In emerging markets push, follow the freezer

BOCA RATON, Florida (Reuters) - To see how difficult it is for U.S. food companies to tap into the growing demand in emerging markets, try keeping ice cream in a freezer that is shut off each night.

General Mills Inc (GIS.N) has faced that problem while trying to sell Haagen-Dazs ice cream in India, one of the fastest growing markets in the world, but one where the retail infrastructure is not built for some Western products.

"We're waiting for the cold chain to develop," Chris O'Leary, chief operating office for General Mills international unit, said of the need for temperature-controlled supply chains to expand in India.

The continued push into emerging markets was a common theme for executives presenting at a conference hosted by the Consumer Analyst Group of New York in Boca Raton, Florida.

Kraft Foods' (KFT.N) five-month battle to acquire chocolate maker Cadbury CBRY.L for $18.4 billion and tap its presence in markets like India shows how far U.S. packaged goods makers are willing to go for the double-digit sales growth potential overseas.

Emerging markets also bring risk, as the recent devaluation of the Venezuelan bolivar shows. Companies say they have a long-term view on those markets, but that may not be soothing to investors.

"It's easy to say we're going to ride it out until you have multiple land mines exploding in your portfolio," David Kolpak, managing director at Victory Capital Management, said.

Yet there may be little choice. The U.S. is a mature market for packaged food, toothpaste, toilet paper and other packaged goods, while emerging economies have a growing class of consumers who are just starting to have the money to buy those products.

"All of these markets are offering very dynamic growth," Euromonitor International analyst Ildiko Szalai, said.

In 2009, Kraft reaped 20 percent of its $40 billion in sales from emerging markets. Combined with Cadbury, 26 percent of the revenue would have come from those markets. Now it will be able to sell products like Oreo cookies in markets like India and Cadbury's Dairy Milk bars in countries like China.

Coca-Cola (KO.N) has said it expects to get about 30 percent of its profits from emerging markets in three years, up from 20 percent now.

Just do not expect that growth to come in a straight line, given the potential political and economic risks, said Morningstar analyst Erin Swanson.

LOTS OF POTENTIAL SHOPPERS

Infrastructure is also an issue. If you sell ice cream or frozen dinners, for example, it helps to have global retailers like Wal-Mart Stores (WMT.N) and Carrefour (CARR.PA) so that manufacturers can be sure the freezer will stay on.

But oh, that growth potential.

For example, H.J. Heinz (HNZ.N) branched into emerging markets 15 years ago with baby food and ketchup. By 2013, the $10 billion company expects 20 percent of its sales to come from emerging markets.

Colgate-Palmolive (CL.N) notes that per capita consumption of toothpaste is 291 grams a year in the developing world, well below the 484 grams used by people in the developed world. That is a lot of potential demand in the future.

As the middle-class grows worldwide, consumers have more money to spend and less time to do things like cooking meals.

According to Euromonitor, annual household income in China more than doubled to $7,294 in 2009 from $3,070 in 2004. Russian household income shot up to $14,298 from $6,306 in that time. India and Brazil have also had sharp growth.

Still, the struggling global economy hit many emerging markets in 2009, with Russia, India and Brazil seeing income fall last year.

At the end of 2007, for example, Sara Lee (SLE.N) made a big push in Moccona instant coffee business in Russia and has been hit by the economic downturn, though it is gaining market share in that country.

"You have to make a commitment, a 10-year commitment. Not a one-year, a two-month commitment," said CEO Brenda Barnes.

LATIN LAND MINE

The currency devaluation in Venezuela is the latest example of risk. Since most consumer products purchased in that country are imported, the devaluation meant the cost of those products to consumers shot up.

Colgate-Palmolive (CL.N) expects to post quarterly charges of 4 cents to 6 cents a share this year as a result and Newell Rubbermaid (NWL.N) expects a 4 cent to 5 cent a share charge.

But the market is still too lucrative to leave, Newell Rubbermaid CEO Mark Ketchum said last month.

Kraft CEO Irene Rosenfeld tries to mitigate those risks by being in lots of different emerging markets.

"There clearly are risks market to market, but the benefits of having a fairly broad portfolio across the various emerging markets is you are able to offset those risks," she said.

Companies also need to overcome cultural barriers.

In India, Procter & Gamble (PG.N) CEO Bob McDonald said mothers didn't want to buy disposable diapers "because they thought it was all about convenience for the mother. And no human being likes to do things for themselves, they like to do things for their child, right?"

Telling mothers that their babies would benefit by feeling drier and sleeping through the night, when much development happens, meant that "the whole dialogue changed," he said. The business has since grown at about 70 percent a year.

The money, and people, keep pouring into new markets. General Mills said it now has more than 500 employees in India. PepsiCo (PEP.N) has spent $1 billion in China over the past five years and $1 billion in Russia over the past three years.

A combined Kraft and Cadbury will employ some 19,100 people in the BRIC countries, with the biggest boost from the merger in India and Russia.

For some manufacturers, countries like Russia, China and Brazil are old hat and they are looking to southeast Asia and Africa.

In Indonesia and Vietnam, "We have people on the ground. Not even teams, people," General Mills' O'Leary said of the early steps the company is taking in those countries,

No word if those people are installing freezers.

(Reporting by Brad Dorfman, additional reporting by Jessica Wohl and Martinne Geller; Editing by Michele Gershberg, Phil Berlowitz)