Is China Eating Our Lunch?
Two Harvard professors penned books this year describing the rise of the non-Western world and the growing significance of megacities. These topics can spark endless debate over America's potential decline, but savvy investors will spot opportunities in up-and-comers like China. American companies create powerful brands and products tailored to a rapidly urbanizing world. For the food and beverage industry, overseas markets look like an international tasting menu.
The rise of the rest
In Niall Ferguson's book Civilization: The West and the Rest, he claims the West rose to power through "killer apps," including competition, science, property, modern medicine, consumption, and work ethic. Currently, the "rest" of the world is playing catch-up by "downloading" these apps at an astounding pace. From his perspective, globalization and outsourcing have strengthened economies like China and India, but the book serves as a wake-up call of sorts for the West.
The effects of Ferguson's killer apps can be seen in the cities of the developing world. In Edward Glaeser's book Triumph of the City, he concludes cities are thriving because "urban density provides the clearest path from poverty to prosperity." This shift from remote villages to megacities shows no signs of slowing. Take a look at these statistics:
- The World Health Organization predicts that the urban population in developing countries will double by 2050.
- A market research firm estimates that 58% of food is consumed by developing countries currently. It expects this figure to reach 72% by 2050!
This is explosive population growth, but what does it mean for food and beverage companies? Let's focus on four major trends:
As China prospers, American companies profit
In a recent Financial Times interview, Coca-Cola's (NYS: KO) chief executive, Muhtar Kent, voiced frustration over the uncertain business climate in America, but praised the developing world:
They're learning very fast, these countries. In the west, we're forgetting what really worked 20 years ago. In China and other markets around the world, you see the kind of attention to detail about how business works and how business creates employment.
However, he doesn't seem deterred by a sluggish domestic economy. Kent claims that American companies can "crack the code for growth" overseas, which ultimately benefits shareholders and creates jobs. Coke performs exceptionally in this area, capturing an estimated 21.4% of the international soft drink market. In the first six months of 2011, Coke sold more than 1 billion cases of its products in China, twice the rate of sales from five years ago.
Meat, it's what's for dinner
In the past 20 years, China's appetite for meat has doubled. To feed its livestock, China has been importing crops like corn, wheat, and soybeans at a rapid rate. From 2005 to 2010, China went from the fifth largest U.S. export destination to No. 1, and agricultural exports to China grew 235%. This shift from a carbohydrate diet to a protein diet will be a boon for agribusiness giants like Archer Daniels Midland (NYS: ADM) and Bunge (NYS: BG) . Archer Daniels noted in its recent 10-K that "Soybean protein meal demand improved, particularly in Asia." Likewise, Bunge's sales to Asia grew 14% from 2009 to 2010.
The hurried consumer
The U.S. is not only exporting commodities, it's exporting a lifestyle. Standard & Poor's recent report described increasing "demand for processed foods ... especially in urban areas, where busy consumers seek some of the same features (e.g., convenience, healthier choices, variety, and quality) that are valued in the US." Companies like PepsiCo (NYS: PEP) , owner of Frito-Lay snacks, stand to benefit from this trend. The stock analysis site Trefis estimates that Frito-Lay currently controls 37% of the international salted snacks market. Likewise, Kraft Foods (NYS: KFT) , which acquired LU biscuits and Cadbury in recent years, has seen its global market share increase from 9.7% in 2007 to 13.7% in 2010. PepsiCo and Kraft are well positioned to tap into emerging market growth.
Show me the brands
City-dwellers with rising incomes tend to be more brand-conscious than their rural neighbors in countries like China. Fortunately, as China.org.cn pointed out, "Chinese people have grown to trust American products." The article describes how American firms often produce better quality goods than Chinese firms. For example, when a Chinese food manufacturer added the harmful melamine substance to its infant formula in 2008, Chinese families quickly switched to trusted American brands like Enfamil, a Mead Johnson (NYS: MJN) product, and Similac, an Abbott Laboratories (NYS: ABT) product. China currently has some kinks in its food supply chain, and U.S. companies are taking advantage.
Food for thought
So is China eating our lunch? Perhaps. But the American food and beverage industry isn't complaining. Ferguson's and Glaeser's studies could indicate a tilt in global power, but this tilt presents opportunities for competitive American businesses. The ongoing trade of high-quality American products with foreign consumers is a two-way street, providing benefits for all parties, including investors!
My research indicates the companies above will thrive because of a growing global appetite, but feel free to dig deeper. Read this excerpt from Glaeser's book or listen to Niall Ferguson's perspective on a recent Motley Fool Moneypodcast.
A free lunch?
So you may be convinced that emerging markets will greatly benefit a number of American companies, but you're not sure which brands will continue to be the strongest going forward. There is another way to play this trend then, by scooping up shares of our favorite broadline retailer for emerging market growth. The Motley Fool has placed a strong bet on "The Motley Fool's Top Stock for 2012," and we think it will dominate retail in one emerging market. Thousands have requested the report, and you can access your totally free copy by clicking here now. Don't worry, it's 100% free of charge.
At the time this article was published Fool contributor Isaac Pino does not own shares in any of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.The Motley Fool owns shares of PepsiCo, Coca-Cola, and Abbott Laboratories.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola, PepsiCo, and Abbott Laboratories.Motley Fool newsletter serviceshave recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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