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November 12, 2011

Riding The Rising Wave of China's Consumer (Guest Post)

As Americans in the 1970s sang that they’d like to “teach the world to sing,” Coca-Cola was entering the Chinese market. More than 30 years later, China is the beverage company’s third largest market, and Coca-Cola is still seeing modest growth in China.

Many other U.S. companies have been growing in China over the past several years. In fact, USA Today recently reported that China is America’s third-largest export market, with the total U.S. exports of electronic, agricultural and other products to China rising an astounding 468 percent from 2000 to 2010.

In recent months, however, China’s imports have slowed following the strong rebound in 2009. On a year-over-year basis in October 2011, China’s total exports increased only 15.9 percent compared to total imports, which grew 28.7 percent. This difference compares favorably to October 2008, when imports decreased significantly more than exports. This discrepancy is not surprising, given the fact that Europe is China’s largest export market, according to Stratfor Global Intelligence.

In light of China’s domestic demand continuing, we took a look at a few U.S. companies in the consumer goods area that stand to benefit.

As traditional tea drinkers, Chinese have been slowly broadening their beverage options over the past 10 years and U.S. multinational companies have been reaping the rewards. Companies such as have enjoyed success in converting the tea lovers to consumers of other beverages, including coffee, juice and carbonated drinks.

When it comes to coffee in China, most of the purchases are made from retail outlets, in the form of processed or instant coffee, and bought from mainly two U.S. companies: Nestle and Kraft. Together they account for more than 80 percent of the market share in China, according to data from CLSA Asia-Pacific Markets Research group. However, coffee consumption remains far lower than consumption in the U.S. and Hong Kong. As you can see below, on a per capita basis from 2005 through 2010, while GDP has grown, consumption of coffee remains near zero.

While CLSA doesn’t anticipate the Chinese to consume much more than 3 kilograms of coffee, the research firm indicates that the Chindonesian markets together “still have at least two decades left of positive volume growth.”
On-trade consumption, which is coffee purchased at chains and fast-food outlets, also remains very low, says CLSA, but this hasn’t stopped Starbucks from forging new frontiers. This fall, the Seattle-based company opened its 500th store on the mainland—the company reports a total of 800 stores in Greater China. The strategy appears to be successful so far: The Financial Times indicated that sales in China grew between 30 and 40 percent during the third quarter.

By 2015, Starbucks plans to open 1,500 stores, although this number is low on a per person basis when you consider that in the U.S., there are more than 10,000 stores serving lattes and cappuccinos today.

The carbonated beverage market is growing as well. In this area of the beverage market, Coca-Cola and PepsiCo together have more than 90 percent market share in China, says CLSA. Over the past 10 years, the firm’s data shows the volume of carbonated drinks in China has increased an average of 8 percent per year, but the growth has been slowing in recent years due to rising health awareness and a maturing market.

However, Coca-Cola had continued growth over this last quarter: the company reported that worldwide volumes grew by 5 percent, primarily driven by operations in India and China.

This growth may be partially due to the company’s rising market share in the fruit and vegetable juice category. In a very fragmented market, over the past 10 years, CLSA shows that Coca-Cola has grown from virtually no market share in China’s fruit and vegetable juice category, to a 10 percent market share.

In China, fruit and vegetable juices by volume from 2005 through 2010 have experienced strong growth: CLSA says that the market for juices has grown 15 percent per year, driven by a rising health trend. Going forward, volume of fruit and vegetable juices should growth 10 percent per year over the next five years, and 8 percent a year during the 2016 through 2020 timeframe, says CLSA.

I've discussed how American companies are riding the wave of China’s growth all the way to the bank. From what they drink and eat to where they shop and what they buy, as increasing incomes provide more discretionary income, the dynamics of the Chinese consumer forever change. I believe savvy investors can benefit from these emerging trends.

About The Author - Frank Holmes is CEO, Chief Investment Officer of U.S. Global Investors and the co-author of The Goldwatcher.   (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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