Axe-ing the Competition

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Adweek’s best commercials of 2012 are out and one that sticks out is the ad for Axe, a line of grooming products aimed at young men. It is a poignant piece about the all-American girl who got away, quite a departure from their more hardcore spots which were controversial and singled out as sexist and degrading by the Campaign for a Commercial-Free Childhood. The “Sally Glenn” commercial is truly an ad that’s inspired and lovely yet still so honest.  Axe is owned by Unilever (NYSE: UL) and has been competing against Procter & Gamble Co (NYSE: PG) owned Old Spice with its older male demographic, which also had a very successful and viral ad campaign.

Axe has been one of the most successful rollouts ever of Unilever’s product lines. Men’s grooming has been on the upswing as the male of the species discovers that good looks (and smells) also equate to more money, better jobs, and of course, ladies. Never forget the ladies. Ulta Salon and Macy’s have both expanded men’s grooming offerings and it’s about time. Better smelling men is a better world, in my opinion.

Aside from Axe how is Unilever really doing compared to Procter & Gamble? Unilever has a P/E of 20.57 and a yield of 3.30% very close to Procter & Gamble’s 19.43 P/E and 3.20% yield. With two competitors so similar with many overlapping product categories the growth rate and guidance are critical. Analysts expect the P&G growth rate to be 8.04% over the next five years and 4.90% for Unilever.

Zacks recently upgraded Unilever to outperform while keeping Procter & Gamble as a hold based on Unilever’s very bullish Q3 earnings report and guidance and its superior performance in emerging markets. Fellow Fool  Rich Smith disagrees with a CLSA analyst upgrade of P&G to Outperform with a $78 price target supporting his case that P&G, while a name investors think is solid, is also stolid and stale.

Edgy And Canny

In contrast, Unilever’s strategy with Axe is an example of how much more edgy and canny they’ve been than P&G. Axe comes out with regular limited edition fragrances, designed by the same consultant, Ann Gottlieb, who worked on Calvin Klein’s fragrances. This year they are introducing a line of women's Axe products.While they've toned down the advertising for Axe some they did use the same ad agency for the new commercial and still haven't lost anything in translation.

Unilever, a British company founded in 1885, is a major diversified consumer goods company with an extensive portfolio of laundry, personal care and food products. It has been buying up personal care companies like its 2011 acquisition of Alberto Culver and 2010's purchase of the personal care line from Sara Lee. In emerging markets it has also buying stakes in small personal care companies like Concern Kalina in Russia.

That's what Unilever has been doing with its money as opposed to the share buybacks by P&G and another competitor Church & Dwight (NYSE: CHD) with a higher P/E of 23.41 and a lower yield than both at 1.80%. Again Fellow Fool Rich Smith gives his blistering opinion of buybacks as a sheer waste of free cash flow.

Slashing The Risks

There are risks with Unilever as with any global brand, especially of the geopolitical and country specific economic variety. This is even more true now that Unilever is making a concerted effort to enter and grow those emerging markets. CEO Paul Polman has said that emerging markets are now 56% of the business. This is what I see as the major risk in owning Unilever while at the same time it may contribute to the major reward in owning Unilever. 

If you're an Anglophile you might want to read Malcolm Wheatley's assessment of the risks in owning Unilever. He sees a significant risk in their Sustainable Living initiative, i.e. reducing their environmental footprint, and while attractive to socially responsible investors he may have a point if profits are sacrificed to being more "green."

He also cites customer relationships with major customers (he uses British examples; for American readers substitute Safeway, Kroger et al.) as a risk as these customers have their own private label alternatives to Unilever products. This is really not news and it's baked into all major consumer brands. Store brands can't compete with Axe as a brand, for example, and the Alberto Culver products are so cheap already that a store brand can't make it cheaper. On the food side, Hellman's, just one example, is a superior product to store brands and even its Kraft Mayo competition.

The Cruelest Cut

I'm afraid in this case the Unilever Brits are winning out over iconic American brands Procter & Gamble and Church & Dwight in the hearts and minds of consumers, especially that much wished for demographic, males between 18-24. As it worked for the British just a few hundred years ago when the sun never set on the British Empire, Unilever is looking for world dominion over the way we smell and look, especially young men. And that's not a bad thing in my book.

leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Procter & Gamble Company and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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