China and India Are Hungry … for Your Products

Now, the two most populous countries also are the fastest-growing; their burgeoning middle classes are developing Western cravings.

By Dave Fusaro, Editor in Chief

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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.

Chinese-Tyson"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?

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