It's been going on since time immemorial, but more attention seems to be paid these days to the rising economies in the "developing world." And, for food and beverage marketers, a holy grail is the rising middle classes in countries such as China and India.
"Heinz is strategically focused on accelerating our growth in emerging markets like Brazil, China and India because these countries have higher birth rates, increasing numbers of middle-class consumers and growing economies," says Michael Mullen, vice president of corporate & government affairs for H. J. Heinz Co. While it's based in Pittsburgh, Heinz claims to be "the most global U.S. food company." And with nearly two-thirds of its sales coming from outside the U.S., that's no exaggeration.
"Emerging markets have become the primary growth engine for Heinz and are on track to generate more 20 percent of total company sales [about $2.5 billion] this year [fiscal 2012], more than double their contribution in fiscal 2005," he says.
A report from the Wharton School (of business) at the University of Pennsylvania states: "A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers." (Learn more about the report at The New Global Middle Class: Potentially Profitable -- but Also Unpredictable)
"…that tailor products," the report says. That's the key point. For some products and some emerging-markets consumers, a bag of Lay's potato chips or an American-style fried chicken leg is perfect as-is. For other markets, maybe the chips should be namkeen (Indian fried dough strips). And maybe they should carry the Kukure brand rather than Lay's.
The World Bank estimates the global middle class will grow from 430 million in 2000 to 1.15 billion in 2030. In 2000, developing countries were home to 56 percent of the global middle class, according to the Wharton School report, but by 2030 that figure is expected to reach 93 percent. China and India alone will account for two-thirds of the expansion, with China contributing 52 percent of the increase and India 12 percent, according to the World Bank.
The world's middle class has, until recently, been concentrated in Europe, North America and Japan. In the 1970s and 1980s, countries such as South Korea, Brazil, Mexico and Argentina also built sizeable middle-class populations. "Nowadays, it's China and India," says Mauro Guillen, a Wharton management professor.
"The driver is economic growth. As the economy expands, the domestic market starts to become bigger, and it is typically a middle-class market."
As a result, multinationals that so far have viewed developing nations largely as a cheap source of labor are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods. "Countries like India consist of young consumers who are ambitious and save quite a bit, but are also willing to spend on small luxuries like Western brands of consumer packaged goods," says Jagmohan Raju, another Wharton marketing professor.
The Chongqing plant is the first food & beverage plant in China and the first international PepsiCo site to receive LEED gold certification.
China is expected to become the world's third-largest consumer market by 2025, as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute (www.mckinsey.com/mgi), the consulting firm's independent economic research arm, projects China's middle class will increase from 43 percent of the population today to 76 percent by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term," says Diana Farrell, the institute's director. "China has maxed out on the input model."
The institute projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth.
"Clearly this broad expansion of a middle class with discretionary income to buy more than life's necessities presents a remarkable opportunity for multinational corporations," the Wharton report continues. The middle class in any country is at the forefront of consumption and leads important business trends. Marketers must pay close attention to this population to reap the benefits.
At the same time, even though millions of individuals are now reaching middle-class status in their own countries, they still do not have the same levels of income as their counterparts in mature economies. To capture customers in these markets, companies must create new products that take into account price sensitivity.
For example, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets, the Wharton report notes. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor -- a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West. "Coca-Cola customized a product for lower price points so that [those consumers] can have a taste of the product. As the economy grows and more people join the middle class, demand will keep increasing," says John Zhang, another Wharton professor and co-author of the report.
According to Farrell, distribution is an important consideration for companies hoping to reach the emerging middle classes. Roads and airports are underdeveloped, particularly in India, a situation that presents a significant challenge -- and opportunity -- for companies that want to create innovative distribution systems.
"If you're not planning to have more business outside the U.S. than in the U.S. market, then you're probably planning wrong," says Bill Amelio, CEO of Lenovo, the Chinese firm that bought IBM's personal computer business.
Heinz: 'The most global U.S. food company'
Heinz has become a particularly global company, especially in the past 15 years and especially under Chairman/CEO William Johnson. The company has acquired and grown businesses in China, India, Indonesia, Russia, Poland and most recently Brazil.
It uses a "buy and build" strategy, acquiring strong local brands and solid platforms in emerging markets and augmenting them with investment -- for manufacturing and distributing Heinz-branded products as well as local brands.
"We generally do not export Heinz products made at our North American factories to emerging markets," says Mullen. "Our global infrastructure enables us to manufacture Heinz-branded products in local markets for local consumers."
"Long term, China is a tantalizing growth opportunity for packaged foods because it has the world's biggest population and the second-largest economy," says Mullen. In November 2011, Heinz acquired Foodstar, a leading Chinese manufacturer of soy sauce and bean curd with expected net sales approaching $150 million this year. It gives Heinz "a dynamic growth platform in China's rapidly expanding, almost $3 billion, retail soy sauce market, where its Master brand holds a strong position, especially in southern China."
Foodstar is expected to boost Heinz's total sales in China to around $350 million in fiscal 2012. "And we see this as just the beginning in China," adds Mullen. Following the buy, Heinz also delivered on the build, opening a new Foodstar factory in Shanghai.
Thanks to that rising middle class, Heinz also has a growing baby food business in China.
In India, Heinz opened a new factory in Sitarganj in 2010 to support the growth of its Complan nutritional beverages. A new ketchup processing line recently was added in Mexico.
At the moment, however, Heinz appears most excited by prospects in South America, a region in which it had little market presence. "We are particularly enthused about our growth in Brazil after acquiring an 80 percent stake in the manufacturer of Quero, a leading Brazilian brand of tomato-based sauces, ketchup, condiments and vegetables," says Mullen.
"Quero had annual sales of about $325 million when we bought the business in April and it is off to a strong start in fiscal 2012, with expected net sales for the year approaching $400 million," he continues. "It's our first major business in Brazil, the world's fifth most populated country, and we expect it to double our sales in Latin America this year as we invest behind the brand and expand to new categories and customers."
With Quero, Heinz already gets a modern, centrally located factory in Brazil … but Heinz already is investing in a new vegetable processing line and enhancements to its other manufacturing capabilities.
Tyson: Chicken for China
For Tyson Foods Inc., the door to China probably was opened by Kentucky Fried Chicken. KFC first set foot in the No Longer Sleeping Dragon in 1987 and was quickly embraced. It has more outlets in that market than any other U.S. food chain, even McDonald's. Winner, winner, chicken dinner. The chain proved Chinese have a fondness for chicken.
"We're in China not for just one customer, but for international growth opportunities," says Bill Teeter, senior vice president of Tyson's Asia Pacific international business. "According to our research, annual per capita consumption of meat in China is about 20 lbs.; it's about 89 in the U.S. Because China is so densely populated, any upward movement in meat consumption with the Chinese population could be a boon to our international business. If consumption increased by 10 lbs. per person, it would be equal to all of Tyson's U.S. production."
It's true all of the major quick service restaurants doing business in China are growing, "so of course we want to service them," he says. But Tyson has a number of other assets to contribute. In a country used to buying chickens hanging in open-air markets "there is a growing concern about food safety among the middle class, so Tyson provides safe, high-quality poultry for foodservice and retail."
The middle class also is gravitating from rice toward nutrient-dense foods, such as meat and poultry. And with both dad and mom working in many urban Chinese families, the convenience of prepared or at least semi-prepared meals is becoming prized. Sound familiar?
Tyson's business strategy has been joint ventures. The first, was Tyson Dalong, formed in 2001 to produce fresh chicken to be sold under the Tyson brand name for the Shanghai retail market. Ditto for Jiangsu Tyson Foods. Shandong Tyson Xinchang Foods is a fully integrated chicken and duck operation.
Three years ago, there were about 400 Tyson team members in China, says a spokesperson. There will be 10,000 by the end of this calendar year.
An interesting side note is China's appetite for chicken feet, or "paws." They're virtually worthless here in the U.S. but are considered a delicacy in China, often commanding a higher price than white chicken meat. They're become a lucrative export product for Tyson U.S.
Tyson's also active Brazil, Mexico and India. "Growth in our joint venture in India is very good," says Teeter. "We have two complexes and will soon upgrade both and build a third. Much like China, consumers and quick service restaurants there are clamoring for high-quality, safe products."
PepsiCo: India, of course
PepsiCo Chairman and CEO Indra Nooyi is a native of India, which may be incidental to that country's growing importance to the largest food company in the U.S. and Canada. But Nooyi's background may have much to do with her company's strategy in that market.
PepsiCo has been much more than an importer of Western food concepts, an investor in the country or an acquirer of Indian companies. It has become a godfather (godmother?) to a country that is at once the second largest in the world (at 1.2 billion people, a scant 120 million behind China) and one of the poorest.
According to a 2005 World Bank estimate, nearly 42 percent of the Indian population falls below the international poverty line of $1.25 a day. According to a new UN Millennium Development Goals Report, as many as 320 million people in India and China are expected to come out of extreme poverty in the next four years, with India's poverty rate projected to drop to 22 percent in 2015.
PepsiCo apparently sees in those numbers both opportunity and a social mission.
PepsiCo has been in India since 1989 and last year saw revenue of $1.5 billion from that market, according to reports. PepsiCo India is the country's largest food and beverage business. Products range from its namesake cola to Lay's, Tropicana, Quaker and Gatorade products to Kurkure (a fried snack) Nimbooz (a soft drink) and Aliva (chatpate crackers with wheat and daal). Headquartered in Gurgaon, Haryana, PepsiCo India directly and indirectly employs about 150,000 people and operates 36 bottling plants (13 company-owned, 23 franchisee-owned) and three food plants.
Nimbooz is an interesting case in point. It was launched in 2009 as India's first nationally available packaged nimbu pani (lemonade-like drink). It capitalizes on the familiarity with and high consumption of unpackaged/home-made nimbu pani. Even though it's churned out in factories, it remains authentic by using the traditional matka (earthen pot) and squeezer in the manufacturing process.
PepsiCo also has a 50-50 joint venture with Tata Global Beverages, a subsidiary of one of India's largest companies, to develop and market beverages in the health and wellness space.
In 2008, Nooyi committed $500 million of investment in its India operations over the succeeding three years to triple revenues over the next five years. The investments were to be spread among manufacturing capacity, market infrastructure, environment sustainability initiatives, R&D, new product development and agriculture. PepsiCo estimated the investment would contribute 50,000 new direct and indirect jobs to the Indian economy.
PepsiCo also created a pilot program in India in support of the United Nations' Millennium Development Goal to eradicate extreme poverty and hunger by 2015.
"Millions of people – here in India and elsewhere – suffer major deficiencies of key micronutrients, like iron, vitamin A and zinc, which lead to serious health problems," said Mehmood Khan, PepsiCo's chief scientific officer. "PepsiCo is working toward developing nutritious fortified products to reduce micronutrient deficiencies in select developing countries, to address the huge challenge of malnutrition among the poor."
This all fits perfectly with PepsiCo's global commitment to sustainable growth, "Performance with Purpose," which works on four planks: replenishing water, partnering with farmers, converting waste to wealth and nurturing healthy kids.
Water has been a key subject, with the company finding ways to reduce its water use, improve its treatment of wastewater and improve water quality for all Indians. From 2003-2008, the company cut its water use by 55 percent. Perhaps more importantly, the PepsiCo Foundation, working with Water.org, established a $1 million grant and loan program for public water and sanitation improvement projects.
In 2009, PepsiCo India achieved a significant milestone, by becoming the first business in the PepsiCo global system to achieve "positive water balance," a fact validated by Deloitte Consulting.
However, it's not all about helping the poor in India. Here, too, is a rising middle class as well as a generation of highly educated young people with disposable incomes and Western tastes. PepsiCo India developed a slim can for Pepsi Cola, "that … embodies the individual spirit that drives today's young adults." Digital and social media built buzz around the new can. The company says the efforts helped increase local Pepsi volume by 5 percent.