The consumer opportunity
The allure of the ‘emerging market consumer’ has for years enticed companies, governments, and investors to the emerging world. Emerging and frontier markets are home to 85 per cent of the world’s population, an ocean of future consumers. According to data from the IMF, emerging markets’ contribution to global consumption growth has risen from 14 per cent in the late 1970s to more than 60 per cent today. (Source: IMF)
For the best part of three decades, China has exemplified the emerging market consumer opportunity. The resulting growth is one of the most consequential economic trends of recent years. Yet as penetration rises across the consumer landscape in China, the hallmarks of the emerging market consumer – low current income, young, part of a growing population – are no longer particularly Chinese. Elsewhere however, this consumer remains central to emerging economies. We believe those companies able to tap into this will prove outstanding opportunities.
The China example
China’s share of global consumption growth rose from 9 per cent in the 2000-2005 period to 23 per cent in 2013-20181. Headlines such as ‘Weak Chinese consumption holds back global economic recovery’2 are now relatively common – a remarkable feat for an economy which at the turn of the millennium contributed just 3 per cent to global GDP.
Whilst it would be mistaken to argue that the China consumer revolution is over, we believe the nature of that revolution has evolved. As China’s GDP per capita passes the US$10,000-mark, penetration for many consumer products is towards the upper end of the emerging market spectrum. In turn, the Chinese consumer has become more discerning and ‘premiumisation’ has replaced pure volume growth as the driving force in the consumer landscape.
GDP per capita (USD nominal)
As well as a richer population, China’s population is older and growing more slowly than emerging peers. The recently published census showed China’s demographic challenges are not dissimilar to many developed economies. The population growth of 0.54 per cent p.a. was the slowest since records began in the ten years to 2020, and the 12m births in 2020 was the lowest number since 1961 – bringing the country’s fertility rate below both the US and Japan.3
China will unquestionably remain a giant of the global consumer landscape. However, largely as a result of the remarkable past three decades, we believe there is a longer runway for volume growth elsewhere. In the Jupiter Emerging and Frontier Income Trust (JEFI), we hold three companies which, in our view, demonstrate this: Indus Motor in Pakistan, Coca-Cola Icecek in Turkey, and Integrated Diagnostics in Egypt.
Indus Motor (Pakistan)
Henry Ford’s 1908 Model T is often pinpointed as the dawn of American consumerism and went on to become the defining symbol of an emerging middle class. Over a century later, cars remain for many the ultimate consumer purchase.
In JEFI, we hold Indus Motor in Pakistan, a joint venture between local conglomerate House of Habib and Toyota. Motor vehicle penetration in Pakistan is a fraction of China (which enjoyed years of strong growth but has seen negative sales volumes in two of the past three years). For Pakistan to reach the current Chinese level of penetration, volumes would have to grow at 13.6 per cent p.a. for the next 20 years.
The strength of the Toyota brand in Pakistan is also important, giving Indus the pricing power to profitably capture the structural growth on offer, whilst Toyota’s hybrid and electric offering helps to ‘future-proof’ the product line-up against the disruption risk facing all auto manufacturers.
Motor vehicle per 1000 people
Indus has a strong balance sheet – maintaining a net cash position for the past 9 years – and pays out a significant proportion of earnings as dividends (current yield 6.8 per cent).
Coca-Cola Icecek (Turkey)
The world’s most iconic consumer brand has long been a favourite of emerging market consumers. In fact, four of the Coca-Cola Company’s top 5 markets are emerging markets as the US is followed by Mexico, China, Brazil, and India.
JEFI holds Coca-Cola Icecek, the bottler for Turkey and Pakistan (together 70 per cent of volumes), as well as several central Asian countries. Icecek has full access to the 80 plus major brands of the Coca-Cola company (led by the ‘big three’ of Coke, Fanta, and Sprite), and has delivered 9 per cent annual volume growth since 2006. Yet the future prospects remain outstanding, in our view. In developed economies, typical non-alcohol consumption is around 1,000-1,200 8-ounce servings per capita. The average equivalent figure across Icecek’s markets is 257 and in the important Pakistan market it is 124.
8-ounce servings per capita p.a. (Icecek markets highlighted)
Icecek is a leader of sustainability practices within the Coca-Cola system. The company has published a sustainability report annually since 2007 and Turkey is one of the lowest water usage countries globally (at 1.52 litres of water used per litre of product vs. a Coca-Cola average of 1.89).
Integrated Diagnostics (Egypt)
Integrated Diagnostics (IDH) is Egypt’s largest medical diagnostics company with a 60 per cent market share of private clinics. The company conduct more than 1,000 tests at 481 branches. Scale is an important advantage in this business, bringing operational efficiencies and bargaining power with suppliers.
Healthcare spending in many emerging markets is ultimately a discretionary choice and rises – alongside other consumer products – with incomes. There is no equivalent GP network or easily accessible publicly funded option in Egypt which makes diagnostic labs the standard non-emergency port of call. Over time, tests per capita rise as we have seen in more affluent Gulf countries. Egyptians annually conduct 3 tests per capita vs. 9 in Oman and 10 in Saudi Arabia4.
As with other diagnostic testing businesses, IDH has low working capital and capex requirements which enable excellent cash generation and an almost 5 per cent dividend yield. Unlike other businesses, however, IDH trades at a mid-teen price-to-earnings multiple which is well below global peers despite, in our view, a superior long term growth outlook.
We believe the prospects for the ‘emerging market consumer’ remain a highly attractive long-term opportunity. As the Chinese market begins to mature and opens up different investment characteristics, there is a new generation of countries with rising incomes, young populations, and low penetration of consumer products. The case for structural change to consumer habits in these markets – whether in cars, Coca-Colas, or healthcare – is exciting and the runway for growth is substantial.
1Source: McKinsey, Understanding Chinese Consumers: Growth Engine of the World, November 2020
2Source: S&P Global, Weak Chinese consumption holds back global economic recovery, March 2021
3Source: FT.com, China census reveals depth of demographic challenge, May 2021
4 Source: Integrated Diagnostics, FY201 Results Presentation May 2020
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