Are P&G And Unilever Headed In Opposite Directions?
Procter & Gamble (NYSE: PG) is the world’s largest consumer processed goods (CPG) company with revenues of $80 billion in 2014, from a portfolio of about 200 brands. Unilever (NYSE: UL) is the world’s second largest CPG company with revenues of $57 billion [1] from over 400 brands. Both companies operate in primarily two broad segments, namely, personal care and home care. Additionally, Unilever also has a significant presence in the foods and refreshments market, from which Procter & Gamble exited in 2011.
Now, it appears that Procter & Gamble and Unilever are headed in opposite strategic directions. P&G is targeting a hundred brands to divest by the end of this summer, while Unilever is on an acquisition spree that is set to speed up this year. To a casual observer, it would appear that P&G is attempting to reign in years of unchecked expansion and become smaller; while Unilever is speeding up its expansion plans to catch up to the market leader – two seemingly contrasting strategies.
In this article, we will put the strategies of the two CPG behemoths under the scanner and determine whether their goals are really as contrasting as it seems; or if their strategies are simply different means to the same end.
See our complete analysis for: Procter & Gamble | Unilever
Procter & Gamble: Leveraging The Pareto Principal
According to the Pareto Principle, 80% of a company’s revenues or profits are derived from 20% of its revenue streams. Last year, P&G apparently realized that it is a textbook example of the Pareto Principal in practice – about 80 of P&G’s 200 brands account for 86% of its total sales and over 95% of its net profit (Read: P&G Expects Brand Consolidation to be Over by Summer).
Taking note of the fact that the remaining 100-120 brands do not add significant value to the company, P&G embarked on an ambitious, so-called ‘brand consolidation program’ to get rid of under-performing and non-core by way of sale, IPO or discontinuation. P&G expects to identify most of the brands to be divested by the end of this summer, following which it will be left with category-leading brands with the best growth potential and relatively high margins.
It should be noted that the brand consolidation program is not an exercise in managing scale as much as managing growth and profitability. The divestment of these non-core brands will shrink P&G’s top line by only 14%, but will free up the resources allocated to these brands. More importantly, the program will provide a boost to P&G’s overall revenue growth and margins as the company will no longer be dragged down by under-performing brands.
Lastly, post consolidation, the company will own only 65 brands across 10 product categories. P&G claims that it is the leader in 7 of these 10 categories and is number two in the remaining three categories. Geographical concentration is also expected to be higher, as the top 5 countries of each category will account for 54% to 98% of total global profit of that category. [2]
This indicates that P&G plans to focus almost exclusively on its strengths, that is, the markets and regions in which it has a commanding presence. The dominant position of its brands in these markets and regions is expected to improve P&G’s growth trajectory as well as its margins. Therefore, P&G’s objective is not to curtail its operational scale, but to rejuvenate revenue growth and bottom lines by focusing exclusively on its core strengths.
We have a price estimate of $83 for Procter & Gamble, which is nearly the same as its current market price.
Unilever: Realigning Priorities
Unilever’s CEO Paul Polman stated last year that the company is eyeing personal care brands for potential acquisitions, especially in the premium segment. [3] Earlier, the company had reported that cash generation from the Foods business is being used to finance faster expansion in its Personal Care unit. [4] Most recently, in the fiscal 2014 fourth quarter earnings call, Mr. Polman termed expansion of the personal care segment through acquisitions as one of the top priorities in fiscal 2015. [5]
It is clear from the above that expansion of the personal care business is currently a high priority for Unilever. It may appear that the purpose of this strategy is to catch up to its biggest rival, Procter & Gamble, which is the leader in most personal care sub-categories. Towards this end, Unilever has already acquired three brands in the year so far. (Read: Unilever Continues Expansion of Its Personal Care Portfolio With Acquisition of REN Skincare) Unilever did not undertake any major acquisitions in the personal care segment in calendar 2014, which resulted in a decline in its Skin and Hair Care market share in 2014. However, based on the aforementioned statements, we expect M&A activity to pick up in 2015, which should expand Unilever’s market share going forward.
However, the inorganic expansion of Unilever’s personal care business should be viewed in conjunction with its divestments in the foods and refreshments business. Last year, Unilever sold off seven slow-growth food brands, and announced that its spreads business will be split off into a standalone company. Further, Mr. Polman recently stated that Unilever plans to continue investing in its “core business” while simultaneously “pruning along the edges of the portfolio”. [5]
These facts indicate that while inorganic expansion is certainly an important goal for Unilever, realigning focus on its core strength is a higher priority for the company. Unilever’s foods segment has maintained a commendable EBITDA margin, but its revenue growth has dragged in recent years. Moreover, the foods segment falls outside of what Unilever considers to be its “core business”. Thus, with its current strategy, Unilever is aiming at becoming a pure-play CPG company with a renewed focus on the premium personal care segment.
On comparing the P&G’s and Unilever’s strategies, it can clearly be seen that they’re different means to the same end – reviving top line growth and bolstering margins. P&G has set out to achieve this aim by shuffling brands, while Unilever is on the same path by shuffling business segments. Therefore, it can be conclusively stated that Procter & Gamble and Unilever are, in fact, headed in the same direction.
We have a price estimate of $40 for Unilever, which is about 10% lower than its current market price.
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Notes:- Based on 2014 average rate of $1.1766 per Euro [↩]
- P&G Consumer Analyst Group of New York Conference Call, February 19, 2015 [↩]
- Unilever CEO says eyeing higher-priced personal care brands, Reuters, 4 December 2014 [↩]
- Unilever Annual Report 2013 [↩]
- Unilever 2014 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 20, 2015 [↩] [↩]