Confectionery not recession proof; target emerging markets, says Goldman Sachs
Confectionery has often been hailed as resilient to economic pressures as consumers always seek treats even in tough times.
Confectionery not immune
But speaking to an audience of manufacturers at the National Confectioners Association (NCA) Miami Conference, Jason English, vice president of equity research at Goldman Sachs, said: “People often say confectionery is recession proof. You are not.”
He said that the fastest growing gross domestic profit (GDP) was coming from emerging economies such as China and India.
“This has meaningful implications for consumption and implications for your industry…Exploit it if you can,” he said.
Rise of China
According to Goldman Sachs, the confectionery industry will grow $100bn by 2020 to $280bn, with much of the growth coming in emerging markets.
English said that China was the growth engine. While growth slowed in the market last year, it is expected to pick up in 2013 after a smooth political transition.
The rise of emerging economies comes as consumers move into the middle classes. But English warned that consumer spending would be lower than established markets in Western Europe or North America.
$6,000 a year is the average income for the middle class in emerging economies, while the average annual salary in the US is $42,980 and £26,664 ($40,327) in the UK.
Hershey and Nestlé in China
Multinationals have latched on to the growth of China with both Nestlé and Hershey making investments in China in recent years.
In 2011, Nestlé paid €1.2bn ($1.6bn) for a majority stake in Chinese confectionery maker Hsu Fu Chi.
Hershey holds a joint venture with Korean firm Lotte in China and recently announced that it had reached capacity at its China plant and was planning to construct a new plant somewhere in Asia, at an as yet unnamed location.
Rabobank recently told this site that it was not too late for confectioners to enter China. See HERE.
What about the US?
“Is the US a bad place to be? No it’s a great place to be,” continued English.
He said that companies wanted to be in the US, but consumer wealth in the market was tied to their house and the housing market had collapsed.
He said that the housing market was showing signs of recovery and consumers were starting to borrow less, reducing their debt levels, while the unemployment rate was falling.
“Wealth is accumulating for US consumers, but there is a caveat,” he warned.
A $200bn increase in taxes on individuals “changes how people eat”, he said.
He told manufacturers to brace for confectionery growth to decelerate in the US in 2013, but added that it would pick up again in 2014.
