Are FMCG Players Following the Right Strategies?
usman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global fast moving consumer goods (FMCG) sector is undoubtedly among the most competitive and the fastest growing sectors. Every player in the sector is reinforcing its strategies to reach rural and lower income areas to expand distribution networks.
Moreover, the trend towards local acquisitions to increase market share continues. In this article, I will discuss these two strategies with respect to the three well known players of the industry; Prestige Brands (NYSE: PBH), Procter & Gamble (NYSE: PG), and Unilever (NYSE: UN).
Over the last five years, the global personal care and homecare products sector has experienced healthy growth. The growth is mainly driven by a rising population, higher disposable incomes, changing lifestyles in the Asia Pacific region, and the economic recovery in North America.
Besides those, the rapid innovation, eco-friendly products, and the use of natural ingredients are lifting up the demand for homecare products. The personal care products sector is expected to reach around $630 billion in 2017 with a CAGR of 4.1%, whereas the homecare sector is expected to reach to $146 billion in 2017 with a CAGR of 4.6%. The largest growth is expected in China and India.
Whose strategy stands out?
Prestige announced its acquisition of Care Pharmaceuticals, a privately-held Australian marketer and distributor of over-the-counter healthcare brands for children and adults. The company’s main objective for FY13 is to continue participating in OTC mergers and acquisition activities. Its core growth in the OTC market is 5.9%, which exceeds the industry average. According to the company’s management, merger and acquisition is a proven creator of shareholder value.
Its recent acquisition of Care Pharmaceuticals strategically fits its existing business. Care’s brands have market presence in Australia, New Zealand, and Asia Pacific regions. It operates under the same business model as Prestige and has a portfolio of well-known brands which complement Prestige’s existing product line. The acquisition will provide a new and expanded platform to the company in the Asia Pacific region, which is currently the fastest growing sector.
Let’s take a look at the Prestige's competitors’ activities and their financial performance. Procter & Gamble, the leader in the industry, is reorganizing its products under four different product units; global baby, feminine and family care, global beauty, global health and grooming, and global fabric and homecare. This split will help management to effectively position their products by grouping the consumers and then targeting them. It will also facilitate the company in faster global expansion of different units and product innovations to win more customers.
Another move by Procter & Gamble was to bring back its former CEO. A.G. Lafley was replaced by Bob McDonald, but due to the immense pressure from investors, the company had to withdraw its decision. It is expected that the former CEO will bring faster improvements to the company’s operations. This will result in the company having a stronger foothold in the industry.
The steps taken by Unilever to grab a larger market share include increasing its stake in Hindustan Unilever from 52.48% to 67.26%. It paid $5.4 billion to raise its share in the Indian subsidiary. The larger share will bring huge profits for the company as India is currently the largest growing market in the world.
The company is also opening its first global leadership development center in Asia. The new center will assist in developing new talent to lead its growing business. This decision to build a new facility in Asia highlights the company’s focus on developing markets. The special attention given to this region will add immense profits to Unilever’s financial statements as the region accounts for over 55% of its global revenue.
In the past three years, Unilever has grown consistently, increasing its turnover by over $13 billion.
Prestige, currently, is in a very sound position. Its revenue and net profit has increased significantly over the past few years. It achieved a record adjusted EPS growth of 51.5% to $1.50 per share in 2012. The company has an industry leading EBITDA margin of 34.9% while the median is 21.2%. It is anticipated that its latest acquisition will further strengthen its position. So, I would recommend buying the stock.
P&G’s financial position is weaker as the company’s profits have been declining over the past few years. But, the EBITDA of P&G for the latest twelve month period, 23.5%, is slightly above the industry average of 21.2%. Its latest strategies will increase its profits and strengthen its position in the industry. However, it will take some time. So, this stock is not recommended for short-term investors.
Unilever is also showing signs for a bright future. The company has healthy margins. Its focus on the Asia Pacific region is expected to bring higher profits and establish stronger brand equity. Therefore, it is also recommended to buy this stock.
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usman iftikhar has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. 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!