This summer, I spent some time researching the various strategies that companies like Kraft and McCormick are using to appeal to the burgeoning Hispanic population in the United States. Hispanics are the fastest-growing demographic in the U.S. and account for about $1 trillion in spending every year, yet only a fraction of marketing and advertising is aimed at this population.
As this advertising strategy gradually begins to shift, investors can take advantage by using one of two methods: (1) Invest in specific companies that are increasing their Hispanic media spending in meaningful ways. (2) Target industries that are expected to grow in line with the Hispanic population and invest in one or two companies in those industries.
Method 1: Invest in specific companies
Liquor giant Diageo's (NYSE: DEO ) problem is that for every dollar Hispanics spend on alcohol, $0.50 goes toward beer and only $0.23 goes toward spirits. Compare this with non-Hispanic consumers, who spend about $0.38 on beer and $0.30 on spirits, and it's obvious there is some ground to make up. Considering that in 20 years, Hispanics are expected to make up nearly a quarter of drinking-age adults, Diageo made the right decision to step up its marketing game now.
The plan
Last year, Diageo spent nothing on Hispanic television ads and only $220,000 in Hispanic print media. But earlier this year, the company began testing ads on Univision in Texas markets, and this summer struck a deal for an upfront buy on Univision that will essentially increase their Hispanic media spending by 3,000%. It marks the first time a liquor company has negotiated such a deal to buy upfront time from the network.
Will it work?
As of this summer, Hispanic spirits volume was up 13.7% versus a general increase of 2.6%. Beer-case sales volume fell 2%, compared with a 0.9% drop for non-Hispanics. It was enough to prompt industry publication Beer Business Daily to publish an article titled "Are We Losing Hispanic Drinkers to Spirits?"
If Diageo is successful, we will almost certainly see other alcoholic beverage companies follow its lead.
Method 2: Invest in growing industries
In the next five years, the Hispanic population's buying power is expected to increase 48% to $1.6 trillion. When you compare that to the overall expected forecast for growth in the U.S. -- 27.5% to $14.7 trillion -- one realizes this is a trend worth following -- and hopefully cashing in on.
As a place for Fools to begin their research, I've selected three industries from research firm IBISWorld's list of the seven sectors most likely to benefit from a growing Hispanic population: food, retail, and transportation.
Food industry
On average, Hispanics spend more on eating at home than non-Hispanics. That being said, when they do dine out, Hispanics are much more likely to dine out with the whole family and therefore make up a significant portion of consumers in the restaurant industry as well.
The demographic is forecast to see annual sales growth at fast-food restaurants of 4.3% in the next five years.
Stock pick: McDonald's (NYSE: MCD ) . The company invested $118 million in Hispanic media advertising last year, the fifth-largest amount of any U.S. company across all industries.
Retail industry
A Bureau of Labor Statistics figure shows that Hispanic men spend, on average, 7% more than non-Hispanic men on clothing. The demographic also accounts for 23% of U.S. residents under age 15 and for 19.2% of child and infant clothing so far in 2011. All of a sudden, department stores start to sound like a pretty safe bet.
The demographic is forecast to drive growth at department stores by 4.7% annually over the next five years.
Stock picks: J.C. Penney (NYSE: JCP ) and Kohl's (NYSE: KSS ) . J.C. Penney was the apparel retail leader in Hispanic media spending in 2009, with $50 million. J.C. Penney's and Kohl's experience in selling Latino-targeted clothing lines will be the subject of a talk at the Association of Hispanic Advertising Agencies' 2011 annual conference.
Transportation industry
By 2016, Hispanics are forecast to contribute about $14 billion to the automobile industry. Market research shows that younger Hispanics are more likely to purchase a car than older Hispanics, so expect this number to continue to climb as the youth bulge comes of age.
The demographic is expected to drive growth in the auto industry by 7.4% annually over the next five years.
Stock pick: Toyota (NYSE: TM ) . Toyota is among the top five auto brands among Hispanics. Among other initiatives, the company funds Hispanic literacy programs.
Sleeper pick: General Motors (NYSE: GM ) . GM is not one of the top five brands among Hispanics, but the company is desperate to become one. Pouring $102 million into Hispanic advertising last year, GM is worth keeping an eye on.
Airlines also stand to benefit from Hispanics' increasing purchasing power. As the demographic grows, it has begun to spread far outside of the traditional Sunbelt states as Hispanics relocate for employment, college, and other opportunities.
The demographic is forecast to drive annual growth of 5.1% in the airline industry over the next five years.
Stock pick: Southwest Airlines (NYSE: LUV ) . At the end of last year, Southwest struck up an international partnership with Mexican airline Volaris, increasing its exposure to Hispanics and cashing in on international flights.
Foolish bottom line
Many investors have pointed their portfolios at rapid growth companies in emerging markets, but we cannot forget that our domestic market is changing as well. Selecting companies that maximize the potential of changing demographic trends at home is a great strategy for investors.
Refuse to give up interest in foreign markets? I'll let it go this time. Click here for The Motley Fool's Special Free Report "The Hottest IPO of 2011" to see what Latin American company is making the most of an American favorite.
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