The Asian Food Epidemic
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the things that is changing rapidly with the development in Southeast Asia is how urban dwellers are eating. There is a natural progression as people lift themselves out of poverty. They expand their spending on food, choosing to buy richer calorie food. Meat and dairy consumption rates invariably rise. Much has been made about the obesity levels in the West, especially America, and while there are a lot of competing explanations for why this is so it is not my intention to spark a diet controversy. Suffice it to say that in emerging markets like India and Vietnam, American brands that cater to these shifts in taste are finding themselves being handsomely rewarded.
From Pho to Pizza
Domino’s Pizza (NYSE: DPZ) is a brand that, on top of its corporate and menu make-over, has found success in expanding overseas. Vietnam, in particular, is an almost turn-key market for them. This is because home delivery is almost always an option. I can get the best restaurants in Ho Chi Minh City to deliver or FPT to deliver me a new iPhone. I’m half-tempted to see if I can get a currency exchange completed via home delivery. My point is that for a company like Domino’s leveraging their core strength into Vietnam’s market will meet with very little resistance.
Domino’s international business has grown significantly in the past five years which has contributed an increasing proportion of operating income. They’ve increased the number of stores from 3,469 in 2007 to 4,835 in 2011, a 39% increase while operating income from that portion of the business has increased 63% growing from a 24.3% of total income to 29.1%. They are likely to see high single digit growth in their international sales for the near future. Major targets for Domino’s, though, include expanding their presence in India from 440 to 1000 stores, as well as Brazil.
With Gain Comes Pain
The exportation of American-style prepared food which, ironically, is seen as cheap in The States while Pho is exotic, here in Vietnam it is, for lack of a better term, bourgeois. So, we’re seeing as the middle class expands, somewhat, a rejection of traditional Vietnamese dishes for Yum! Brands (NYSE: YUM) KFC and now Domino’s Pizza. While this is great for these companies’ bottom lines, it also comes with a cost.
With these changes in diet as well as lifestyle have come increases in certain metabolic diseases. Type 2 diabetes is on the rise all across Southeast Asia and is likely under-reported. A recent report from Australian researchers found that 11-12% of Ho Chi Minh City’s population has Type 2 diabetes, which, broadly, is brought on by chronically high blood sugar. This will have long-term effects on the development of the economies of Southeast Asia. In terms of diet, there is no Asian Paradox, though there is genetic variability. In my view of things, as more calories ingested come from fat without a commensurate decrease in carbohydrate intake this trend will continue, especially among those segments of the populations which use their heads as opposed to their hands. This will create a demand for medical services and products that serve to offset these effects.
Treating the Symptoms
The health and wellness bull market in the U.S. and Europe is a direct result of their food choices over the past few generations. The U.S.D.A has pushed a high carbohydrate-low fat diet since the 1960’s and with it has come a meteoric rise in obesity, diabetes, heart disease and cancer. The response has been multi-lateral with the proliferation of medication treating the effects, such as arterial breakdown benefiting pharmaceutical giants like Merck. But as well Americans have become obsessed with fitness, spending billions on everything from gym memberships to free weights to nutritional supplements. So much of the politics surrounding Universal Health Care in the U.S. centers on the skyrocketing health care costs and the cost/benefit analysis from a societal level. If these trends continue, similar discussions will be had all through the ASEAN nations as well as China and Korea.
A growing percentage of people, though, are taking their health into their own hands. Companies like GNC (NYSE: GNC) have capitalized on this trend providing an ever-growing array of nutritional supplements to such people. Since their IPO last April the company’s stock has risen 114%. Their net margins have steadily increased from 34.6% in 2008 to 36.4% in 2011. Year over year revenue growth in 2011 was 13.7% with net earnings of $1.52 per share. They are also aggressively pursuing emerging markets like Vietnam and China, looking to add 100 stores per year either as stand-alone stores or stores-within-a-store(SWAS). Their international business is running at gross margins of 33-34% versus 11-14% in the U.S. and Canada.
The irony of this story is that the rise of Domino’s overseas almost anticipates the success of companies like GNC. Diseases like type 2 diabetes and the secondary effects of it are a consequence of lifestyle choices. Part of the reason why capital is fleeing the developed world and moving towards the emerging markets is the cost of care for dependents and the ever rising cost of health care. Those costs are low now but they are going to rise as time wears on.
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