By Tassos Stassopoulos
Sugar consumption has often been seen as a mark of affluence. But for emerging market investors, knowing how sugar is consumed can also be a guide to the successful investments of the future. We argue that only on-the-ground grassroots research can provide the knowledge needed to find these investment sweet spots.
As they get richer, consumers want more sophisticated ways to satisfy their sugar craving. This "sweet tooth evolution" means that, in very poor societies, people typically consume large quantities of unrefined sugar. In India, for instance, many eat jaggery -- unrefined blocks of sugar -- with chapatis (unleavened bread). As they get richer, they trade up to locally produced biscuits and sweets, like barfi. But, as people become genuinely affluent, they "premiumize" toward international brands of biscuits, ice cream, and chocolate (see below).
Grassroots Research Is Key
For investors, it is vital to find out where an emerging market's sweet tooth has reached on this evolutionary spectrum. The only way, we believe, is to go to the source -- the consumers who buy the products.
That's exactly what we've done over the last two and a half years, traveling off the beaten track to some rather unusual places. We've visited rural areas and lesser-ranked cities in China, spoken to a broad cross-section of Indian society, and journeyed to South Africa, Ghana, and Nigeria to examine street stalls and supermarkets. We've learned about consumers' hopes, dreams, and aspirations and, most importantly, where their tastes and affluence will take them next.
Shifting to Premium Brands
In India, for instance, we interviewed the wife of a middle income jeweler in her own home. She impressed us with her focus on healthy eating, a focus that was borne out by the contents of her kitchen cupboards. Despite that, when given the equivalent of US$10 to spend in a convenience store, she bought a jar of Nescafé, some savory snacks, and a bar of Cadbury’s chocolate. Hardly the mark of a healthy diet, yet we realised later that she was premiumizing -- her US$10 had gone on what she would buy if she had more to spend.
This inexorable trend toward premium brands means it is often a mistake to buy companies at too early a stage in the sweet-tooth evolution. Often locally based, their earnings may be currently growing fast on the back of strong demand for traditional sugar-based products. But, as consumers gain affluence, they will trade up to international brands. That means sales growth is likely to fade quickly as companies further along the evolutionary spectrum take business from them.
Think Like a Company
One such company is Unilever (NYSE:UL), which has been trading in India for about 125 years. Its long and deep knowledge of the Indian consumer probably explains why it recently thought fit to buy out the publicly traded minority stake in its Indian subsidiary, Hindustan Unilever, for a hefty 35 times forecast earnings. We'd guess that the parent knows that a combination of premiumization and increased penetration of refrigeration means that ice cream sales -- currently a tiny fraction of group turnover -- are about to take off. (For more on this see the following: "Indian Milk Helps Quench Thirst for Emerging-Market Growth," April 24, 2013.)
So we think India is in a sweet spot when it comes to this sweet tooth evolution. Consumers there not only aspire to international brands, more importantly they will soon have the means to buy them, creating huge new markets. The lesson for investors is: If you want to understand and forecast consumer trends, think like a company, not like an investor -- and be prepared to put in the grassroots research needed to feed those thoughts.
Tassos Stassopoulos manages Global Growth/Thematic Portfolios at AllianceBernstein.
Disclaimer: The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.