Vaccine Rollouts Are a Key Ingredient for Big Food

Long-term, emerging markets remain an attractive place for companies that sell food and other consumer staples.

Long-term, emerging markets remain an attractive place for companies that sell food and other consumer staples.

Photo: Dhiraj Singh/Bloomberg News

A patchy global recovery is bad news for big food companies such as
Nestlé
and Unilever, even if their meaty exposure to emerging markets remains a plus for long-term investors.

The health situation in some developing countries is serious. India is grappling with one of the worst outbreaks yet in the Covid-19 pandemic, while Brazil recently recorded over 400,000 deaths, second only to the U.S. toll. Slow vaccine rollouts are likely to extend the problems. Just 30% of citizens in emerging countries are expected to get a jab by the end of 2021, compared with over 90% in wealthier nations, according to
UBS’s
global vaccination tracker.

Big European food companies are more exposed than U.S. peers, such as Kraft Heinz, which tend to do more business at home. Nestlé and Unilever generate 42% and 60% of revenues in developing countries, respectively. Sales in these markets outpaced those in mature countries in the first quarter for both companies, reversing an unusual trend last year when the strongest demand came from European and American consumers who were stockpiling goods.

Still, conditions in emerging markets could be harsh this year. With the notable exception of China, consumers in less wealthy economies have been hit harder by the pandemic. Across emerging markets, excluding China, per capita incomes are expected to slip 20% between 2020 and 2022 compared with pre-pandemic levels—almost double the fall in developed countries, IMF data shows. Tens of millions have dropped out of the middle classes, particularly in Asia, and consumer spending in countries that depend on tourism, such as Thailand, may take years to recover.

Pinched shoppers are already trading down to cheaper goods. Nestlé Chief Executive

Mark Schneider
said on a recent call with investors that the pandemic has “wiped out a lot of our progress” in emerging markets, adding that the company’s coffee and pet-care brands could be affected. Both categories were growing strongly before the pandemic, as consumers switched from feeding their cat or dog table scraps to giving them manufactured pet food, and traded up to more upscale coffee.

Major food companies that operate in emerging markets also have to deal with exchange rate swings. The Brazilian real, Mexican peso and Indian rupee were among depreciating currencies that wiped 7.9% off Nestlé’s top line in 2020. Although sales growth in developing markets can be impressive, the gains are often lost when translated back into companies’ reporting currencies.

Long-term, emerging markets remain an attractive place for companies that sell food and other consumer staples. The growth of the middle classes is a deep-rooted trend that should return. And it is sometimes easier to pass on higher costs to consumers in developing countries than in wealthier regions such as Europe, where consolidated and powerful grocery retailers can resist price increases. This will be important as consumer giants need to offset unusually high commodity inflation this year.

U.S. food companies such as
Campbell Soup
and Kraft Heinz have no significant emerging markets exposure, so don’t have to worry about health crises in far-flung countries. The outlook for the American market is rosy as consumers seem to be eating at home more than usual even as states reopen. While Europe’s food names still offer better long-term growth prospects, investors this year might be tempted to stay local.

Write to Carol Ryan at carol.ryan@wsj.com