Asian Tastes Add Spice to Consumer Industry Returns by Liliana Castillo Dearth, AllianceBernstein
Asian consumers are proud of their distinct tastes and traditions. That puts homegrown restaurant franchises and consumer companies with a deep knowledge of local appetites at the top of the food chain. In our view, they stand a good chance of staying there, even as competition from global franchises and brands picks up.
On a recent trip to seven countries in the region, we met with top executives from several small consumer companies with strong brands, superior distribution networks and an intimate understanding of local tastes and preferences. All of these are ingredients for sustainable growth and returns.
Accounting for Taste
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Just how popular are some of the local companies?
In the Philippines, one fast-food chain serves 11% of the entire population every week, according to recent research from Credit Suisse. While in Manila, we noticed that office buildings—especially the many that house customer-service call centers for airlines, banks and other global firms—have local fast-food branches on the bottom floor, serving highly popular meals such as deep-fried chicken with local spices and sweet tomato around the clock.
Throughout developing Asia, fast-food (Display 1) and food service industries are expected to grow at a healthy clip over the next five years.
Building Brand Loyalty
The most successful local companies have built strong brand loyalty—and that’s paying off as disposable incomes creep higher. The coffee-mad Vietnamese, for instance, have typically gone to street kiosks and roadside stands to get their caffeine fix.
These days, younger consumers are enjoying their café sua da—strong coffee laced with super-sweet condensed milk and served over ice—at locally run cafés that fuse western café culture with products that appeal to local tastes. Catering to the tastes of those consumers—who prefer much stronger coffee beans than in a typical European espresso—will be a tall order for competitors such as Starbucks, which recently opened its first store in Vietnam.
Competing on price may be equally difficult. Prices at Starbucks Corporation (NASDAQ:SBUX)’ new store in Hanoi range from about $2.50 for a black coffee to about $4 for a more elaborate drink. A cup of traditional Vietnamese coffee costs less than $2 at new local cafés and 50 cents at roadside stands.
High Valuations Not Necessarily a Negative
To be sure, some local consumer companies’ stocks trade at high multiples—especially in some Southeast Asian countries like the Philippines and Indonesia.
But in consumer companies, there’s a high correlation between valuation and excess returns. And many regional companies we’ve analyzed have seen their return on investment capital consistently exceed their cost of capital for years—a trend we expect to continue. To us, that adds up to sustainable growth and continued profitability.
The Long Reach of Local Companies
Southeast Asians’ brand loyalties are equally strong when it comes to items such as tea, chocolate, spices, cooking oils and other foods and provisions—all important staples for people in developing countries.
Again, we think some local companies have a leg up on their global competitors, thanks largely to their strong distribution networks. These are critical because these markets are highly fragmented, with significant parts of the population living in rural areas, where modern retail outlets such as supermarkets are rare.
In Vietnam—a country nearly as big as California—only about 15% of the retail market would be considered “modern.” Local companies have developed extensive distribution networks to cope—some with more than 300 distributors throughout the country. Building a similar network from scratch will be difficult and costly.
Don’t get us wrong: we expect competition from global consumer brands to increase as income levels across emerging markets rise and more people move from villages to cities. But when it comes to niche opportunities in small- and mid-cap stocks, investors would do well to pay attention to strong local companies. In certain markets, we think they will continue to dominate and provide the sustainable excess returns that investors crave in a low-growth world.
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.
Liliana Castillo Dearth is Team Leader and Portfolio Manager for the International Discovery Equity Portfolio at AllianceBernstein Holding LP (NYSE:AB).