Unilever plc: Opportunity Or Threat?

unilever2Last week, I advised Fools not to touch Tesco with a barge pole, since it looked to me like the supermarket retailer’s management was completely lost. That turned out to be pretty great advice. 

Given that Tesco today announced an overstatement of its sales, and that the retailer’s new CEO David Lewis comes fresh off a 27-year stint at Unilever (LSE: ULVR) (NYSE: UL.US), it’s worth taking a closer look at whether Unilever is as safe as many assume.

Is Unilever’s competitive position really as secured right now as its reputation for having 2 billion global customers justifies? I don’t think so. In fact, there are signs that this company’s somewhat inflated growth might be starting to backfire.

Unilever has increasingly pursued an overseas strategy in the past 5 years, most aggressively in emerging markets, which account for over half of its annual sales. Within the emerging markets, the bulk of these sales are made in Asia.

That alone should sound warning bells, whatever the broad direction of emerging market growth looks like. That’s because fast-growing economies will tolerate foreign market-share dominance on their home turf for as long as they are not able themselves to provide identical products via their own homegrown brands. 

So while you might have some chance at staying the long haul profitably in such markets if you are a pharmaceutical giant with complex patents under your belt, or a high-technology company with a unique proprietary software to offer, if soaps, skin and hair care products, tea and savory snacks are all you have going for you then the competition is only going to get hotter – and quickly.

A Recent Chinese Whisper

For example, while in China it’s true that in the past few years Unilever has achieved market share dominance in the cosmetics range with its Lux, Ponds and Dove and Clear brands, by far the majority of this has been in top-tier cities such as Shanghai and Beijing.

Which has been great, but that strategy is not likely to deliver the company a significant increase in growth going forward, since the major untapped market share now lies in many of the second-tier industrial cities such as Dalian, where workers are finding themselves more flush than ever before as a result of increased demand for their services as available labour has dried up in light of the exporter’s recent manufacturing boon.

For these customers, who are much more traditional in their product discernment tastes, local rivals such as Inoherb and Bawang have been ready at the gate to snatch up the newly hygiene-conscious teenagers and early-20s consumers dashing to the supermarket to pick up a skin moisturiser before their Friday night date.

In many cases, what this means is that foreign firms eyeing the market segment are partnering with the local brands, which is a deal that favours the home team, as you might expect. (Shanghai Jahwa’s two-year old partnership with Kao is a case in point).

Homegrown Hygiene Habits

The examples above focus on mainland China of course, but this sort of pattern is not just restricted to the Chinese mainland: it’s the case with many fast-growing markets which have zoomed ahead in previous years and are now flush with international investment.

The evidence of this trend is born out in Unilever’s earnings: sales fell a sizeable 5.5% to 24.1 billion last quarter.

The company attributed this to a cooling off of emerging market spending, which is especially worrying, since it suggests that management doesn’t understand why it’s emerging market sales have cooled some 40%. It’s true that emerging economies are slowing down, but not so much that consumers are opting out of their hygiene!

They are just buying their own homegrown brands, that’s all. And local competitors are using the edge they have now to erode margins of foreign rivals.

Make A Million, Not A Mistake

Today I am directing your attention to our report on making a million in the market. By utilizing the kinds of key information points such as the ones that I have described in today’s analysis of Unilever, you can become a much more successful investor that avoids costly mistakes made as a result of making broad assumptions (e.g. that non-cyclical companies are safe bets) and instead turbo-charge your portfolio so that you harness information to make huge returns. 

Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.