* Consumer spending volatile in some emerging markets
* Firms producing more consumer goods locally to cut prices
* Middle class estimated to grow by 3 billion in two decades
By Martinne Geller
LONDON, April 21 From chocolate and dumplings to
toothpaste, consumer goods companies are adapting to new
spending habits as incomes rise in emerging markets while
protecting profits in places where they can be volatile.
Packaging toothpaste into tiny tubes or moving more
manufacturing locally, consumer firms are cutting prices and
costs to make their wares more affordable and accessible to
people able to buy their products for the first time.
The key, executives say, is to challenge thinking and
processes that have driven growth in developed markets.
"If I want to successfully conquer India ... I can't do that
with a plant in Hamburg," said Stefan Heidenreich, head of
Beiersdorf, whose products range from Nivea to the
high-end La Prairie creams. "It sounds relatively simple, yet we
were for years and years in a very centralised mode."
Nivea plans to open a factory in India in 2015, to make
creams in smaller, cheaper packs, products with different scents
and whitening creams, which are popular in Asia.
Consumer companies have long been seen as a good investment
as they should grow with the new middle classes which are
clawing their way out of poverty thanks to higher growth in many
Asian, African, Latin American and post communist economies.
Consultancy EY reckons the middle class - which it defines
as people earning more than $10 a day - will grow by three
billion in the next two decades, with almost all the growth
coming in emerging markets.
Currency volatility and changes such as a curbs on
gift-giving in China to crack down on corruption or a drop in
economic growth in Brazil can suddenly squeeze earnings.
Despite the risks, makers of everyday products such as food,
soap and shampoo are spending time and money to win new buyers
who they hope will be long-term shoppers and secure future
One way they cut costs is by producing the goods locally,
using local ingredients and labour. That allows them to pass on
lower prices to consumers, gain market share and reduce the
effect of foreign exchange fluctuations as costs and prices are
in the same currency.
"That is the holy grail for growth in emerging markets -
Getting your cost structure down in a way that you can hit the
lower price points in a profitable way," said Morningstar
analyst Philip Gorham.
Diageo, the maker of Johnnie Walker whisky and
Smirnoff vodka, ships kit in to set up small distilleries in
Africa to make what it calls "mainstream" spirits such as
Gilbey's gin that cost less than half of its international
brands thanks to lower overheads, labour costs and input prices.
"Our target with mainstream spirits is very different to
whom we would target with our premium brands," said Chris
Goddard, Diageo's innovation marketing manager for Africa.
"Strategically, it's about aspirational brands and
fantastic-tasting liquids, but ultimately at really accessible
price points," he told Reuters in an interview.
In its emerging market push, Diageo launched a $1.9 billion
bid last week to nearly double its stake in United Spirits
, India's biggest spirits company.
Another way of cutting prices is simply using smaller
packages, giving buyers the opportunity to try a new product
without spending too much. Colgate-Palmolive Chief
Executive Ian Cook cited small, 10-rupee tubes of toothpaste for
large gains in household penetration in rural India.
In markets with hot climates and inadequate refrigeration,
selling perishable foods can be tricky, again challenging
companies to think differently about their products.
Companies including Nestle, Hershey and
Mondelez International have all worked on
heat-resistant chocolate bars. However, Hershey Chief Executive
John P Bilbrey told Reuters that a better solution might be to
sell chocolate in a squeezable sachet that would be much less
messy than a half-melted chocolate bar.
"If you think differently about it, you don't have to
deliver it in a bar," Bilbrey said, adding that doing research
and development in local markets dramatically increases the
chance of new products succeeding.
Hershey recently agreed to buy a controlling stake in
Chinese confectioner Shanghai Golden Monkey, increasing its
scale in China and expanding its sales of home grown,
With only about 14 percent of Hershey's Chinese product
array priced at levels considered "premium" or "super-premium,"
Bilbrey said Hershey is largely insulated from the government
clamp down on corruption that has hurt sales of consumer goods
from Swiss watches to cognac to ice cream cakes.
U.S. food maker General Mills had a shock last year
when, three weeks before China's Mid-Autumn Festival, it learned
that state-owned firms would not take part in the annual ritual
of handing out cakes, a tradition that accounted for 30 percent
of sales of its Haagen-Dazs' luxury "mooncakes".
Chris O'Leary, head of General Mills' international unit,
said his team switched quickly to deliver the cakes to its more
than 100 Haagen-Dazs stores, sold the mooncakes to a new set of
individual consumers and reduced the percentage drop in sales to
a low single-digit rate.
"We weren't able to grow, but we did not have a disaster on
our hands," O'Leary said.
He said the company's success in China depended on its array
of products, including some, such as Wanchai Ferry frozen
dumplings, that appeal to commuters and workers with less time
to cook from scratch. "Maybe they (make their own) on Sunday,
but Monday through Friday, they can't."
(editing by David Stamp)