How Companies Are Profiting From the World's Poor

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Consumer markets in developed economies are anything but robust. The European consumer is shouldering wage freezes, benefit cuts, and tax hikes while the U.S. economy looks to be on shaky ground again, amid a pullback in consumer demand. For consumer goods companies, that necessitates an increased focus on emerging markets -- and not just the rising middle classes of Asia and Africa, but these regions' poor, too.

Among the companies making a push into this demographic is French food and nutrition giant Danone (OTC: DANOY.PK), the company behind such familiar brands as Activia and Danonino. According to a recent Wall Street Journal article, Danone is targeting consumers who subsist on a dollar-a-day food budget, offering 15-cent cups of water in Mexico and 10-cent tubes of drinkable yogurt in Senegal. Sales of the latter product have been growing at an average monthly clip of 10%.

The investor's first response, of course, is whether such ventures can be profitable. Yes, apparently. Danone reports that its emerging-markets bottled water operations, for example, are more profitable than its developed economies water business. However, profitably selling the small-serving dairy products hasn't been without challenge, and at least one product is now sold mostly to urban stores rather than rural villages, as originally planned.

Danone is not alone in its efforts. In 2008, diversified consumer packaged goods giant Unilever (NYSE: UL  ) was independently recognized for its ability to sell to all price points in developing and emerging markets. More recently, the company launched a branded tea targeted at India's poor. Nestle (OTC: NSRGY.PK) is another name pinning its hopes on emerging markets, a geography that graced the company with first-quarter organic sales growth of more than 10%.

Meanwhile, emerging markets exposure was one of the charms that Kraft (NYSE: KFT  ) saw in acquiring Cadbury. Procter & Gamble (NYSE: PG  ) , a fellow U.S.-based titan, has openly declared its intention of expanding deeper into developing markets, including plans to roll out more lower-priced products.

However, the strategy of repackaging existing products as smaller portions with lower price points might not work for every company with a significant emerging-markets footprint. Colgate-Palmolive (NYSE: CL  ) could have a tough time selling a miniaturized toothbrush (although toothpaste would be a different story) and H.J. Heinz (NYSE: HNZ  ) could theoretically face headwinds in persuading consumers who make a few bucks a day to spring for condiments, no matter how cheap.

Ultimately, whichever happens to be your favorite consumer-staples company, I'd keep a keen ear out for their emerging-markets strategies. Success among the world's expanding middle class and its poor could be the difference between single- and double-digit earnings growth, and accordingly, a rising or flatlining stock price.

Unilever is a Motley Fool Global Gains recommendation. H.J. Heinz, Procter & Gamble, and Unilever are Income Investor recommendations. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters, free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2010, at 2:38 PM, TMFKris wrote:

    This article prompts a couple of off-the-cuff comments (not strictly from an investor's standpoint) from me. What's the effect of selling sugar-laden foods (flavored yogurt) to people in regions where that's not typical? Maybe the nutritional value of the products is a boon. Maybe it's a baby, baby step to putting people on the road to the health problems that send Americans screaming about health-care costs. 5-cent Big Mac, anyone. First one's free...

    Unilever's branded tea: Is that taking sales away from a local grower or seller?

    Kris (MF copyeditor)

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