International Sales Driving U.S. Company Growth
Over halfway through the year, U.S. companies have begun reporting 2nd quarter earnings. Unsurprisingly, international sales are mostly responsible for contributing to the Standard & Poor’s 500-stock index companies reporting the highest profits in four years. Both large and small U.S. companies are weathering the weak U.S. economy through exports. U.S. Gross Domestic Product (GDP) grew a meager 0.4% in the 1st quarter and only1.3% in the 2nd quarter. While U.S. sales remain soft, companies are prospering due to sales growth in their international operations, often in emerging markets.
“Our global growth was especially strong,” said CEO of General Electric, Jeffrey Immelt.1 GE’s core business in the U.S. decreased -3.4% in the 2nd quarter, but its international sales increased +23%.
U.S. companies also appear to be investing more in their international operations than in the U.S. This is due to their belief that future profits will flow from offshore rather than U.S. operations. Air Products & Chemicals Corp., which produces industrial gases to manufacturers, split its capital investment this year equally between Asia and the U.S. Paul Huck, CFO of the company, said recently, “We think that number starts to tilt more toward Asia going forward.”
Food and beverage companies are also taking advantage of rapidly rising global markets. Nestle, the world’s largest food and beverage company, just announced a US$1.7 billion acquisition of Chinese candy maker HFCI. 2 Nestle is interested in the Chinese confectionery industry’s 10% annual growth rates and 30% gross margins. U.S. food company Kraft — which has quadrupled its China sales in the past four years – believes there is a market in China for breakfast cereals and other “new” products such as Pop Tarts. Mars, the world’s largest candy producer with brands such as M&M’s, Snickers and Wrigley’s, has two factories in China with plans to add a third.
Other emerging markets offer growth potential for U.S. firms, including Brazil, which is set to become the world’s fifth largest economy in the next five years. In 2009, Brazil’s GDP was US$2 trillion dollars, which would make it the ninth largest economy. 3 Socio-economic factors should help drive the increased demand for U.S. food imports, including more women in the workplace, increased urbanization, demand for convenience, increasing number of fast-food and casual dining restaurants, growing disposable income, and a strengthening currency vs. the U.S. dollar.
India has also maintained impressive growth rates. India’s GDP expanded 7.8% in the first quarter of 2011 vs. the previous year. From 2004 until 2010, India’s average quarterly GDP growth was 8.4%. The main drivers supporting increased exports of U.S. high-value agricultural products to India are growing middle-income consumers, increasing urbanization, a steady transformation of the food retail sector, an increased number of restaurants and fast food chains, and greater exposure to international products. U.S. exports of consumer ready food products reached US$292.5 million in 2009, a new record high by over 10%. Total U.S. agricultural exports from the U.S. to India reached another record high of US$690.8 million, an increase of 41.38%. 4
It is an opportune time for U.S. manufacturers to expand their export sales and mitigate a weak domestic economy. U.S. food and beverage companies, which have been impacted heavily by rising commodity costs such as sugar, cocoa, and coffee, can offset these higher cost ingredients with a weak U.S. dollar. A weak U.S. dollar has helped increase sales 5% this year for Kimberly-Clark Corp., maker of diapers and toilet paper. Colgate-Palmolive reported that it contributed 6% of its sales growth in the 2nd quarter.
Of course, companies with little or no exports cannot take advantage of these factors. It is a sound strategy to deploy resources toward selective international markets in order to diversify sales channels, increase the number of customers, limit risk exposure, enjoy a higher return on invested capital, and hedge against an anemic U.S. domestic economy.
1 “Business Abroad Drives U.S. Profits,” Wall Street Journal, B1, July 25, 2011
2 “A Business Sweetens Many,” China Daily USA, page 15, July 24, 2011
3 “Brazil Country Profile,” Food Export Association, 2011
4 “India Country Profile,” Food Export Association, 2011