Can This Consumer Goods Giant Continue to Grow?

Source: Unilever.

Unilever is one of the world's largest consumer companies. It recorded revenue of close to $50 billion euros in 2013 and boasts a portfolio of well-known brands such as Lipton teas and Knorr soups and sauces.

Given its size, it has performed admirably in recent times. It has expanded its top line and bottom line by three-year compound annual growth rates of 4% and 4.5%, respectively. Notwithstanding this stellar track record, there have been concerns raised over Unilever's ability to grow further in the future. It's also insightful to compare Unilever with peers such as Energizer Holdings and Yum! Brands .

Developed markets
The developed markets are proving to be tough battlegrounds for consumer brand giants like Unilever, given high product penetration rates and weak consumer sentiment. This is evidenced by the fact that Unilever suffered a 1.7% decline in underlying revenue growth for developed markets in the fourth quarter of 2013, compared to 8.4% growth in underlying revenue for emerging markets over the same period. In addition, Unilever estimates that revenue growth from developed markets has been flat for the four-year period from 2010 to 2013.


However, investors can draw positives such as market leadership and cost control from Unilever's financial performance in the developed markets. Within the consumer product categories where it competes, Unilever has managed to hold its overall market share at 50%. Furthermore, it grew its core operating profit from developed markets by 50 basis points from 2010 to 2013.

Looking ahead, Unilever has to optimize its brand and product portfolio in the developed markets to grow. In May 2014, it announced that it had agreed to divest its North America pasta sauces business under the Ragu and Bertolli brands. This came as part of Unilever's plan to reduce its dependency on the slower-growth foods category and focus on the higher-growth personal care business in developed markets.

In recent times, it has sold iconic food brands like Skippy, and it acquired Alberto Culver (hair and skin beauty care) and TIGI (professional brands for hairdressers) in the personal care space.

Unilever's strategic actions parallel those of consumer brand peer Energizer. While Energizer is better known for its branded batteries and classic bunny advertisements, it also boasts a portfolio of market-leading personal care brands such as Schick (shaving) and Playtex (feminine care). Energizer disclosed plans to spin off its household products and personal care businesses into two separate listed companies by the second half of 2015.

The separation has two key benefits for Energizer.

Firstly, it will allow Energizer to allocate a greater amount of resources to invest in the growth of its personal care business. While Energizer's household products division is more of a mature cash cow, its personal care division is more of a growth business which demands greater investment in advertisement and innovation.

Secondly, it will align the incentives of the managers in charge of Energizer's personal care business with the division's results, as management of the personal care division will be directly accountable for the new entity's profit and share price performance.

Coming back to Unilever, its portfolio restructuring actions have paid off. The personal care product segment now accounts for a third of Unilever's developed market revenue, compared to 24% in 2009.

Source: Unilever.

Emerging markets
Companies that sell branded consumer goods always see emerging markets as key growth drivers because of the potential of securing a mere 1% market share of an enormous pool of customers. They tend to forget about the supply side of the equation, as growing markets attract many competitors angling for slices of the pie.  

Has Unilever successfully capitalized on emerging market opportunities?

Unilever's brands are ranked either first or second (in the various consumer product categories) in each of the emerging market countries where it operates. This has enabled Unilever to achieve an annualized 9% underlying sales growth from emerging markets over the past two decades.

Despite this strong historical growth, room still remains for further expansion. For example, an average consumer in Turkey spends only one-eleventh of what a person in Brazil spends on deodorants, based on Unilever's internal estimates. There are also unexplored markets such as Ethiopia, where Unilever has close to zero sales now. Ethiopia boasts a population of close to 100 million, with average GDP per capita in excess of $1,000.

Another consumer company that has leveraged the growth potential of emerging markets is fast food giant KFC, owned by Yum! Brands. KFC's operating income from emerging markets has increased at a 2009-2013 CAGR of 18%, compared to a CAGR of 3% for developed markets over the same period.

One successful case study is China, where KFC beat other well-known international brands for the title of the country's most powerful brand in a Millward Brown study. KFC is also the largest fast-food chain in China, with twice as many stores as its nearest competitor.

While both Unilever and Yum! Brands' KFC have benefited from leading market positions in emerging markets, there isn't any guarantee that this will remain as the status quo. Going forward, Unilever plans to deepen its distribution reach by expanding into more cities and capturing consumer trade-up opportunities with premium products.

Foolish final thoughts
Unilever may already be a Goliath in the consumer products space, but its growth prospects remain intact. It has focused on the higher-growth product segments (personal care) within developed markets, while extending its dominance in emerging markets to more countries. Unilever's share price (+11%) has underperformed the S&P 500 (22%) for the past 52-week period, which represents an opportunity for investors to accumulate stock in the company at a reasonable valuation because it trades at a forward P/E of 18.

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The article Can This Consumer Goods Giant Continue to Grow? originally appeared on Fool.com.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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