| Why is P&G getting aggressive? We believe P&G is strategically tryingto expand its presence in emerging markets in order to achieve its stated target of acquiring one billion new consumers over the next five years.
P&G would need to capture a wider audience in mass segment to do so and hence is trying to introduce low price points (like Tide Naturalsdetergent in India) and reducing prices across shampoos and skin creams in Indonesia. We believe this is not a short term volume grab strategy for P&G but is more consistent with its long term strategy of gaining share in emerging markets.
• Unilever is more vulnerable in India and Indonesia. While India andIndonesia together account for low single digit share of P&G's profits, for Unilever these countries account for 12% of EBIT. Hence these markets are much more important to Unilever which will continue to defend its market share in response to any competitive challenge and in the process risk its margins in these markets.
• Emerging modern retailers and urbanization erode distributionadvantage: The emergence of modern retailers and rapid urbanizationwill erode the competitive advantage of Unilever's distribution. A new product launching will need only be offered to a couple of key retailers to have sizable overnight presence in the market: in Indonesia 35% of the FMCG market is sold through modern channels. A new product will only need to be launched in first and second tier cities as the population of these cities encompasses 50% of the population.
• Unilever guiding for price decline in 1H10; P&G lowers long termEPS growth target. P&G has indicated preference for topline growth overmargins and even Unilever in India has mentioned defending market share as a top priority. With consumer opportunity lying in emerging markets, the market is likely to be increasingly competitive.
• Maintain UW on Hindustan Unilever and Unilever Indonesia. Wewould expect lower price growth (high inflation further hurting price/mix growth), high competitive spends and rising input costs to weigh on margins for Unilever in India and Indonesia in coming quarters. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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