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Cold Facts in Emerging Market Fridges

June 20, 2014, 10:14 am

Cold Facts in Emerging Market Fridges

by Tassos Stassopoulos, AllianceBernstein

It’s not easy for investors to grasp the dynamics of consumer spending in diverse emerging markets. We think the best way is to look inside the refrigerators of people across the developing world.

Refrigerators are more than just iceboxes. Their contents speak volumes about their owners. And their proliferation signals a country’s economic progression. So the fridge and its contents can serve as a guide for investors seeking to tap emerging consumer spending, which is projected to grow eightfold to US$63 trillion by 2030, according to our forecasts, based on OECD data.

Devices Are Deceiving

Emerging consumers defy simple classifications. Some analysts look at income, assets or people per room as a framework. In our view, these indicators are flawed. For example, a Living Standard Measure counts the number of certain items in a home to determine a household’s socioeconomic status. So a person with a laptop, TV, mobile phone and stereo could be classified as rich. Yet in our field research, we’ve met people in countries like Ghana whose ramshackle homes are full of electronic devices but who are quite obviously poor.

Kitchens offer a more honest reflection. Behind the fridge door is an abundance of information that can help us understand who emerging consumers are and how they’re likely to spend money in the future. We’ve analyzed the contents of 70 refrigerators in rural and urban homes that we visited across 12 developing countries from Chile to China. While it may not be a statistical sample, the initial patterns we’ve seen suggest that the inside of a fridge mirrors the status of a home.

Food for Thought

In working-class homes, the fridge is used mainly for efficiency items (Display). It includes basic foods such as eggs, fruits and vegetables and some pre-cooked food. Middle-class fridges stock more indulgences, from alcoholic beverages to chocolate and cheese. And for affluent households, health is a primary concern. So expect to find foods like low-fat yoghurt or 100% fruit juices.

Why is this important? Because once we understand how people’s tastes change as their income levels increase, we can also figure out how to invest in the consumer evolution as the refrigeration revolution sweeps through a market.

The display below shows penetration of refrigerators in different countries as income levels increase, from 1980 through 2013. In developed markets, more than 99% of households have a fridge. Brazil isn’t far behind. In China, about 86% of homes had a fridge. But in India, by contrast, only about 27% of households were able to chill their food. This is likely to increase rapidly as annual per capita incomes reach US$3,000, which seems to be the tipping point for rapid adoption of refrigeration.

Indulgences in China

Our research suggests that China is in the indulgence phase. So companies that make products like beer, butter and chocolates should benefit from rising incomes. Indian families are still buying fridges, then filling them with efficiency items like milk, yogurt and ready-made sauces. Brazil has already shifted toward health mode, which should see higher-end food producers draw more spending.

Of course, specific investing conclusions differ in every country. Market environments and company fundamentals must also be studied to identify successful portfolio candidates. But by starting with refrigerator shelves, we think investors can gain vital intelligence to understand the people, lifestyles and spending scenarios that will unlock earnings growth in emerging consumer companies.

 

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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