Consumer Goods Companies: Great Expectations
Vanina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a major shift in the consumer goods industry. Consumer spending in developed markets is hesitant to pick up as is still held back by a sluggish economy and high unemployment. This macro-economic environment, however, has been beneficial for developing countries, where sales have been growing at a fast pace along with optimal branding and positioning.
This industry is governed by big global companies that own a wide portfolio of brands in a variety of categories. If you are planning on adding some consumer goods producers to your portfolio you should take a close look at these three big firms.
Emerging Markets are keeping the growth going
Unilever (NYSE: UN) supplies personal & home care products, food and refreshments on a global scale.
The company showed very good results for its first quarter. Underlying sales rose 4.9% driven by a 2.2% volume increase and a 2.6% gain in prices. The best performance was shown by emerging markets, with a 10.4% year over year growth in underlying sales.
Unilever is characterized by its increasing investments in innovation and improved product quality. The firm is continuously introducing its brands in new markets, which contributes to its growth. Management’s main focus is on emerging markets, which are showing double-digit growth for Unilever while sales remain flat in the developed markets. In order to optimize resources in these promising markets, the firm is focusing on divesting its non-core operations. In Aug. 2012 Unilever sold its frozen foods business to ConAgra Foods and more recently its Skippy peanut butter brand to Hormel Foods.
I am optimistic about the company’s wide brand portfolio since it guarantees a strong presence and dominant market share. This goes along with Unilever’s acquisition strategy, which recently involved buying Sara Lee and Alberto Culver to strengthen its personal care business in Western Europe and hair products in the U.S. respectively.
The main threats to the company are macro economic challenges, which I expect will persist throughout 2013.
Former CEO coming back to ameliorate performance
Procter & Gamble (NYSE: PG) provides consumer packaged goods in more than 180 countries.
The company reported mixed results for its third quarter. Earnings improved 5% year over year, driven by strong cost savings and lower taxes. However, sales lagged due to slower market performance and weak beauty sales. Management expects fourth-quarter sales to decline compared to the same quarter of 2012 which indicates some concerns. Fiscal 2012 was a tough year for Procter & Gamble: So tough that the company just announced the reappointment of its former CEO, A.G. Lafley, replacing his own replacement, Bob McDonald.
We have to acknowledge that Procter & Gamble is an emerging market company and this is where its main efforts should be addressed. Bob McDonald could not manage to successfully execute the company’s strategy in these markets and well, time was up.
Under new management, the firm plans to introduce changes to power its top and bottom lines. Productivity improvements and cost-savings initiatives - which are already in place - should drive margins up again. Plus, Procter & Gamble will focus on better understanding its customers in the emerging markets. Unilever did a better job by driving higher margin products in these countries. The company will have to as well, providing that just focusing on premium products and the U.S. consumer does not cut it.
Best in class consumer goods company
Colgate-Palmolive (NYSE: CL) sells oral, personal, home care and pet nutrition consumer products in over 200 countries.
The company announced its first-quarter earnings of $1.32 per share, which showed a 6% increase year over year. Global sales grew 2.7% to $4.31 billion. Cost containment efforts and increased prices gave a 40 bps expansion in adjusted gross profit margin and a 20 bps increase in adjusted operating margins, which reached 22.8%.
Colgate has a vast geographic reach. Its toothpaste accounts for 46% of the global market share, and it claims to have even greater market share in the emerging markets. Even though it is hard to accurately measure it due to lack of infrastructure, the company’s presence in these markets is impressive.
In order to maintain this leading position and augment unit volume growth, the company initiated a four-year "Global Growth and Efficiency Program." This program will generate annual cost savings in the range of $365-$435 million, including a 6% reduction in the workforce (2,300 individuals approximately) by the end of 2016.
Having dominance in the oral care category involves continuous spending. Competitive pressure from Procter & Gamble and local brands is even worse in overseas markets, where Colgate has to deal with currency headwinds as well. Even though, the company has outstanding market share in these countries, this share could reach a ceiling, limiting future returns.
Unilever is a strong company and its efforts to remain a leader are paying off. It is a safe investment to consider. Procter & Gamble is a different story. The company will have to show better results from its turnaround efforts, and pay special attention to monitoring its performance in the emerging markets. If the company does not show any improvement on those sides going forward, I would not invest in it. On the other hand, I believe Colgate-Palmolive’s long-term objectives will be achieved. The company’s fundamental capabilities for improving its top and bottom line make me think the company will be able to keep on hitting home-runs. I support its management decisions and would remain long in this stock.
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Vanina Egea 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!