Why Higher Exposure To Developed Markets Is Helping P&G To Report Better Margins Than Unilever?

The two consumer giants, Unilever (NYSE:UL) and Procter & Gamble (NYSE:PG), have similar product lines, but when it comes to margins, Unilever has lagged behind P&G by some points since the start of this decade. Unilever’s largest division by revenue, i.e. ‘Personal Care’, reported EBITDA margin of around 21% in 2015, whereas P&G’s Beauty division, which is similar to ‘Personal Care’, reported EBITDA margins of 25% in the same year.

In this article, we look at how the difference in exposure to various markets is affecting the margins of these two companies. P&G extracts around 65% of its sales from the developed economies and Unilever derives 58% of its revenues from the emerging markets. The key effects of these two markets on margins can be filtered down to two factors:

1. High inflation in emerging markets is negatively affecting the margins of Unilever.
2. P&G’s Premiumization strategy, which is more successful in developed markets where the company has a comparatively larger footprint.

Due to the above reasons, it is likely that P&G will continue to post higher margins as compared to Unilever goig forward. Also, it was clear after the September quarter results that higher growth rates associated with the emerging markets can sometimes backfire as Unilever went on to show bleak performance led by high volatility (See: Brexit And High Commodity Prices Weigh On Unilever’s Q3 Results) , whereas P&G exceeded the analyst’s expectations (See: Procter & Gamble’s Q1 Results Indicate A Revival Of The Giant).

See our complete analysis for Procter & Gamble

Inflation in Emerging Markets Weighing On Unilever’s Margins:

• Emerging markets experience higher growth rates, but that usually comes with the burden of inflation. Though inflation has its advantages, countries like Argentina and Venezuela have been experiencing extreme inflation of over 40% and 180% respectively. This has led to high cost of production, which has made it difficult for Multi National Companies to keep their margins intact, despite the price increases. Given the fact that 16% of Unilever’s revenues come from Latin America, it is evident that company is lagging behind P&G on margins front as its EBITDA fell by almost 3% in 2015.

• On the other hand, nominal inflation of under 2% in the U.S. and Canada has helped P&G to focus on cost cutting and improve its efficiency. P&G saved $7 billion on cost of goods during their 5 year productivity improvement program.
• This was backed up by the divestiture program carried out by P&G where they sold off about 100 under performing brands to concentrate on 65 core brands. P&G’s EBITDA margins have increased 3 percentage points over the last 4 years.

Successful Premiumization In Developed Markets Uplifting P&G’s Margins

• Both Unilever and P&G have adopted the strategy of premiumization. They have been either acquiring the premium brands or launching the higher priced versions of their current products. Unilever’s key premium products and brands include Magnum double ice cream, Talenti, Murad, Iluminage, etc.  In turn, P&G has SK-II, Olay, Crest 3D and new Mach 3 in its premium product arsenal.
• But the demand for premium products is more in developed economies as compared to the emerging ones, because of higher incomes and spending capacity in the former.
• For instance, according to Euromonitor, premium skin care market in North America is growing faster than the market of mass skin care products. The trend is opposite in Asia where mass products are leading the growth. In such cases, P&G’s premium products are placed in a much better situation to collect the the maximum profits from the sales.

To conclude, Unilever benefits from its emerging markets exposure, generating higher growth, albeit with lower profitability. But P&G, due to its size and stronghold in developed markets, is likely to generate higher profitability and margins going forward.

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