Why Are Emerging Markets Important For Unilever?

Sep. 4.14 | About: Unilever Plc (UL)

Summary

Unilever, as a company, suffers from higher currency volatility as opposed to its competitors.

Unilever has experienced a slowdown in the emerging countries, whilst developed markets are not yet picking up.

80% of the world's population resides in emerging markets. By tapping into these markets, any company can gain a large portion of the market share.

Unilever has found itself in a gold mine, and is simply waiting for excavation to begin.

Unilever (NYSE:UL), one of the major consumer goods brands, has almost 400 products in its portfolio. More than 2 billion of the 7.25 billion world population makes use of Unilever products every day.

The company reported revenues close to $66 billion in fiscal year 2013. During the first half of 2014, the company reported revenues worth $33 billion, which was 1.4% lower than the earnings reported in the same period for 2013. The domestic sales turnover in euro terms adds up to €24.1 billion for the first half of 2014, and is 5.5% lower than the sales reported in the first half of 2013. This shows that the turnover of the company is susceptible to currency volatility.

Unilever, as a company, suffers from higher currency volatility as opposed to its competitors. The reason why Unilever is more exposed to this volatility in currencies is because it operates mostly in emerging markets, such as Brazil, India, South Africa, Argentina and Indonesia. The sales in these and other emerging markets account for almost 57% of the company's total sales. Price growth in emerging markets during the first half of 2014 was almost 4%, and that created inflationary pressure on the prices of consumer goods.

In addition to this, currencies of these countries depreciated against the euro and the U.S. dollar in the second half of 2013, which has added to inflation. All of this has led to a reduction in the buying power of consumers in these markets. Based on this reduction in buying power, Unilever's underlying volume growth reduced from 5.5% in the first half of 2013 to 2.5% in the first half of 2014. Similarly, underlying sales growth of the company also decreased from 10.3% to 6.6% during the same time frames.

Divisions in Unilever that are most affected

According to Unilever CEO, Paul Polman,

"Our markets have been challenging and we have experienced a further slow-down in the emerging countries whilst developed markets are not yet picking up."

The result of this slowdown in emerging markets was most evident in the personal care and home divisions of the company. These divisions are most affected by volatility in emerging markets, since they account for 80% of Unilever's sales in the same markets.

The CEO of the company warned that the conditions in these markets could continue to shadow the markets for some time in the future as well. There are also some indications that the company may have to raise prices in these markets, due to the high costs they are bearing in the region owing to inflationary pressures.

Why are these markets so important for Unilever?

80% of the world's population resides emerging markets. By tapping into these markets, any company can gain a large portion of the market share for its products. According to the IMF, the contribution of these markets is about 50% to the global GDP. The World Economic Outlook report by the IMF also states that with an incremental increase of 0.7% each year, these markets may end up contributing about 54.5% to the world GDP by 2019.

The high population of these countries and their high growth rates of income present almost every consumer good company with the perfect opportunity to set its foot into them.

However, based on the challenges that these emerging markets are facing now, the currency depreciations and inflation rates could lead to sluggish sales for companies that are currently selling their products in these markets.

Why Unilever chooses to stay

Based on the statistics and demographics of most of the emerging markets in the world, Unilever has found itself in a gold mine and is simply waiting for excavation to begin. Though these markets are not presenting the company with the best opportunities at the moment, activity is bound to pick up in the years to come.

These developing countries are perfect avenues for investments. Their spurring population growth only increases the number of people that companies such as Unilever will have to sell their products to, generating more sales for the company.

With flat growth being demonstrated in developed economies, with spikes in purchases of cars and homes only, these markets do not demonstrate much room for consumer goods companies such as Unilever to grow.

If estimates are accurate, and if the emerging markets pick up soon, Unilever could find itself with growing revenues and a higher bottom line. Considering that this is a company that has its management constantly working in the interest of its shareholders and providing them with better returns, the company and its shareholders are set to gain as soon as emerging markets begin recovering.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.