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Nestle (PINK:NSRGY) Builds Momentum in China, $0.45 at a Time

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The government-mandated increase in China's minimum wage means a lot more people should be able to afford Nestle's low-cost consumer products.

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Apparently, it makes a difference whether you're selling $1,000 raincoats or coffee capsules at $0.45 each.

On September 11, luxury-goods maker Burberry (PINK:BURBY) announced that same-store sales for the 10 weeks that ended on September 8 were flat with the same period in 2011. A slowdown in sales growth in China was a big part of the problem. The stock fell 21% on the news.

Two days later, Roland Decorvet, Greater China Chairman for Nestle (PINK:NSRGY), said he expects the company's sales in China to grow by about 20% in 2012. That would follow 20% growth in 2011. Decorvet projects China sales will grow at a double-digit rate in 2013.

Rising wages in China, a part of the government's effort to encourage domestic consumption, will increase sales in Nestlé's coffee and dairy business, as well as at recent acquisitions such as snack and candy maker HSU Fu Chi International and Yinlu Food Group, a maker of ready-to-drink peanut milk and instant canned rice porridge, Decorvet argues.

According to the latest five-year plan, the minimum wage in China is to increase by 13% a year for the next five years. According to Decorvet, that rising income translates into big growth in low-cost consumer goods, such as Nescafe instant coffee or Kit Kat candy bars.

Chinese consumers drink an average of four cups of coffee a year. The average is 150 a year in Hong Kong, 400 a year in Japan, and 600 a year in the United States.

I think you can see the logic behind Nestle's thinking.

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