First, let's focus on the similarities. Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) are two of the world's largest and most successful suppliers of consumer goods. Both companies own hundreds of popular brand names across dozens of product markets. Most importantly, each stock has rewarded shareholders over the long term. Yet careful research reveals that these two businesses vary not only in their size - (P&G is twice as big) and location - (Unilever is headquartered in the UK and Netherlands) - but also in their business model and strategy going forward. Below, I'll discuss what these differences are and touch on some strengths and weaknesses of each company.
The battle over developing markets has been a recurring theme within comparisons of P&G and Unilever over the years, and the consensus generally places Unilever on top. While P&G's size gives it comparable sales volume in absolute terms, Unilever is more exposed to emerging markets as a percentage of its total sales mix (see below).
Source: Company Documents
With headquarters in London and Rotterdam, Unilever was one of the few companies to focus on emerging markets before focusing on emerging markets became so popular. The company benefits from long-established relationships in many of these growth engines, and has over 50 years of experience in Brazil, China, India and Indonesia. In India alone, the company has roots in local marketplaces dating back to 1888. Most recently, Unilever has recorded double-digit growth in emerging market sales for the past 6 quarters. Unilever expects emerging markets to account for 70% of total sales by the end of the decade.
That's not to discredit Procter & Gamble's initiative. The company has renewed its commitment to developing markets in recent years, and it's particularly notable that in 4Q12, P&G's organic sales in China grew by 9%, Brazil by 17%, India by 21%, and Russia by 18%. By most measures, P&G has a strong international presence-but it still lags Unilever's success in this category, for now.
- Advantage: Unilever
Despite their many similarities, P&G and Unilever do not overlap their product offerings as much as one would think. Unilever's brands are more centered on food and drink offerings (it's the world's largest provider of ice cream) as well as beauty and personal care products. Meanwhile, P&G has an especially strong presence in household care products.
Table 1: Product Market As a Percentage of Sales
Still, there's something to be said for global market share, and that's an area where P&G shines:
Table 2: Market Share Snapshot: Procter & Gamble
Global Market Share
Major P&G Brand
Head & Shoulders
Table 3: Market Share Snapshot: Unilever
Global Market Share
Major Unilever Brand
Rexona, Axe, Lynx
Bath and Shower
While much of P&G's market share dominance can be chalked up to its size advantage, its scope is undoubtedly impressive. Out of 7 billion people worldwide, P&G reaches around 4.4 billion of them.
There are some concerns, however. With 51% North American market share, the company is particularly exposed to slower-growth household products, which are expected to grow at just 2-3% due to competitive pricing and consumer frugality (P&G products tend to be priced at a slight premium to Unilever's). The outlook is even dimmer for laundry-care sales, which have been negatively affected by excessive in-store promotional activity. Meanwhile, the global beauty and personal care market, to which Unilever is more exposed, is expected to grow at a 4% clip in 2013.
- Advantage: Procter & Gamble
Procter & Gamble is one of the most innovative companies in history. In its long history the company was behind the first soap to float on water (Ivory brand), the first stackable potato chip (Pringles), and the first mass-produced disposable diaper. Yet many of P&G's innovation home runs-think Crest Whitestrips, Febreze odor fresheners, the Swiffer-were all launched more than a decade ago.
It's probably no coincidence that research and development expenses, as a percentage of sales, have dropped from 4.5% in 1999 to 2.4% in 2012. There are certainly triumphs today-Tide pods have been a huge hit and have reached 6% U.S. market share in less than a year-but the results aren't quite what they used to be.
In contrast, the improvement at Unilever has been astounding. In 2005, Unilever was able to bring just 0.16% of new products to greater than 10 countries within a year of their debut. Today, under new management, that statistic has risen to 15%. The company has over 20,000 registered patents, files around 300 more every year, and sets aside more than $1 billion annually for research and development. These are powerful resources when put to use. When Unilever took over TRESemme shampoo in 2011, it established the brand in a new market, Brazil, and within a year, TRESemme went from zero market share to surpassing P&G's Pantene brand in the region.
- Advantage: Unilever
Bob McDonald's tenure as Procter & Gamble CEO has been a roller coaster of ups and downs since he took over in 2009. On the one hand, McDonald has been with the company since 1980 and knows P&G's business inside and out. Yet something is still off. P&G's net income is down 20% since McDonald began as CEO, while shares have underperformed the broader consumer staples index. At the root of it all is the fact that P&G is losing share in more than half its markets. Personally, while these are certainly causes for concern, I think people can be quick to discredit a CEO. I like McDonald's leadership style, and I'm cautiously optimistic that he'll be able to turn things around.
Around the same time Bob McDonald took over in 2009, current CEO Paul Polman began his leadership at Unilever. A veteran of P&G and Nestle, Polman was quick to shake things up. He eliminated earnings guidance in quarterly reports, allowing Unilever to focus on its long-term strategy. Most recently, Polman launched an ambitious plan to double revenue by 2020 while halving the company's environmental impact (which, depending on your views, could be a good or bad thing). Unilever has performed well financially since Polman took over, but it remains to be seen if he can execute on his high expectations.
- Advantage: Draw
For an excellent comparison of P&G and Unilever's balance sheets, I recommend reading this article written by another Seeking Alpha contributor. Since his analysis is so thorough, I'll simply include a snapshot of their respective financial positions below.
5-yr CAGR Sales Growth
Source: S&P Capital IQ
In this low interest-rate environment, I want to take a brief moment to compare each company's dividend track record. While Unilever sports a higher yield at 3.08% and has returned a dividend every quarter for over two decades, P&G is the clear winner in this category. Procter & Gamble is one of only 9 companies to have paid a dividend for 122 consecutive years, and it has increased its dividend each of the past 56 years. This reputation shows no signs of fading-P&G saw strong, uninterrupted cash generation in 2012 and expects to return $11-12 billion to shareholders this year in the form of dividends and share buybacks. In the end, Unilever has impressive margins, but P&G is a more disciplined dividend stock.
- Advantage: Procter & Gamble
Both stocks are currently trading at 52-week highs thanks to the market's extraordinary run in 2013. While gaining an in-depth understanding of a company's valuation cannot be achieved by looking at operating metrics alone, it's valuable to have a snapshot of each company's multiples.
Shares of both companies appear to be trading at a slight premium to the rest of the market. Personally, I tend to be more value-oriented and would prefer to wait for a dip before buying either of these solid businesses.
- Advantage: Draw
While every category I've highlighted is central to each company's strategy going forward, P&G and Unilever hold hundreds of brands in dozens of countries, and growth opportunities will surely present themselves from areas we never anticipated. Today, it's evident that Unilever is especially strong in emerging markets and innovation, while Procter & Gamble benefits from a rock-solid balance sheet and a product portfolio with leading market share in a number of categories. After analyzing the strengths and weaknesses of each business, I feel confident writing that both companies would be excellent additions to most portfolios.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PG, UL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.