Emerging Markets Strategically Important For Unilever Despite High Inflation

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Unilever

Unilever (NYSE:UL) is an Anglo-Dutch major consumer goods company with a headquarters in London and Rotterdam  and more than 400 brands in its portfolio. The company competes with other global consumer goods companies such as Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL). Unilever has a market capitalization of about $127 billion and annual revenues of approximately $66 billion in fiscal year 2013. The company finished FY13 with operating profit and net income margins of 15.1% and 10.6%, about 1.5 and 1.0 percentage points higher that their prior year levels.

Unilever classifies its entire brand portfolio into four broad categories, namely Personal Care, Foods, Refreshment and Home Care. In this note, we talk about key macroeconomic trends that are shaping Unilever’s business briefly. We have a Trefis price estimate of $47 for Unilever, approximately 7% higher than its current market price.

See our complete analysis of Unilever here


Inflation Concerns in Emerging Markets Depress Unilever’s Volumes

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H1’14 for Unilever stood at $33 billion, about 1.4% lower than sales from H1’13. In domestic Euro terms, sales turnover in H1’14 was approximately €24.1 billion, down 5.5% from €25.5 billion in H1’13. The contrast in growth between dollar turnover and euro turnover highlights Unilever’s high exposure to currency headwinds. Unilever’s sales growth in H1’14 was trimmed by approximately 8.5% due to currency volatility, much higher than most of its competitors such as P&G and Colgate Palmolive. Through fiscal year 2014, P&G had a currency headwind of 2% while Colgate Palmolive had a currency headwind of 4% in H1’14.

Unilever’s high exposure to emerging markets contributes to its currency headwinds. Emerging markets make up approximately 56% of overall sales, compared to less than 40% for P&G. The currency volatility in major emerging markets resulted in significant inflationary pressure on consumer goods. Underlying price growth (UPG) for emerging markets stood at 4% in H1’14 compared to 4.6% in H1’13, with emerging market UPG accelerating to 4.4% in Q2’14 from 4.1% in Q2’14. Comparatively, UPG for developed markets decelerated from (-0.8%) in H1’13 to (-1.2%) in H1’14.

Emerging market currencies have steadily depreciated against the U.S. Dollar and the Euro, which has created a sustained inflationary environment in recent times, thereby greatly reducing consumer buying power. Unilever’s underlying volume growth (UVG) and underlying sales growth (USG) decelerated from 5.5% to 2.5% and 10.3% to 6.6%, respectively, between H1’13 and H1’14. Currencies typically play a very important part on discretionary consumer goods, and Unilever has significantly greater risks arising from its exposure to emerging markets.

Emerging Markets Important for Long-term, Broad-based Growth

Despite the risks pertinent to emerging markets, they are strategically important for consumer goods companies. The emerging markets constitute about 80% of the world’s population. Unilever states that more than 2 billion of the world’s 7.25 billion population use its company product everyday. Investing into emerging markets increases the company’s chances of gaining user share. In the recent Q2’14 earnings call, Unilever highlighted stronger growth from markets such as Indonesia, Turkey, the Philippines, Japan and South Africa compared to BRIC markets that are struggling with inflationary pressures.

Moreover, emerging markets have outpaced growth from developed economies and now contribute more than 50% to the global GDP, according to recent data from the IMF. [1] The IMF notes in its World Economic Outlook report that emerging markets combined are likely to grow faster than before, and estimates their share of the world GDP to expand by about 0.7% per year through 2019 to reach 54.5%. [1] The high population base and rapidly expanding income levels from urbanization of emerging economies present the perfect mix of opportunities for consumer goods companies such as Unilever and P&G. In the near term however, volumes and sales are expected to continue declining across emerging market economies from weaker domestic currencies and inflation.

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Notes:
  1. Emerging Markets Dominate Global GDP, ThinkAdvisor, May 2014 [] []