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GLOBAL INVESTOR 3.06 Switching — 65
mont) are strong product categories as their monetary value is
easily identifiable. It is also not surprising that leather goods (Louis
Vuitton, by LVMH) and accessories with strong recognizable brands
are growing rapidly. Depending on the rate of urbanization and
wealth creation, we expect that the mix of emerging market consumers,
especially in China, will gradually rebalance in two ways.
The importance of male shoppers should diminish in favor of women
and younger customers, as economic growth will translate into
more social independence and disposable income. The development
of local infrastructure (malls, transport) should benefit domestic
sales, in particular accessories and ready-to-wear.
Premiumization is paramount to spirits producers
In emerging markets, there is continuing trading up from local beer
to international beer and champagne and from local spirits to international
branded spirits, especially Scotch Whiskey and Cognac.
We expect China and Russia to remain the key growth regions,
driven by premiumization and rising per capita spending. SAB Miller,
InBev, Diageo and Pernod Ricard all earn a significant part of
their sales in emerging markets, ranging from 80% down to 25%,
respectively. We believe that this share is likely to further increase,
driven by a still high growth differential between emerging markets,
particularly Asia (spirits: +3.3% CAGR 2003 – 2008, Euromonitor),
Latin America (beer: +2.7%) and Eastern Europe (beer: 4.8%),
and developed countries (e.g. Western Europe, +0.3% for spirits
and +0.1% for beer). We note that volatility in sales volumes in
the emerging markets is likely to be higher than in the developed
countries.
The main growth driver at Coca-Cola and PepsiCo
Emerging markets have been very important for Coca-Cola and
PepsiCo over the past five years. We estimate emerging markets
have contributed 75% of Coca-Cola’s incremental volumes and
roughly 60% of PepsiCo’s beverage growth since 2000. Emerging
markets also drive a large portion of the two companies’ long-term
profit growth algorithms. We forecast 60% of Coca-Cola’s profit
growth and 50% of PepsiCo’s (including snacks) is targeted to
come from those markets between 2005 and 2010. We estimate
a 1% change in emerging market GDP causes a 0.9% change in
these two companies’ emerging markets sales. We believe the
economic backdrop in emerging markets remains favorable but
business risks linger. The greatest operating challenges include
affordability pressures, competition from cheap local brands, commodity
cost pressures, and reputational risks.
Figure 1 Source: Credit Suisse estimates (July 2006)
Real GDP growth by region
According to Credit Suisse forecasts, emerging market regions will continue
to outperform the developed countries in terms of GDP growth.
%
10
Rising middle class buying more consumer electronics
Another consumption trend in emerging markets in the offing is the
migration from cathode ray tube TVs to flat panel TVs, and this is
already evident in China. Rising incomes among the middle class in
emerging markets, rapidly falling prices and improved functionality
are increasing the penetration of consumer electronics in emerging
markets. With regards to brand perception, consumers in emerging
markets value foreign brands more when buying consumer electronics.
Recently, in June 2006, Brazil’s government said that it
would adopt Japanese technology as the basis for its digital TV
standard, which suggests that Japanese consumer electronics
would be the major beneficiaries. Sony has established a strong
brand name in emerging markets thanks to the success of its legacy
businesses of walkmans, videocassette recorders and TVs. Matsu-
5
0
Emerging
markets
Latin
America
2005E 2006E 2007E
Emerging
Europe
Emerging
Asia
Developed
markets
(OECD)