Unilever’s Home and Personal Care Businesses Will Be Most Affected In A Prolonged EM Slowdown
Unilever’s (NYSE:UL) CEO, Mr. Paul Polman, announced at the 2013 World Wildlife Fund Duke of Edinburgh Conservation Awards that the ongoing slowdown in the emerging markets will stay for a long period. [1] Mr. Polman had earlier warned in late September that slowing growth in the emerging markets would hamper third quarter (July-September) sales in FY 2013. However, at that time he was upbeat about Unilever’s performance in Q4 and the complete fiscal year. (Read: Unilever’s Profit Warning Indicates Slowdown Across The Consumer Products Industry)
Mr. Polman’s recent expectations of a prolonged slowdown suggest that the company could face a tougher operating environment not only in Q4, but also in the years to come. In such a scenario, we believe that Unilever’s personal and home care units will be most affected, since they have higher exposure to the emerging markets compared to the company’s other units.
We have a price estimate of $40 for Unilever’s stock, which marks our valuation almost in line with its market price.
How Is The Emerging Market Slowdown Affecting Unilever’s Growth?
Unilever’s above-market growth in the last decade has come on its rapidly expanding presence in the emerging markets, where the demand for consumer products has increased year on year due to rising per capita disposable income. The company achieves about 85% of its overall growth from developing economies such as Brazil, India, Indonesia and South Africa. In the last year or so, these markets have witnessed rapid currency depreciation aggravated by fears over the Federal Reserve’s plan to taper off quantitative easing. This has created inflationary pressures on consumers, who have reduced buying activity.
Negatively affected by the slowdown, Unilever’s underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements) in the emerging markets rose by only 5.9% year over year in last quarter, the worst in ten quarters. Overall underlying sales grew by an even lower 3.2% year over year, as the demand in developed markets increased at a slower pace. Currency weaknesses in developing countries further worsened things for Unilever. The company’s total revenue fell by 6.5% year over year due to the exchange rate impact of currency headwinds on sales. (Read: Emerging Markets Hold Back Unilever’s Growth)
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Personal And Home Care Will See The Worst If The Slowdown Were To Continue
The contribution of emerging markets to Unilever’s total revenue currently stands at close to 60%. Despite the deceleration in growth, emerging markets continue to grow faster than the developed world. This is one of the key reasons why Unilever intends to lift the revenue contribution of emerging markets to three-fourth by 2020. [2]
Personal and home care categories together generate about 80% of Unilever’s emerging market sales, and hence are most prone to emerging market volatility. The two categories combined account for half of Unilever’s total revenues.
1. Personal Care: About 60% of the revenue generated by personal and home care comes from personal care products for skin and hair. These products also account for 35% of our price estimate for Unilever’s stock. We currently forecast the markets for skin and hair care products to grow to $107 billion and $70 billion by 2020, respectively. This represents an annual growth rate of over 3%. If the market sizes for both skin and hair care were to increase by only 1% annually due to the slowdown, there would be a 5% downside to our price estimate for Unilever.
2. Home Care: The remaining 40% of the revenue generated by personal and home care comes from personal care products for oral hygiene and deodorants, and home care products for fabric, surface and dish cleaning. We estimate that the market size of all these products combined stood at $138 billion in 2012, and forecast it to reach $172 billion by 2020. If the market were to increase to only $150 billion instead, there would be a 5% downside to our price estimate for Unilever.
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Notes:- Unilever CEO Says Emerging Market Slowdown to Last for Years, Bloomberg, December 2013 [↩]
- Emerging markets to generate 75% of Unilever sales by 2020, Live Mint, November 2012 [↩]