Three reasons why Unilever is outperforming Procter & Gamble in the emerging markets.
Most British households contain several products that are made by Procter & Gamble (NYSE: PG.US) and Unilever (LSE: ULVR), the two largest consumer goods companies in the world. They square off against each other in many markets, in particular washing powder and shampoo where between them they account for over one-third of global sales.
Yet when it comes to the emerging market nations, Procter & Gamble has been struggling in the last few years.
Unilever has pulled ahead of Procter & Gamble in these countries because of three major differences in how it does business. Many companies, even those in very different industries, could learn a lot by looking at how Unilever operates.
While Procter & Gamble's total sales in the emerging markets are slightly higher than Unilever's, that isn't too much of a surprise because it is twice its size. But in relative terms Unilever is the clear leader as it currently gets 56% of its sales from the emerging markets, compared with just 37% for Procter & Gamble.
Unilever has been far more successful in the emerging markets in large part because its corporate culture has a very strong international outlook, having been formed by the merger of Britain's Lever Brothers and the Dutch company Margarine Unie in 1930. So Unilever has strong roots not only in Britain and Holland but also in many former colonies of the British and Dutch Empires.
In contrast, because Procter & Gamble was founded in Cincinnati, this has meant that America has always been its biggest market. But Procter & Gamble is stronger than Unilever in most of Central and South America because of America's ties to these countries. History matters.
Three big differences
A good performance in the emerging markets is important to multinational companies because that is where most of the world's economic growth is going to come from in the next couple of decades. So in theory this should compensate for sluggish European and North American markets.
The three main reasons why Unilever is outperforming Procter & Gamble in the emerging markets are as follows:
1) Unilever pays much more attention to local consumers' needs. It takes account of what consumers can afford by offering less expensive versions of its products, such as shampoo in sachets rather than in larger bottles. Procter & Gamble in contrast has been much slower to adapt its products to local markets, in some cases having mistakenly assumed that whatever sells well in America will automatically sell well overseas.
2) Unilever has a more decentralised management structure; so many key decisions will be made by local managers who are in tune with the market. Procter & Gamble will refer more decisions back to its headquarters in Ohio, which takes time and this can make it a little bit harder to operate in these countries.
Unilever is particularly strong in India because ever since 1932 it has operated there through its 52% owned subsidiary Hindustan Unilever, which is separately quoted on the Bombay Stock Exchange.
3) Whenever Unilever finds that a new product which it developed for the emerging markets is a hit, it will try it out in its mature markets in the developed world. Procter & Gamble has found it much harder to do this.
A good example is 'Dense Soup Treasure', a soup which is stored as a jelly, which was introduced in China in 2007 and targeted at consumers who didn't like the current choice of packaged soups. It was such a success that it was launched in Europe as Knorr Stock Pot where it quickly became a big hit with consumers.
This isn't to say that Procter & Gamble isn't doing any of these things; it's just that it hasn't done them as well as Unilever. So it's been less effective in coping with the downturn in the developed world by expanding into the emerging markets and its share price has underperformed as a result.
I expect that Procter & Gamble and Unilever will still be battling each other in several decades time, when both will be making much higher profits than they are today. There's plenty of scope for both of them to grow in the emerging markets and unlike many companies they have a long and successful history of innovation and coping with change.
They are, however, going to continue to come under pressure from local competitors as well as from the smaller multinational consumer goods companies such as Colgate-Palmolive (NYSE: CL.US) and PZ Cussons (LSE: PZC), best known for its Imperial Leather soap, which is also strong in many former colonies having started off life as a trading post in Sierra Leone in 1879.
If I was ever forced to choose just one company in which I was allowed buy shares, both Procter & Gamble and Unilever would be on my short list, which would contain only a couple of other names.
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> Tony owns shares in Procter & Gamble and Unilever but he doesn't own shares in any of the other companies mentioned in this article.