Research Postcard: AllianceBernstein

Local and global brands in a Thai village shop


By Wouter Klijn

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AllianceBernstein emerging consumer portfolio manager Tassos Stassopoulos speaks to theinstoreport about the importance of grassroots research and debunks a few consumer myths along the way.

Where and when did you go on your trip?

I travelled to Indonesia, Thailand and the Philippines for 10 days in September 2013, visiting six cities or regions in total, including Jakarta, Serang, Bangkok, San Kamphaeng, Manila and Bulacan.

What was the purpose of the trip?

Grassroots consumer research. We research the consumer investment opportunity in emerging markets the same way that consumer companies do, by interviewing people from different income groups in urban and rural areas face-to-face to understand their hopes, dreams and aspirations. It’s the only way to gain real insight into future consumer trends. You have to go straight to the source of demand and work out your investment conclusions from there, rather than simply invest in consumer companies in an emerging market index. An index is full of companies that were successful yesterday. We’re looking for companies that are going to succeed tomorrow.

What stood out most about the people you interviewed?

All gave or added to important insights in various ways. For example, at a village market in San Kamphaeng in northern Thailand I asked a stallholder, Ms Mic, about the brands she sold. They were an almost equal mixture of local and global—Twin Lotus Herbal Toothpaste alongside Colgate, for example, and Oishi Green Tea alongside Nescafé—and I was interested to know whether it was the local brands that were gaining market share or the global ones. When I asked her how the mix had changed over the last few years, I had to explain which brands were local and which were global. She looked surprised and said: “They sell Nescafé in other countries too?”

So the insight Ms Mic gave me was that investors really have to look closely at the dynamics of local and global brands, and not assume that consumers differentiate much between them and prefer local to global or vice versa. There could be as much reason to consider investing in global companies supplying brands to this market as in local companies that compete with them.

How is this sector performing at present?

It’s more stable than other emerging market sectors, which are caught up in global volatility. In any society, the consumer sector becomes interesting to investors after infrastructure development has delivered productivity gains and other efficiencies that contribute to economic and social stability and increasing wealth. This gives the sector a structural foundation, and the fact that consumers are employed across different industries, some of which are less cyclical than others, adds to the stability. People have been getting richer for centuries, ever since the industrial revolution – it’s not a new theme – and the emerging market consumer opportunity is an extension of this. For us, the opportunity is clearly defined, because we’re really just focused on consumer spending patterns.

What can local investors learn from this market?

A lot, but they either have to go there themselves or somehow acquire the same in-depth knowledge we do. Even our local analysts who come on these trips discover how little they really know about the consumers. After all, our local analysts live in big cities and come from privileged backgrounds, so even they benefit from grassroots research.

One of the first lessons they learn is how diverse consumers are across different cultures. In Indonesia, for example, consumer attitudes and values are highly influenced by the importance of family in Indonesian culture. Thais, on the other hand, are highly individual; they want to be entertained and they have aspirations, but seem uncertain about how to achieve them. In the Philippines, consumption has something of a US style about it – people love to eat and hang out at malls – while a lot is financed by remittances from overseas workers and locals who work in the business process outsourcing sector.

Grassroots research is also great for debunking myths about consumers. For example, there’s a widely-held view that consumers in ASEAN (Association of Southeast Asian Nations) countries all aspire to being able to afford imported brands. But that’s not the case in Indonesia, where local brands have done a better job of adapting to consumer tastes.

Do you have any holdings in this sector?

We have a diverse portfolio of stocks consisting of global, regional and local companies that serve emerging market consumers.

Are you considering changing your allocations to this sector?

We invest in goods and services on which consumers spend directly, so our allocations tend to cover everything except energy, materials and resources. Of course, we employ top-down and bottom-up as well as grassroots research in constructing our portfolio, and country and stock allocations change over time. We recently increased our exposures to Indonesia and the Philippines and reduced our exposure to Thailand. That had nothing to do with political unrest in Thailand, however, it was about how we saw the relative development of the consumer opportunity across those countries.

What is driving the growth in this sector?

Income growth, essentially. Emerging market incomes will continue to grow much faster than in developed countries. Again, this isn’t a new story, but many people don’t appreciate the nuances behind it. In some emerging market countries, for example, working-class incomes are growing faster than middle-class incomes, and this has implications for how consumer trends will develop and what kinds of products will be in demand and when. This is why grassroots research is so important, because we analyse consumer demand and the behaviour that drives long-term trends.

What are the risks to this sector?

Most people will tell you that they are corruption, war, natural disasters and political instability. Our research tells us that the main risk is education. The education risk varies across countries, but many emerging economies could fall into a middle-income trap – enjoying a one-off rise in GDP (gross domestic product) per capita as they switch from low-productivity agriculture to high-productivity industry, but stagnating thereafter. We see education as the key to overcoming that. Other risks are inadequate healthcare, insufficient financing and unreliable infrastructure.

What implications do these findings have for your portfolios?

Our grassroots research can tease out the various ways that a consumer trend or consumer values can translate into investment opportunities. In Indonesia, for example, the focus on family and home has led us to holdings in malls and to home improvement chain stores. Thai consumers are less debt averse than other cultures, so we have holdings in credit providers. Filipinos’ enjoyment of eating and socialising means we have exposure to food and drink companies with aspirational brands.

Most interesting or unusual custom you came across?

It wasn’t a custom in the traditional cultural sense, but it was interesting in terms of consumer behaviour. At Bulacan in the Philippines I met a grandmother who was raising her two grandchildren, who were two-and-a-half and 10 years old, because their parents had gone to Manila to find work. She couldn’t always afford to give them regular healthy meals, so she would give the younger one Nestlé infant formula to make sure he received the right nutrients. The older child had been on the formula until he was eight. Up until that point, we hadn’t really challenged the widely-held view that only affluent people in the emerging markets bought baby formula, while low-income mothers breastfed. What we discovered was that as more women move into the workforce, baby formula is in demand among low-income families as a dietary supplement for children, during infancy and for well beyond that too.

Next planned trip?

Brazil, Chile, Peru and Colombia.

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