to the PwC survey.
One result is a renewed focus on familiar countries where CEOs already have established business, the PwC survey says. Just 14 percent of responding CEOs said they planned to explore new geographic markets, PwC says.
One factor is resource scarcity, where the larger companies can't find the ingredients they need for a particular food or beverage, says Leanne Sardiga, retail and consumer deal leader at PwC in Chicago. "What they're having to do is develop their supply chain very strategically even if they don't own it," she says.
U.S. products generally sell well in Europe and emerging markets, in part because they're perceived to be of higher quality. But maintaining that reputation requires solving supply chain challenges to ensure ample supply.
The trends are fueling merger and acquisition activity, with multinationals weighing what products to focus on and which ones to divest, Burke says. "When this business slows down as it has for the last few years, companies get really particular as far as what they're going to keep in their portfolios," Burke says. "It cuts both ways with [multinational companies such as] Nestlé saying, We don't think something is going to grow a lot. We don't want it to take up share of mind with our executives." Nestlé recently sold its Australian ice cream brand and two French water brands to focus on higher-performing businesses, the Wall Street Journal said Oct. 1.
"When this business slows down as it has for the last few years, companies get really particular as far as what they're going to keep in their portfolios."
ABOUT-FACES IN RETAIL
On the retail side, uncertainty in emerging markets has spurred an about-face by some large chains, with Walmart abandoning its expansion plans in India and modifying its new store activity in China. In October, Walmart executives told Bloomberg the company would open 110 stores in China from 2014 to 2016, while shutting as many as 30 under-performing locations. The changes come as the retailer is facing increased competition from regional chains Sun Art Retail Group and China Resources Enterprise Ltd., while it still sees promise in the world's second-largest economy, Bloomberg reported.
In December, Tesco Plc said it would become the first foreign supermarket in India after it agreed to purchase a 50 percent stake in Tata Group's Trent Hypermarket Ltd., Reuters said. India relaxed its regulations in September 2012, allowing foreign investment in supermarkets.
Meantime, retailers in Europe are adding natural and organic foods to their private label brands and in-store prepared foods, as they emphasize healthy living. Private label products gained popularity globally in 2013, due largely to the sustained malaise in the economy, says Charisse Jacques, partner at Kalypso in Beachwood, Ohio. "Almost all of the major stores [Ahold, Metro, Carrefour and Albert Heijn] have a huge focus on winning with private label," Jacques says. Because the margins of private label products tend to be higher than branded items, retailers are investing in innovation and marketing to make them stand out and draw a following.
"Almost all of the major stores [Ahold, Metro, Carrefour and Albert Heijn] have a huge focus on winning with private label."
European retailers are moving away from hypermarkets to smaller formats that allow them to be closer to the consumer, Jacques says. "They're innovating how they interact with the consumer," she says.
A growing consumer preference for quick trips is driving sales at convenience stores. Sainsbury, which saw its c-store sales increase 18 percent in December compared to 0.2 percent growth for the company as a whole, announced plans to open its 594th convenience store. At its supermarkets, Sainsbury is among those retailers offering discounts, such as half-price offers, to drive traffic and increase basket size, the Daily Mail reported. Overall, the top four supermarkets in the UK–Tesco, Asda, Sainsbury's and Morrisons–lost market share in the fourth quarter, while discounters Aldi and Lidl picked up share as a broader segment of consumers shopped at the stores.
Besides new formats, retailers are adding digital signage, e-commerce and delivery services, Jacques says. In the UK, Waitrose in January announced plans to open a second fulfillment center for its e-commerce operations, allowing it to double its delivery capability, The Guardian said.
In the Netherlands, at Albert Heijn stores, about a quarter of shoppers now pay for their purchases with mobile phones, says George Young, CEO of Kalypso. "It speeds the checkout process. Particularly for younger Europeans, that's how they pay for things. It's mixed with how European life is. You can swipe your cellphone to check out books, to get on a train. For most consumables you buy, you never reach for your wallet, you just use your phone."
The digital trend extends to Mexico, where Walmart has a 92 percent market share in home delivery of groceries. In February, the giant announced plans to triple the number of stores offering its Superama delivery service, the Wall Street Journal said.
Many of the latest trends capitalize on the growing affluence of consumers. PwC indicates the number of middle-class consumers is expected to increase dramatically during the next 15 years, as better-paying jobs in emerging markets are created and the standard of living improves.
Food safety remains a concern in China, where consumers are concerned about contamination. They are fueling demand for imported food from Yihaodian.com, which had about 57 million users in 2013 compared with 29 million in 2012, ZDNet.com reported. Walmart owns a 51 percent stake in the company, which generated $1.89 billion in sales in China in 2013 and is opening new distribution centers to keep up with demand.
But food scandals aren't limited to China, as Europe learned from a horsemeat contamination incident in 2013. And in Japan, a frozen food worker at a subsidiary of Maruha Nichiro Holdings, Japan's largest seafood company, was arrested in January for alleged food contamination after the chemical malathion was detected in frozen food linked to illnesses in more than 2,800 people, the Associated Press said.
In Germany, retailers such as mid-market players Edeka and Rewe along with giant Metro have reacted to the new concern about food safety with new strategies emphasizing upscale products, such as organic meat, Reuters reported. As a result, they are stealing share from discounters, which have commanded as much as 44.5 percent of the market in 2008. Now that share is about 43.9 percent, Reuters said.
Another development spurred by the horsemeat scandal is a new emphasis on transparency throughout the food chain, with food manufacturers and retailers adding information technology.
Technological advancements also are fueling improvements in logistics and distribution in international markets. Increased smartphone penetration means new reliance on social media marketing, mobile applications and B-to-B developments that can improve distribution and logistics in emerging markets. The PwC survey indicates 25 percent of CEO respondents said technology would be "the next big thing" to impact their business over the next 10 years, while 19 percent pointed to the role of government, 10 percent selected consumer behavior, 9 percent said innovation and 7 percent said sustainable sources of energy.
For multinational CPGs targeting emerging markets, distribution challenges can hamper their growth, says Girish Ramachandra, vice president and head of products and platforms for consumer goods retail at Infosys, which provides cloud-based technology platforms to Procter & Gamble and other CPGs operating in emerging markets. "One of the biggest challenges is actually an opportunity. The largest CPG company in India would be covering 30 percent to 35 percent of the population. A large amount of the population is underserved. They have the money to buy it, but they can't get it." The lack of food storage in many areas requires frequent deliveries, but managing them can be problematic without technology.
"One of the biggest challenges is actually an opportunity. The largest CPG company in India would be covering 30 percent to 35 percent of the population. A large amount of the population is underserved. They have the money to buy it, but they can't get it."
"Distribution in emerging economies is very different from the U.S. and Europe. There are no large retailers," but about 9 million small ones, Ramachandra says. Infosys is now piloting a text message system allowing brands to communicate with distributors more easily. "You can publish you have demand for a product through a text message," he says.
The company also offers a cloud-based ERP system for use with laptops or tablets to assist CPGs in automating sales, computing share of shelf, and managing inventory. "'What is the percentage of products covered by my brand?' is a good indication of market share. Since there are millions of outlets, you [collect information on] a handful of stores and then monitor the market," he says.
With a better understanding of what is selling, CPGs can adjust their product mix to reflect the hot sellers, improving their relationship with distributors. "What it really means is consumer satisfaction. They will find the product when they are looking for it," he says.