Asia's fast-growing emerging markets have been good to multinational consumer-product trailblazers like Coca-Cola (KO), Unilever (UL), Colgate (CL), Danone (DANO.PA), and PepsiCo (PEP) that now earn up to 20% of their total revenues in the region. The rising tide has lifted local players, too, benefiting everyone from Chinese health-food maker Celestial Nutrifoods to Indian personal-care company Godrej to Indonesian chocolate maker Petra.
But now that the global downturn has caught up with them, multinational and local companies alike are feeling the threat of slower growth. They've spent the past weeks revising their rosy forecasts and 2009 plans—and experiencing déjà vu. Those who emerge as winners will be the companies best able to use the lessons they learned in previous troubled times still sharp in their memory: the Asia financial crisis of 1997-98, the Internet bust of 2001-02, and the SARS scare of 2003.
In the 1997-98 crisis, consumption shrank by 7% to 8%. Today, such shrinkage is already happening as consumers hold on to their wallets. Consumer goods companies are beginning to slash prices and aggressively promote their products. Distributors and wholesalers are under cash-flow and margin pressure, forcing them to destock and focus on fast-sellers rather than the strategic products consumer-products players would prefer. Weaker distributors and wholesalers are going out of business. And while commodities prices are coming down, many makers of consumer products have hedged at higher prices and are now facing currency devaluation.
A Chance to Race Ahead
But there's good news. If previous recessions in Asia are anything to go by, consumer goods consumption may be one of the sectors least affected by the downturn. The markets recognize this: Equity indexes for fast moving consumer goods in some parts of Asia are down only half the level of overall market indices, which have been down by as much as 70%. Moreover, downturns represent an opportunity for changes in market leadership. About 24% more firms moved from the back of the pack to the front in the 2001 downturn compared with the subsequent period of economic calm, according to an eight-year study by Bain that analyzed the net profit margins and sales growth of more than 2,500 companies.
For many, the immediate priority is to cut fixed and variable costs. Consumer products companies are now slashing overhead built on assumptions of high growth. That's what Procter & Gamble (PG) did in the 2001-02 global downturn. By streamlining its supply chain, eliminating divisional overlap, consolidating manufacturing operations, reducing capital spending, outsourcing some operations, and divesting brands, the company was able to cut operating costs as a share of sales to 82% in 2003 from 88% in 2001. As a result, the company watched its operating margins increase to 18% in 2003 from 12% in 2001. The cost cutting has put P&G in a strong position to weather the current downturn.
Earnings grew by 9% in the first quarter of fiscal 2009, and the company outperformed both the S&P 500 and the Dow Jones industrial average by about 40% from November 2007 to November 2008.
One of the biggest areas of opportunity for many consumer companies is to take advantage of some commodities that are now down by as much as 50% from their peaks. These costs make up 30% to 50% of product cost, and trimming them can help fund reduced pricing or promotions, or just help to bolster margins. But companies need to act quickly. Global food maker Nestlé is already ahead of the game. It revised recipes, replacing high-price commodities with cheaper ones while using the changes to refresh products. Nestlé also saved by buying directly from farmers, investing in machinery that ensured bottles were filled precisely, and getting out of the less profitable business of making basic wholesale products like tomato puree. The company increased its global profit margin to 14% in 2007 from 13% in 2006.
In addition to driving down costs, top performers in previous troubled periods were quick to refocus their offerings and adjust price and promotion—to catch the down traders, stimulate demand, and weed out unprofitable products. L'Oréal, the world's biggest cosmetics maker, achieved double-digit profit growth during the 2001-02 downturn by cutting unprofitable product lines and refocusing resources on its 14 most profitable brands, accounting for 90% of its sales. The result: In 2002, L'Oréal increased sales by 4% and net profits by 19%.
Winning companies also take a hard look at key channel partners in search of ways to strengthen their route to market. Reviewing its distribution and sales strategy helped accelerate the turnaround of a multinational tobacco company in Asia following the Asian crisis. The company was hindered by poor distribution coverage in key channels, items out of stock, and high returns—all exacerbated by an excessive number of stock-keeping units. By rationalizing the product portfolio, forming new partnerships with a handful of distributors, and instituting performance-based trading terms, the company managed to return to growth.
Finally, in a downturn consumer-products companies can invest to leapfrog competition. Downturns throw out a wealth of merger-and-acquisition opportunities. In the four years prior to the Asian crisis only three M&A deals took place among consumer-products companies in China, India, and Southeast Asia. That number ballooned to 43 in the subsequent four years, including company-defining deals like Danone's acquisition of mineral-water businesses Robust in China and Aqua in Indonesia. It acquired 40% in 1998 and raised that stake to 74% in 2001.
As in previous downturns, valuations are beginning to look attractive again, with some Asian companies trading at price-earnings ratios of well below 10—unthinkable even nine months ago. During the Asian crisis, the companies that came out ahead took full advantage of such opportunities. Already we are seeing early signs of multinationals on the acquisition trail, best illustrated by Coca-Cola's pursuit (BusinessWeek.com, 12/5/08) of Huiyuan Juice in China.
As consumer-products companies start to batten down the hatches and adjust forecasts to reflect slower growth in Asia's emerging markets, they need to follow the steps taken by those who got ahead in tough times.