P&G India Expansion Could Require Heavy Investment

Procter & Gamble (NYSE:PG) is the largest consumer goods company in the world with sales in excess of $79 billion in 2010 and competes with Colgate (NYSE:CL) competes with Unilever Group (NYSE:UL), Revlon (NYSE:UL) and L’Oreal (PINK:LRLCY). We value P&G with a $75.25 Trefis price estimate of its stock at about 20% premium to its current market share price. In our last note, we discussed P&G’s game plan for India in a recent article India is Key to P&G’s Additional Billion Customer Goal and outlined the upside potential from this strategy. Here we assess issues that could  the potential upside does not come without its share of threats, which P&G shall need to address in order to realize its ambitious goal.

Consolidation of local players

The major local players in the India Fast Moving Consumer Goods (FMCG) space – Dabur, Marico, ITC and Godrej – have taken advantage of the robust growth rate of the Indian economy hovering at over 8% for the past decade and acquired businesses within and outside India in South Asia, Africa and to a limited extent, also in Latin America.

Marico acquired Malaysian hair styling brand Code 10, Singapore-based skin care firm Derma Rx and South African health brand Ingwe in 2010 and is eyeing more acquisition opportunities in Africa and Asia. Godrej acquired a leadership position in ethnic hair care segment in South Africa with its acquisition of Rapidol and Kinky brands. It further acquired Tura, a leading West African medicated brand; Megasari Group, a leading Indonesian household care company; and Issue group and Argencos, two leading hair colorant companies in Argentina. Back in India, Godrej recently announced the acquisition of Swastik and Genteel brands of liquid detergents.

How can consolidation of Indian players impact P&G?

The regional players have a wider distribution network extending to the remote corners of the country and benefit from low cost local manufacturing and an established local supply chain network. This enables them to offer highly competitive prices while maintaining margins. Consolidation through international acquisitions has helped the Indian FMCG players introduce new product innovations in the Indian market to broaden the appeal as well.

These merged entities now compete in more product segments, have higher budgets for advertising and promotions, and stand to make higher margins over larger volumes. The consolidation of local players has only increased the competition for P&G in India and warrants increased advertising, promotional expenses, and more aggressive pricing, all of which threaten to strain operating margins.

Pricing of products

P&G products still carry a premium image and despite much effort to reduce prices, P&G products are still priced at a significant premium to local competition. While the Indian economy grew by 8.3% in 2010, the per capita spending by the population of over 1.18 billion people was less than $1, below the Asian Average of $3 and well below US at $96. While this leaves some scope for an increase given the abysmally low GDP per capita for India at $3.4k compared to $8.7k for Asia as a whole, the statistics not only necessitate pricing products competitively but also launching smaller sized product variants at lower price points to cater to such low economic demographic.

Unilever’s Plans

P&G’s biggest competitor in India, which has a comparative business scale and financial muscle, is Hindustan Unilever (HUL), the Indian subsidiary of Unilever. While P&G is bigger globally, Unilever commands the market leadership position in India and is present in more product categories spanning from shampoos, bath soaps and detergents to ice creams, foods and beverages. The sheer breadth of Unilever’s product offering in India had helped it gain wider distribution and preferential shelf space at the retailer.

Given P&G’s plans of entering more product categories in India, we expect Hindustan Unilever to go more aggressive in an attempt to retain market shares. Unilever under its current CEO, Paul Polman, plans to double its revenues within this decade and particularly increase its presence in beauty and personal care segments – see Why Unilever Could Bid for Colgate and Why Now. With the result Unilever has already made some strategic acquisitions recently which include that of Alberto Culver’s hair care brands, ^[1] Sara Lee’s personal care and European laundry care business. ^[2]

Gong forward, we expect Unilever to increase its advertising and promotional spending in India and to even acquire regional businesses in attempts to retain market share and to further consolidate its leadership position.

All in all, India might bring in volumes for P&G but these could be at reduced price points and lower margins amid high selling and marketing expenses.

You can see a detailed analysis of our $75.25 Trefis price estimate of Procter & Gamble’s stock here.

1. Unilever’s Alberto Culver Acquisition Adds Shine To Stock, Trefis, Jan 20′ 2011 [↩]
2. Unilever’s European Expansion Lifts Stock, Trefis, Dec 20′ 2011 [↩]