Consumer Goods Update: Reduced Currency Volatility, Developed Market Recovery Should Re-accelerate Top Line Growth In 2014

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Estee Lauder

Companies operating in the Consumer Goods industry have a significant geographic diversity, which exposes them to high currency fluctuation risks. Last year, beauty and personal care product companies such as Estèe Lauder (NYSE:EL) and L’Oréal (PINK:LRLCY) lagged the Consumer Goods industry, impacted by currency volatility. The benchmark Global S&P Consumer Discretionary Index (SPG1200-25) gained 36% last year, while L’Oréal and Estèe Lauder gained 27% and 30% respectively. Year-to-date, these two stocks are down 8% compared to a 2.5% decline in the benchmark index.

The drop this year is a result of continued adversity in emerging market currencies. Markets such as Turkey and South Africa continued to witness high currency fluctuations so far in 2014, despite corrective measures such as interest rate hikes from their respective central banks earlier this year to contain this volatility. In our previous note, we provided an extensive coverage on what to expect from Consumer Goods companies in 2014. (See: Will The Consumer Goods Industry Bounce Back In 2014?)  This note provides an update on various macroeconomic metrics that materially impact financials for Consumer Goods companies and their trend in 2014.

See our complete analysis of Estèe Lauder

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Asia-Pacific Consumption Story Remains Intact; China Should Continue Driving Top Line Expansion

The booming consumption story in the Asia-Pacific market has been one of the major drivers of revenues for Consumer Goods companies throughout the last decade. Faltering growth in developed markets such as North America and Europe during the recessionary period, combined with sharp increase in discretionary spending from emerging market customers, resulted in a shift in focus from developed markets to emerging markets for consumer companies in recent times. According to Euromonitor, growth in per capita disposable income in real terms within the Asia-Pacific region outpaced all other geographies, growing 19.3% between 2007-2012. [1] Per capita disposable income in China particularly showed immense growth, increasing 63.3% in real terms during the period. [1]

This increase in per capita disposable income contributed to strong growth in the Asia-Pacific beauty and personal care market. Between 2007 and 2012, spending on beauty and personal care products from Chinese consumers expanded 68% to reach $32 billion. During the same period, the developed Japanese beauty market shrunk 5% in size to $47.3 billion. [2] Going forward, per capita income in emerging economies is expected to increase further, spurring consumer spending and thereby contributing to an acceleration in top line growth for beauty players in constant currency terms.

Additionally, the effects of the Fed’s tapering measures on emerging market currencies have tempered down since the second half of 2013. This reduced volatility in currencies should reduce headline risk for consumer goods players in 2014. Moreover, macroeconomic metrics, such as consumer-price inflation, have softened in emerging markets that should spur sales. So, while the reduced inflationary effects suppress product pricing, we expect stronger unit sales from increasing disposable income will offset the corresponding decline resulting from lower unit prices.

Recovery In Developed Economies Should Lift Revenue Growth Rates In 2014

In addition to Asia-Pacific sales driving the global market for beauty products, we expect consumer spending in developed economies such as Europe and North America to bounce back in 2014 from the lows of 2008-09. For example, Estèe Lauder reported revenues of $4.3 billion from the Americas region in fiscal 2013, 5% higher compared to fiscal 2012. Similarly, the EMEA and Asia-Pacific regions for Estèe Lauder witnessed growth rates of 4% and 5.4% in fiscal 2013, each reaching $3.8 billion and $2.1 billion approximately. However, these growth rates were lower than the growth rates witnessed between fiscal 2011 and fiscal 2012, due to currency headwinds as mentioned above. Additionally, the contribution of developed markets to top line growth was weak, which weighed on overall revenues for consumer goods companies.

Macroeconomic indicators, such as unemployment statistics and GDP growth in the U.S. and the European Union, has been strong so far in 2014, indicating a strengthening in the recovery process of these economies since the economic crash in 2008-09. With higher income levels and reduced unemployment rates, buying power is expected to return to consumers as far as discretionary goods go in these economies. This expansion in consumer spending, supported by the ongoing macroeconomic recovery in these regions, combined with reduced currency volatility effects in high-growth emerging markets, should re-accelerate top line growth for beauty companies in 2014.

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Notes:
  1. Regional Focus: Asia Pacific’s Changing Consumption Patterns Spur New Opportunities, Euromonitor Blog, April 2013 [] []
  2. Online Exclusive: A Look at the Top 5 in Asia Pacific Beauty Sales, Beauty Packaging, August 2013 []