Unilever’s Emerging-Market Slowdown Exacerbated by U.S. Weakness

Unilever Chief Executive Officer Paul Polman will next week report one of the worst quarters of sales growth in his five-year tenure amid a slowdown in emerging markets. Making matters worse is that an expected recovery in the U.S., his single largest market, has failed to materialize.

Unilever, the world’s second-largest consumer-goods maker, said Sept. 30 that it will post underlying sales growth of 3 percent to 3.5 percent for the third quarter, down from 5.9 percent in the same period last year and its worst result since the fourth quarter of 2009. While weak currencies in India, Brazil and Indonesia were to blame, sales in developed regions like Europe and the U.S. also remain “flat to down,” it said.

Conditions in the U.S., which accounts for about 18 percent of Unilever’s $70 billion in revenue, are particularly worrisome as analysts such as Panmure Gordon’s Graham Jones anticipated a rebound in the second half. There, Unilever has been hurt by encroachment from Procter & Gamble Co., stalling sales at retailers like Wal-Mart Stores Inc., and a sluggish, uneven economic recovery that’s left many Americans unwilling to spend.

The slowdown at the company “says as much about developed markets as it does about emerging markets,” Jones said in an interview. “They need to get their act together there.”

Unilever’s performance across its entire U.S. business deteriorated in the third quarter, according to Nielsen data cited in an Oct. 9 note from Exane BNP Paribas. Food sales fell 4.9 percent, hurt by a 9 percent decline in margarines and spreads, while sales of personal-care products like Axe body sprays were unchanged. Categories that had double-digit growth a year ago, like shampoo, turned negative.

Declining Share

While Unilever’s U.S. market share has declined for two straight quarters, Cincinnati-based P&G, the maker of Pantene shampoo, gained share in the third quarter, helped by increased sales of cosmetics, soaps and deodorants, according to Nielsen.

“P&G has undoubtedly regained some momentum,” Jeff Stent, an analyst at Exane, said in an Oct. 4 report. P&G’s market share had declined in the previous three quarters.

Unilever’s results in mature markets trail those of its European peers, according to Oriel Securities analyst Chris Wickham. In the first half of 2013, Reckitt Benckiser Group Plc, the maker of Lysol disenfectants, posted a 3 percent sales gain in Europe and North America. Nestle SA, the world’s biggest food company, said sales in developed markets grew 1 percent. Nestle and Danone are among European consumer-products companies that are due to report third-quarter sales this week.

Less Inventory

Like all makers of consumer goods, Unilever is coping with retailers including Wal-Mart and Target Corp. trimming excess inventory from their stores. At Wal-Mart, the world’s largest retailer, U.S. sales grew at less than half the pace of its inventory in the second quarter, prompting the Bentonville, Arkansas-based company to cut some orders in the latter half of the year, according to an internal e-mail reviewed by Bloomberg News. Wal-Mart is Unilever’s biggest customer, accounting for 3.5 percent of sales, data compiled by Bloomberg show.

Wal-Mart’s move reflects a “disconnect between the U.S. economic recovery and the consumer,” Sanford C. Bernstein analyst Andrew Wood said in a Oct. 9 note. Unilever’s Polman has spoken about this phenomenon, exemplified by the rise in Americans using food stamps to help feed their families, which now stands at 47.8 million people, close to a record high, according to the U.S. Department of Agriculture.

“These people run out of money halfway through the month and scrape by until the end of the month,” Polman, who is married to an American, said in a December interview. “So your level of spending is different.”

Low Confidence

The U.S. may decelerate further due to the government shutdown and the looming default on the nation’s debt. A default would “almost surely” derail the economic recovery and lead to potentially major market turmoil worldwide, Olivier Blanchard, chief economist of the International Monetary Fund, said Oct. 8.

The uncertainty and bickering in Washington isn’t boosting consumer confidence. Only 9 percent of North American households polled by Nielsen said they’re able to spend freely, the lowest percentage of any region across the globe. And more than half of U.S. consumers are anxious about the future, according to a recent survey from the Boston Consulting Group.

“Consumers see what’s going on in Washington and that weighs on their behavior,” James Russo, a consumer insights analyst at Nielsen, said in an interview.

In response, shoppers are buying fewer things and making products last longer -- one third are eating more leftovers, according to Wells Fargo Securities. They’re also purchasing cheaper brands in categories like hair care, helping explain Unilever’s falloff in that segment. Bernstein expects underlying sales in developed markets to decline 1 percent in the quarter.

Struggling Businesses

Unilever, which is due to report third-quarter results Oct. 24, has coped with slowdowns before. The company has said it expects sales to “improve” in the fourth quarter. Still, another period of sub-par performance in developed markets should prompt the company to take a closer look at its strategy in struggling businesses like spreads, which accounts for about 7 percent of sales, Panmure’s Jones said.

“Developed markets,” the analyst said, “have not been a bed of roses for a long time.

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