Tough Times For Consumer Goods Companies

by Tony D'Altorio

Tough Times For Consumer Goods Companies

by Tony D'Altorio, Investment U Research

Monday, August 16, 2010

These are tough times for large, global consumer goods companies. Just ask Unilever ADR (NYSE: UN, UL)... which does indeed have two ticker symbols on the same exchange.

The Anglo-Dutch maker of Ben & Jerry's ice cream and Dove soap recently painted a gloomy growth picture for itself and the competition in the developed world.

Unilever CEO Paul Polman said, "I cannot see that Europe and the U.S. will show significant [consumer market] growth for the next five years at least."

Sadly, competitors like Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL) agree.

Unilever's Take on the Consumer Goods Sector

Unilever just joined the growing list of companies predicting rising commodities' costs.

That realization is coming at a very bad time...

Once an industry laggard, it staged an impressive revival recently. It streamlined operations, cleaned up its product portfolio and changed its bureaucratic corporate culture.

All that hard work - with the help of commodity trends - over the last few years has paid off with profitable growth.

The entire sector did have to push up their prices in 2008 as commodities rose sharply. But Unilever was able to take advantage again when the financial crisis hit.

With markets severely depressed, it had the money to increase advertising spending and improve its operating margins at the same time.

But happy days may be ending. With little economic growth in the western world, its competitors have ramped up their promotions.

Unilever's volume rose 6% January - June, but operating margins gained only 0.3%. To remain competitive, it had to lower prices on its products by an average 2.6%. And at the same time and for the same reason, it had to lift its advertising budget by 1.8%.

Rising commodity costs will keep eating away at Unilever's profit margin. So it hopes to combat that issue by raising its prices at the end of the year. When it does though, it shouldn't expect a happy reaction from either retailers or consumers.

Procter's Consumer Goods Gamble

Proctor & Gamble doesn't have it any better.

The company expects sluggish growth from developed markets in the year ahead. And it sees an increasing divide between the shopping behaviors of those with and without jobs.

Procter & Gamble CEO Bob McDonald said: "In developed markets... our new initiatives that are premium priced continue to do very well. At the same time, we also see... consumers without jobs... trade down."

The company had to spend heavily to introduce lower-cost versions of products such as Bounty and Charmin Basic to attract such value-seeking shoppers.

And it expects that trend to continue for some time.

Emerging Markets Are Looking Brighter...

Both consumer goods companies agree that things look much better in emerging markets.

In its latest quarterly report, Procter & Gamble noted how volume unit sales rose by 8%. And its emerging market sales grew at more than twice the rate of those in the U.S. and Europe.

Unilever shares a similar story. In the second quarter, its underlying sales in Western Europe fell 2% to $4.2 billion. But in Asia, Africa and Eastern Europe, they rose 8% to about $6.1 billion.

In fact, volume in Asia and Latin America has risen by double-digits so far this year.

Much of the sector growth from such regions came from personal care products. Emerging market consumers are increasingly spending on shampoo, deodorant and skincare products.

However, the emerging markets are very competitive, in part due to strong local companies. For the first half of 2010, operating margins in Asia and Africa were actually 2 percentage points lower than in Western Europe.

So investors have to realize that global consumer goods companies won't have an easy ride this year, no matter how many emerging markets they can claim.

Unless more traditional areas of business like the U.S. gain some momentum, they'll have to fight for every bit of growth they can get.

Good investing,

Tony Daltorio

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