Banking for 7 billion and 7 million

GLOBAL INVESTOR 3.06 Switching — 66
shita Electric Industrial and Sharp, with their vertically integrated
business models and advanced technology, could also benefit from
growing demand for consumer electronics products in emerging
markets.
Trading up from basic food needs to branded products
Although there is less of a premiumization or fashion argument for
the food-manufacturing sector at the present time, we see two
important trends. With rising income, consumers increasingly tend
to switch from domestic, non-branded food products to branded
products, even at small quantities, as they trust foreign brands
more (see figure 2). The second trend, in our view, is water, with
emerging consumers moving away from potentially impure tap
water to purified water (e.g. Nestlé Pure Life, Danone’s Aqua in
Indonesia and Wahaha in China) and even branded mineral water
in the upper segment, driven by rising per capita consumption from
a low base. We believe the water market in emerging markets will
continue to grow at solid double-digit rates and expect that more
than 60% of sales at Nestlé and Danone’s water business will
come from emerging markets by 2010. However, we have to remember
that sales in emerging markets tend to be highly economically
sensitive, since consumers there spend a much larger
portion of their income on food products. Also, certain categories,
such as fresh dairy, ice cream, chocolate or frozen food may be
sometimes difficult to sell. Reasons include the lack of appropriate
logistics chains (refrigeration) as well as cultural and climate factors.
The four European large-cap food producers Nestlé, Unilever,
Danone, and Cadbury Schweppes each generate about a third of
their sales in emerging markets. While we expect Nestlé to earn
more than that in terms of profit, Cadbury’s profitability in the
emerging markets is below average. In terms of product portfolio,
categories and growth profile, we believe that Danone with its
water and functional drinks and Nestlé with its balanced food portfolio
are best positioned for the emerging markets, owing to the
strength of their brands.
Figure 2
Source: Credit Suisse
China: Awareness of food brands
The brand awareness is based on the Credit Suisse proprietary survey of
Chinese consumer lifestyle and spending patterns (December 2005).
The question asked to the 2,700 participants was: “Are you aware of the
following food brands?”
%
80
60
40
20
0
75
Wahaha (Danone)
72
Nescafé (Nestlé)
63
Wall’s (Unilever)
57
Nestlé Nutritional Grain
56
Bugles (General Mills)
53
Heinz
53
Hormel (Hormel Foods)
49
Nabisco/Oreo
48
Wrigley
46
Lipton (Unilever)
44
Häagen Dazs (Nestlé)
41
Kitkat (Nestlé)
41
McCormick
40
Knorr (Unilever)
38
Frito-Lay/Lays (PepsiCo)
38
Maggi (Nestlé)
38
Milo (Nestlé)
36
Skippy (Unilever)
34
Lao Cai (Unilever)
27
Carnation (Nestlé)
27
Nesquik (Nestlé)
China and Russia are important markets for tobacco
We recognize that certain investors may have moral issues with
investing in tobacco stocks, and although we believe the US tobacco
industry provides great returns in terms of significant free cash
flows, high dividend yields owing to improved fundamentals and a
favorable litigation environment, we would advise those investors to
avoid this sector. Despite the increasing concern about rising
healthcare costs and greater consumer awareness of the health
consequences of smoking, cigarette consumption in emerging
markets is rising. We believe China and Russia will provide opportunities
for major tobacco companies such as Altria’s Philip Morris
International and British American Tobacco over the next several
years. We estimate that China holds a 31% global volume share
and 12% of the profit pool, while Russia has a 6% volume share
and 2% of the profit pool. China has about 2 trillion units in volume
with 400 million smokers. In 2005, Philip Morris International signed
an agreement with China National Tobacco (CNTC) to license the
production and selling of Marlboro in China and also established a
joint venture to sell CNTC’s heritage brands globally. CNTC is a
state-run monopoly, controlling around 98% of the tobacco market
and generating roughly USD 11 billion in tax revenue. Russia is the
fourth-largest cigarette market in the world and one of the fastestgrowing
markets. We estimate that cigarette demand in 2006 will be