Cost Savings Rescue FMCG Giants From Currency Woes

by Trefis Team
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Unilever Group
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In the last year or so, emerging market currencies such as the Brazilian Real (BRL), the Indian Rupee (INR), the South African Rand (ZAR), the Venezuelan Bolivar (VEB) and the Argentine Peso (ARS) have significantly depreciated relative to the dollar. This has negatively weighed in three ways on the operations of FMCG (Fast Moving Consumer Goods) majors, including Unilever, Procter & Gamble, Colgate-Palmolive and Kimberly-Clark. The first and the most significant impact is the slowdown that the currency devaluation has created in the emerging markets. Rapid currency depreciation creates inflationary pressure which forces consumers to reduce buying activity. The remaining two impacts relate to commodity costs and revenues. While inflation has pushed up the commodity costs, currency translation losses have reduced the revenues for the FMCG firms in dollar terms, thus squeezing the operational efficiency from both the ends. Cost savings have become an inevitable measure in such a business environment.

Despite the deceleration in growth, the developing economies continue to grow at higher rates than the developed world. In this article, we analyze the importance of the emerging economies for the four FMCG giants. We also discuss the key highlights of the savings initiatives presently being pursued by each of them to counter currency headwinds in the emerging markets. The common agenda behind the savings programs is to enhance gross margins while also freeing up more resources for investing back into advertising, marketing and brand building. The following table summarizes key metrics for the FMCG companies for 2013 that will be helpful in comprehending this article:

See Our Complete Analysis Of Consumer Stocks: Unilever | Colgate-Palmolive P&G | Kimberly-Clark

Unilever (NYSE:UL): Unilever’s above-market global growth in the last few years has come on its rapidly expanding presence in the emerging markets. The company achieves about 85% of its overall growth and slightly less than 60% of its total revenues from these markets. It intends to lift the revenue contribution of the emerging markets to 75% by 2020. [1]

Unilever saved about €1.5 billion (less than $2 billion) through its cost savings program in 2013. Starting next year, the company expects to save an incremental €500 million ($684 million) annually. This is will be achieved via a combination of measures such as reduction in marketing headcount by 12% globally (mostly in slow growing economies such as the U.S.) and a 30% cut in the number of stock keeping units by the end of this year. The company will also focus on launching more high-margin products in the market to generate higher levels of income. [2]

Our price estimate of $44 for Unilever is almost in line with the market price of the stock.

Colgate-Palmolive (NYSE:CL): Emerging market growth is a strategic priority for Colgate-Palmolive. The company derives more than half of its revenues from emerging markets such as Latin America, Africa and Asia. Its product portfolio in these countries is skewed towards oral care products, which generate more than 50% of total company sales. [3] Colgate is also the oral care market leader in many of the emerging markets, including India and Brazil. [4]

Colgate’s funding-the-growth initiative is helping it to more than offset higher raw and packaging material costs. Under the program, the company has opened new environmentally sustainable distribution centers to offer better service to its customers, while also reducing fuel and transportation costs. It is generating savings on indirect purchases by negotiating better lease terms with its current suppliers in several countries. [5] It is also generating significant savings via raw material substitution, reduction of packaging material, and increase in manufacturing efficiency through reduction in the number of stock keeping units (SKU). [3] In addition to cost savings from its funding-the-growth initiative, Colgate realized $40 million of after-tax savings in 2013 from its global restructuring program, and it expects to save double that amount in 2014. [6]

Our price estimate of $59 for Colgate-Palmolive marks our valuation at a discount of about 10% to the stock’s market price.

Procter & Gamble (NYSE:PG): P&G’s products are usually priced at higher price points due to their premium quality. Therefore, its products witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets. However, it is now looking to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top 10 developing markets in FY 2013. [7]

P&G intends to make productivity its core strength. In recent years, the company has taken significant steps to enhance productivity, including a five-year cost savings initiative that will last until 2016. Through the initiative, P&G aims to save $10 billion in costs associated with cost of goods sold, marketing expenses and non- manufacturing overhead. It saved $1.2 billion in cost of goods sold in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. It is also redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years. [8]

One significant area where the company is striving to reduce costs is energy consumption. In 2010, P&G revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. According to the company’s most recent sustainability report, it has reduced energy consumption by 8%, and continues to introduce energy management systems at new locations to save more energy. Although it is difficult to assess the precise impact of the energy savings, P&G is positive about saving millions of dollars by implementing the energy solutions. [9]

Our price estimate of $70 for Procter & Gamble stands at a discount of over 10% to the market price of the stock.

Kimberly-Clark (NYSE:KMB): The emerging markets contribute less than 40% of Kimberly-Clark’s revenues since the company operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for more international opportunities. It is currently pursuing strong expansion in Latin America which is the primary factor driving sales growth across its segments. The company also recently completed a major restructuring operation which involved exiting the diaper business in Europe and channelizing resources towards better growth opportunities in China.

Kimberly-Clark aims to identify and deliver cost savings in fields where consumers are not much concerned via its FORCE (Focused On Reducing Costs Everywhere) initiative. The program delivered $310 million in cost savings in 2013, allowing the company to absorb currency translation losses and commodity cost inflation. Savings from the program also allowed the company to invest back into innovation and strategic branding. Kimberly-Clark expects significant currency headwinds and higher commodity costs this year. However, it also expects to save at least $300 million from the FORCE program which should help it overcome these problems. [10]

Our price estimate of $110 for Kimberly-Clark is almost in line with its current market price.

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Notes:
  1. Emerging markets to generate 75% of Unilever sales by 2020, Live Mint, November 22, 2012 []
  2. Unilever Plans To Cut 800 Marketers As It Slashes Agency Fees, Products, Advertising Age, December 2013 []
  3. Colgate-Palmolive 10-K, SEC website, 2013 [] []
  4. Colgate-Palmolive Q2 2013 Earnings Call, Seeking Alpha, July 25, 2013 []
  5. Colgate-Palmolive Company 2009 Annual Report, Colgate Company Website, 2009 []
  6. Colgate-Palmolive Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 2014 []
  7. Will an Emerging Market Slowdown Crush Consumer Staples Stocks?, The Motley Fool, October 2013 []
  8. The Procter & Gamble Company’s Management Discusses F2Q 2014 Results – Earnings Call Transcript, Seeking Alpha, January 2014 []
  9. P&G aims to save millions with remote energy monitoring, workplace changes, WCPO, December 16, 2013 []
  10. Kimberly-Clark’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 24, 2014 []
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