I recently travelled to four Asian countries to meet with management teams of companies in the consumer sector. I would like to share the main highlights of this trip.
I started my trip in the Philippines, a country of 96 million people. The economy of the Philippines is a significant economy for the consumer sector in Asia. According to the economists that we met, GDP should grow 6% in 2014 and 2015, close to the government’s target of 6.5–7.5%. GDP is expected to increase with spending on infrastructure (approximately $22 billion U.S. dollars) and double-digit growth in manufacturing. Inflation is under control and should be between 4–4.5% in 2014. The country is politically stable with the next election scheduled for 2016.
Signature believes consumer habits in the Philippines resemble Spanish consumers more than Asian consumers, due to its Spanish heritage. Furthermore, most of the U.S. brands are available due to American influence. The majority of future growth in consumption should come from an improved employment going forward; the unemployment rate is currently hovering around 7%. As the middle class continues to build, this will have a strong positive effect on consumption patterns in this country over the long term but is unlikely to have a significant effect over the next 12 months.
During my visit, I met with the management teams of companies from Universal Robina (beverage/snack producer), Coca-Cola FEMSA Philippines (beverage producer), Puregold (hypermarket chain), and Jollibee (QSR chain). Most of these companies have a dominant market share in the Philippines, are sophisticated operators and should be able to continue to grow revenue and net earnings by double digits over the next three years. This will be accomplished by aiming for higher penetration, market share and square footage growth. Modern grocery retail penetration counts for approximately 27% of sales in the Philippines. According to my observations, the state of the consumer should remain stable for the second half of the year.
Photo (PureGold store in Manila, Philippines)
Indonesia is a country of 238 million people and 13,466 islands; 58% of the population lives on the largest island, Java. It is the largest economy in Southeast Asia with expected growth in GDP of 5.3% in 2014, according to a local broker in the country. Recently, inflation has declined from 8% to 6.7% and should hover around 6.5% in 2014, while the unemployment rate is currently at 5.7%.
The July 9, 2014 election was won by Jakarta Governor Joko Widodo, known as Jokowi. Jokowi will inherit the slowest growing economy since 2010, and a volatile rupiah that was Asia’s worst-performing currency last year. Last January, Indonesia banned the export of metal ores in order to encourage the construction of smelters. This move led to mine closings and thousands of lost jobs. However, the new government would like to reset the terms of mining deals struck in the 1980s and 1990s, which could lead to better job figures.
According to my observations, the state of the consumer remains uncertain for the second half of 2014. The lower-income class stagnated last year because of the government’s decision to lift the price of subsidized fuel. The consumer could remain under pressure in the short term due to the possible elimination of subsidies to people by the new political regime. One play on the consumer sector in Indonesia will be through growth of the middle class. Half of Indonesia’s population is under 30 and the middle class is expected to double to 141 million by 2020. Overall, I came back with a good impression of the consumer sector in Indonesia on a mid to long-term view. Jakarta has more than 200 malls and I met great companies such as: Matahari (department store), Matahari (food retailer), Ace Hardware (general store), and Indofood (food company). These companies are very competitive and well managed. Their main challenges are mainly on the logistics side, specifically on how to move products between all of the islands that make up the country. Modern grocery retail penetration remains low at 16% of total grocery retail, which is below comparable markets like the Philippines (20%) and China (64%). This represents a great opportunity going forward.