Fitch: Consumer Products Exit China in Favor of Profitable Growth
NEW YORK -- January 9, 2014
The recent exit of Revlon Consumer Products and L'Oreal S.A's Garnier brand
from China is an affirmation of the sectors focus on profitable growth,
according to Fitch Ratings. From Procter & Gamble (P&G), with over $80 billion
in revenues, to Revlon Consumer Products, Inc., with pro forma revenues of $2
billion, the pursuit of revenue growth at all costs has become less
fashionable in a slow-growth and volatile global markets environment.
In the short term, focusing investments that have higher margin and cash flow
potential is positive. Due to insufficient scale or pricing power, operating
in China is not always profitable for global fast-moving consumer goods
companies. However, there could be longer term negative implications with a
complete exit from a large market such as China, which has significant
Geographic exits are not unique to China. Kimberly-Clark Corp. is exiting $500
million in tissue businesses in Western Europe, which is considered a highly
competitive and slow growth market. However, there is concern when companies
exit markets such as China where sheer demographics support long-term growth.
Further, many companies find it more difficult to re-enter a market after
incumbents have had time to invest and capture large market shares.
Re-entering large markets at a later stage may require heavier investments,
including merger and acquisitions (M&As).
Fitch regards these exits on a case-by-case basis. L'Oreal, with significant
rating headroom, is merely putting its muscle behind other brands in China and
will still retain access to China's potential. Complete exits such as Revlon
are understandable from a short-term perspective, as the company does not
appear to have the scale and financial flexibility to compete and invest in
China's vast and fragmented retail market, and its margins and profitability
will benefit in the near term. However, Revlon's presence in other emerging
markets is relatively small, and given the Colomer acquisition, its exposure
to the U.S. and Western European markets increases. The benefit in the near
term might hamper its longer term growth.
Avon Products, Inc. also has issues in China, and given the sector focus on
profitable growth, exiting could make financial sense in the short term. Avon
has some flexibility to invest further, though less than several years ago.
The long-term potential of the world's largest population and the difficulty
of re-entering and building a sales force are likely behind the company's
decision to continue trying to stabilize operations in China. Nonetheless,
Fitch notes that management is pragmatic in balancing financial flexibility
versus revenue growth and exited both South Korea and Vietnam in 2012.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
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opinions expressed are those of Fitch Ratings.
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Corporates, Consumer Group
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