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FMCG Companies Most At Risk Due to Emerging Market Slowdown

10/11/2015
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Since 2008, key multinationals have depended on emerging markets for growth - 90% of Unilever’s global growth during 2008-2014, for example, came from emerging markets. Procter & Gamble, an even better example, did not grow in developed countries at all during the same period, and it’s only growth came from emerging countries. Now that the growth prospects of the key emerging markets have worsened, exposure to emerging countries is turning into a potential risk, and using information from Euromonitor International’s Competitor Analytics we can review how exposed key companies are.

Figure 1: Percentage of Retail Value Sales from Emerging and BRIC Countries

Retail-Value-BRIC

Source: Euromonitor International

Note:  All figures in retail value sales and reflect only products tracked by Euromonitor International and the figures above are different from company annual reports due to coverage and msp/rsp conversion.

Danone leads for emerging market focus

Out of top consumer goods multinationals, Danone had the greatest emerging market exposure in 2014, with over 61% of its retail value sales coming from emerging markets in 2014, up from 43% in 2009. Russia, Brazil, China, Mexico, Indonesia are now as important markets to Danone as France, the US or the UK.  Following Danone on the list are Coca-Cola and Unilever, both of which have successfully expanded in emerging countries and now generate more than 50% of retail value sales there.

On the other side of the spectrum are Mars and Nike, both of which generated approximately 30% of retail value sales from emerging countries. This lower figure is partly a reflection that the key industry for Mars - pet care - has been slower to tap into emerging markets as compared to foods or beauty. Branded clothing and footwear, likewise, remains more tilted towards developed countries.

Emerging markets drove growth

More interesting, however, is the growth side, and, in the case of vast majority of multinationals, emerging markets have been the prime growth driver over 2008-2014. These figures add up to significant numbers too. Procter & Gamble added over US$20 billion in retail value sales over 2008-2014 in emerging markets. Unilever added over US$27 billion in retail value terms. This is one third of global Unilever retail value sales in 2008.

On average, Unilever Group’s sales in developed countries grew by 1%, whereas emerging market sales increased by 12% annually during 2008-2014, both excluding currency effects. A similar narrative can be observed for pretty much every multinational fmcg company to varying degrees.

Figure 2: Growth in Emerging Markets Have Outpaced Developed Countries

Unilever P&G

Source: Euromonitor International (Competitor Analytics)

Note:  All figures are in retail value sales and reflect only products tracked by Euromonitor International, and the figures above are different from company annual reports due to coverage and msp/rsp conversion.

BRICs and others

This puts future growth at greater risk if emerging market demand does, in fact, slows down, but not all emerging markets are equally exposed to the current slowdown. Much of the headline news currently centres around Russia and Brazil, which are already in recession, and the slowing Chinese growth (although still positive growth).  Other emerging markets like Thailand and Mexico or Eastern Europe live in their own realities, and a more diversified emerging market presence could be seen as a good thing.

If we look at the four largest emerging markets – BRICs – as a proportion of total emerging market sales, as seen in Figure 1, then Unilever and Mondelez are most diversified in emerging markets. Unilever is especially notable in terms of how well diversified presence it has in emerging markets, with BRICs only accounting for 37% of its emerging market presence, which could minimize emerging market risk, while allowing it to tap into long-term growth prospects.

Figure 4: Unilever Group Sales Presence in Emerging Markets

Unilever

Source: Competitor Analytics

Consumer behaviour adapts to new environment

Another thing to bear in mind is that a slowdown in real GDP growth is yet to transmit to lower consumer expenditure. Results from Beiersdorf and  L’Oréal are still strong in key emerging markets, despite slower growth in Brazil and Russia. Both companies reiterated their confidence about market outlook, despite current slowdown.

The tendency of some categories to ignore economic slowdown is often referred to as the lipstick effect, where sales of affordable luxury categories shoot up during recessions, which would benefit fmcg at the expense of other industries. Beauty companies in particular may be well positioned in this respect.

Either way, monitoring emerging market dynamics becomes more important going forward to gauge company performance, currency headwinds and economic situation - as it remains uncertain whether developed countries can replace this slowing emerging growth.

 

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