Food and Beverage in Emerging Markets - Where and how to play by Deloitte Netherlands

Food and Beverage in Emerging Markets Where and how to play

Randy Jagt Director Consumer Business Leader Emerging Markets Taskforce Rotterdam, 30 January 2013

Agenda

Why emerging markets?

Where to play?

Objectives of today

How to play

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

As Eurozone growth stagnates, wealth is increasingly shifting to emerging markets GDP (PPP, as % of world total)

GDP Growth Rates (YoY%)

50 8.8

7.9

% 4.4 4.1

4 1.3

5.2 4.9

30 4.6

4.0

1.8

19 18

18 14

10 0

0 EU

Asia

2004-2012

Emerging Economies 2011

2013-2016

2017E

LATAM

Africa

CEE/CIS

Established Markets

Emerging Markets

Limited to no growth

Continued growth

Limited increase of middle class

Booming middle class

China

Source: International Monetary Fund, World Economic Outlook Database, April 2012

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

Population growth, higher wages and a rapidly growing middle class are transforming emerging markets in important sources of consumer demand Key growth drivers Working-Age Population (bn) 6

Share of Global Nominal Consumption

% of Global Consumption

’50 ’60 ’70 ’80 ’90 ’00 ’10 ’20E ’30E ’40E Emerging markets

Developed markets

Average annual disposable income ('000 $) Vietnam India China Indonesia Egypt Kazachstan Colombia Turkey Mexico Malaysia Brazil Chile

2006 2012

30 25 20

’90

’94

’98

’02

’06

’10

’15

Developed markets Emerging markets

Source: United Nations; JP Morgan Global Economic Research; OECD WP 285

Food and Beverage in Emerging Markets

The F&B industry will follow a similar trend: emerging and developed economies will account for most of the growth in the coming five years Food and Beverage industry sales (US$ trn)

10 8,6 1,2

N America

1,1

1,7

W Europe

1,0

1,7

1,0

Mid.East and Africa

1,6

0,7

1,1

Latin America

$ trillions

7,2 5,6

4,5 4

0,9

0,8

1,4 2

0,4

0,5 0,6

0,3

1,5

48%

2,9

67% 3,7

Asia-Pacific

2,0

0 2006

2009

2013

2016

Source: EIU; Deloitte analysis

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

Emerging markets consumers are increasingly shifting their preferences more towards Westernized type of food Shift in consumption patterns EM (kg per capita per year) 3

Poultry

1990

2020

Milk

Grains

Pork&beef

â&#x20AC;˘ Middle class consumers drive demand for brands in emerging markets

Fruits

â&#x20AC;˘ In several food categories, standards are becoming increasingly similar to those in developed markets

Source: FAO; Datamonitor; Deloitte analysis

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

Leading F&B companies are investing heavily in emerging markets % revenues from EMs – Leading F&B companies

• Today 55% revenues come from EMs (85% of its growth) • Revenues from EMs to increase to 75% by 2020

• 51% of revenues come from EMs • High growth in Asia, LATAM, CIS, Middle East and Africa offset poor W European performance

Number of companies with % of Global Revenues Generated from Emerging Markets 8%

14%

More than 70%

37%

31%-70%

49%

Less than 30%

20%

72% • 43% of its revenues from EMs in 2012 • Sales mounted 9,7% in Africa and the Middle East, and 7,5 % in Asia Pacific

• 40% revenues from EMs • Planning to triple its sales in Asia, Oceania and Africa over the next decade Last 12 Months

Expected in 3 years

Source: bloomberg; WSJ; FT; the Economist; Euromonitor, Deloitte survey

Food and Beverage in Emerging Markets

However, Dutch mid-market companies are lagging behind with only 24% deriving revenues from outside Europe % of Mid-market companies deriving revenues from selected markets

America (excl.Brazil) Other Asia (excl. 5% 2% India & China) 5%

Comments • On average, 16% of the internationally active companies have no clients in foreign markets; they use these markets for imports and outsourcing only • 24% of the Dutch internationally active midmarket companies derive more than 75% of the revenue from abroad

BRICs 12%

• Out of the total Dutch exports, only 3% goes to the BRIC countries, as compared to the 6% European average

76% Europa

Source: Deloitte Mid-Market Monitor

Food and Beverage in Emerging Markets

Key questions are where to play and how to play

Key Questions

Where to play?

Food and Beverage in Emerging Markets

How to play?

ÂŠ 2013 Deloitte The Netherlands

Second tier emerging markets show comparable growth rates to the BRICs and outperform developed markets in GDP growth 2012-2016 Average Annual Real GDP growth Top 20 largest economies China India Indonesia Saudi Arabia Korea Turkey Russia Brazil Mexico Poland Australia United States Canada United Kingdom France Netherlands Germany Spain Japan Italy

9.4% 8.0% 6.7% 4.6% 4.1% 4.1% 4.0% 4.0% 3.6% 3.5% 3.1% 2.6% 2.3% 2.2% 1.9% 1.6% 1.6% 1.6% 1.4% 0.8% 0%

BRIC 2nd tier Advanced 8% 10%

2012-2016 Average Annual Real GDP growth Top 20 fastest growers (>10mln population) Iraq China Afghanistan India Mozambique Zambia Niger Ghana Cambodia Tanzania Vietnam Rwanda Indonesia Angola Uganda Bangladesh Sri Lanka Uzbekistan Congo Ethiopia

10.1% 9.4% 8.0% 8.0% 7.7% 7.3% 7.3% 7.3% 7.1% 6.9% 6.8% 6.8% 6.7% 6.7% 6.7% 6.6% 6.6% 6.5% BRIC 6.4% 2nd tier 6.4% 0%

10%

Source: Deloitte Research , IMF World Outlook 2012

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

While companies with existing EM presence continue to invest in BRICs, new entrants are increasingly looking at 2ndtier emerging markets High Growth Regions

36,0

34,9 31,0 28,0

27,0 23,2 19,0

% 20

18,9 11,0

7,0

22,7

21,0 17,6

18,1

19,7

15,5

11,0

8,0

6,0

5,0

0 India

Brazil

China

South Korea

Turkey

Hot areas for companies with an existing EM presence

Egypt

South Africa

Mexico, Eastern Southeast Central Europe Asia America, and Russia and South America

Hot areas for companies without existing EM presence

Source: Deloitte survey. “Emerging Market growth expectations are high, but misconceptions and disappointments linger” (2012)

Food and Beverage in Emerging Markets

Entering the right market at the right time is an essential element for gaining a strong position in growth markets Market Maturity vs Ease in gaining market share Market maturity

Ease in gaining market share Window of opportunity

Time

Very limited growth, limited competitor activity 11

Food and Beverage in Emerging Markets

Growing growth rate market, market shares are divided

Strong growth, increasing costs of entering the market

Limited growth, market shares are fixed and can only be gained at high costs ÂŠ 2013 Deloitte The Netherlands

While the growth prospects for the second tier emerging markets are attractive, there are also important challenges to bear in mind Key challenges

Limited purchasing power

Poor infrastructure

Food and Beverage in Emerging Markets

Corruption

Shortage of critical skills

Political instability

Vague and developing regulation

ÂŠ 2013 Deloitte The Netherlands

The selection of countries should be based on a fact based assessment of the market potential and attractiveness Example country analysis Dimensions Macro economics

Industry Trends

• Industry trends • Industry dynamics

Market Structure

• (Applicable) market size • Market growth

Market potential

Financial

Target country analysis

• Demographics • Middle class • Growth

• Market price levels • Labour costs

Competition

• Competitive landscape

Distribution

• Infrastructure & Logistics

Market attractiveness Supplier base Tax, Legislation and risks 13

Food and Beverage in Emerging Markets

With this framework a clear prioritzation can be made on which countries to focus on for market entry Market Prioritisation High Kazakhstan

Iraq Kenya

Vietnam

Ghana

Cambodia

Market potential

Indonesia

Taiwan

China

Hong Kong Malaysia

Korea

Turkey Egypt

Angola Nigeria

Brazil India Chile Australia

Saudi Arabia Mexico South Africa

Zimbabwe

Russia

Austria Netherlands

Colombia

Portugal

Venezuela

Low High

Note: Bubble size indicates GDP per Capita ($bn PPP)

Low

Market attractiviness

Second Tier EMs

BRICs

Mature Economies

Source: Indexmundi; EIU; World Bank; Deloitte analysis

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

Key questions are where to play and how to play

Key Questions

Where to play?

Food and Beverage in Emerging Markets

How to play?

ÂŠ 2013 Deloitte The Netherlands

There are five main routes to market entry. A consideration of the specific market opportunities, accessibility and a company’s competencies and resources will determine the most appropriate option

Advantages

Disadvantages

Greenfield – set up own operations

• Control over quality and branding • Easy transfer of technology and know-how • Provenance of being based locally

• Large capital outlay with only potential long term returns • Set up new supplier relationships • Have to establish retailer relationships

Acquisition

• Acquire existing production facilities • Established market share to build on • Access to local market knowledge

• Upgrades of production facilities • Cost of acquisition • Integration process can be difficult

Joint venture

• • • •

Access to local market knowledge Access to existing channels Access to local operations Potential tax benefits

• Difficult to find partner • Have to share benefits • Potentially complex structures and merging of assets and processes

Distributors / Agents

• • • •

Lower capital outlay Control over quality and branding Quicker access to market Likely to be profitable sooner

• Limited local market knowledge • Requires strong channel relationships • Less tailored to local market requirements

E-Commerce

• Low capital outlay • Quick access to market, albeit generally a small segment of the market

Food and Beverage in Emerging Markets

• Limited local market knowledge • Limited ability to provide full customer service • Reliance on 3rd party fulfilment

Deloitte recognises four distinct archetypes for growth; the pursuit of each archetype strongly influences the execution of Emerging Market strategies Participant (Enhance Competitiveness)

Creator (Break Constraints)

Assimilator (Leverage Innovations)

Intent: Obtain a piece of the pie

Intent: Expand share of the pie

Intent: Increase the size of the pie

Intent: Pursue expansion to other pies

Who: Target top of the population pyramid with a high-end product

Who: Extend addressable market to middle-tier of the customer pyramid

Who: Service unmet demand of the middle and lower-tier of the population pyramid

Who: Fulfill needs of population pyramids in other markets

How: Leverage existing capabilities, develop infrastructure to sell / deliver offering, and provide strong branded products that require little to no alteration

How: Utilize existing infrastructure and offerings where possible, develop capabilities required to increase competitiveness in local market needs and preferences

How: Create capabilities required to enable the autonomous structure required to develop innovative offerings, that capture non-consumption by breaking constraints for addressable demand

How: Develop the global capabilities to leverage knowledge / innovations across the organisation, carrying from local markets to fulfill customer needs in other emerging / existing markets

Entrant (Establish Presence)

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

Depending on the strategy and the stage of journey, different companies can successfully choose a different archetype as a meaningful growth vehicle Successful MNCs Across Emerging Market Framework Stages

Assimilator Creator Participant Entrant

Entered China with existing Apple products and sales model

Customized Tupperware products for Indian market (i.e., Roti keeper)

Developed new business model that broke income & access barriers for nonconsumers

Latin American acquisition strategy to export products from emerging to developed markets

Not all multinational companies have undertaken a progressions from Entrant to Assimilator. Based on their objectives, multinational companies have positioned themselves in different stages 18

Food and Beverage in Emerging Markets

ÂŠ 2013 Deloitte The Netherlands

As companies look to increase market share and strengthen competitive position, they typically move from one archetype to the next

Entrant

Participant

Creator

Assimilator

 Addressable Market is too small

 Market saturation

 Saturation of large urban markets or high and middle-tier consumers; need to target nonconsumers

 Current emerging market saturated

Typical Drivers of Change

Increase market penetration

 Larger addressable market in middle market

 Ability to increase revenue or growth in other markets through leverage

 Large addressable market of current non-consumers

Respond to Competition

React to Regulatory Changes

 Erosion of brand due to rise of local players  Decline of profits in other markets  Regulations that favor local players

 Lift in regulatory ban on production / expansion capacity

Food and Beverage in Emerging Markets

 Serving currently unmet demand  Preemptive action against ‘emerging giants’  Response to competitors’ actions that break market constraints

 Desire to steal market share from current competitors in existing markets

 Ability to work with regulatory  Globally incorporate lessons bodies to develop initiatives that learned from regulatory enable market constraints to be impacts to improve products broken / processes

To support our clients in these transitions we find answers to the questions for each maturity phase

3. EM Optimisation

2. EM Growth strategy

1. EM Market entry

• Which markets do you enter? • How do you enter these?

• How do you improve your position in emerging markets? • How do you gain market share?

• How do you optimise your operations in Emerging markets? • What is the optimal tax arrangement? • How do you effectively organise your operations? • Which target operating model is best suited for which country?

Organisation maturity 20

Food and Beverage in Emerging Markets