Soft Drinks Forecast Model: Nigeria to Present the Riskiest Market
As major emerging markets (China, Russia and Brazil) are experiencing slowdowns in their economies, manufacturers are assessing the possible impact on sales of their fmcg products and discussing how to ideally plan their medium-to-long-term investment strategies. Indeed, our latest Soft Drinks Forecast Model shows that emerging markets were originally (baseline figure finalised in late 2014) expected to contribute to total sales worth 555 billion litres by 2019, but the quarterly update data sees a revised sum of 532 billion litres, a reduction of 23 billion litres. As developed markets are saturated in terms of consumption, with little volume increase anticipated, multinationals are having to turn to emerging markets to generates volume sales growth and adapt their strategies to individual markets; they will also have to wait a longer than expected time to recoup their investments.
Figure 1 shows that eight of the major 10 emerging markets have been downgraded, suggesting their growth is likely to be adversely affected by their respective revised GDPs. Only India and Vietnam have been upgraded. Russia, meanwhile, is expected to see severe downgrading, with the best case scenario worse than initially predicted in late 2014. PepsiCo, which has made large investments in Russia’s dairy and soft drinks, is more susceptible to the situation than The Coca-Cola Co. Euromonitor International’s local analyst reported that local brands might benefit from the situation and end up making share gains as their products are more affordable than foreign brands. Brazil may face a similar scenario to Russia. China and Mexico may continue to expand at the best case scenario; however, both countries to fetch a less increase by around three billion litres.
In the best case scenario, Nigeria is now forecast to see total sales of around 75 billion litres in 2019, despite a reduction of 5.3 billion litres, depicting an encouraging picture, as the consumption base remains low and there is plenty of room to grow, underpinned by a young population in the country. However, figure 2 shows that Nigeria is the riskiest market to invest in, which is reflected in the huge gap between the optimistic (around 12 billion litres) and pessimistic (around -10 billion litres) scenarios. Nigeria’s economic growth is mainly driven by oil-related activities, and with GDP growth revised downwards, this may filter through to the soft drinks market. Thus, potential soft drinks investors may need to take the overall global oil price into serious consideration before marching into Nigeria.
In terms of unmet potential by total volume, figure 3 clearly suggests that India has more room to fill than China. India has a highly underdeveloped soft drinks market, mirroring limited product categories and a huge rural/urban split. Over a solid 2-decade growth period, China’s consumption of soft drinks in general stabilised, with signs of maturity in first-tier cities. However, from a US dollar growth perspective, China will continue to bring in much more money (US$32 billion over 2014-2019) than India (US$10 billion). That said, India may provide long-term volume opportunities, but the market is not yet ready for the introduction of overly premium drinks as the consumer base for high-end products is small. By contrast, China right now has a sizeable middle class of consumers based in first- and second-tier cities who are ready to pay for added-value drinks, especially health and wellness beverages. Rather than playing “capital flight” from China, it is perhaps time for manufacturers to capture the Chinese middle class by introducing the right added-value health and wellness soft drinks.
Manufacturers will need to differentiate their strategies in individual emerging markets, and there is no one-size-fits-all plan. The quarterly update shows that Vietnam may continue to show strong positive expansion, and the country is relatively certain about economic growth compared to Nigeria and Indonesia, showing the attractiveness of the country to investors. Internet marketing to engage and capture young consumers is increasingly important in Vietnam.
Nevertheless, emerging and developing economies are home to the biggest populations on the planet. Being overly pessimistic about market potential due to current slowdowns can risk ones’ future global status and incur potential missed opportunities.