Procter & Gamble's (
) CEO, Robert McDonald, set out on an ambitious plan to acquire one
billion additional consumers by 2014-15 and where else would have
P&G found a billion untouched consumers but in the two most
populous nations, China and India? Standing in its way are
), Clorox (
) in the consumer products businesses and companies like
), Avon (AVP) and Estee Lauder (EL) in the
personal care and beauty segments that are also trying to push
further into these markets.
We currently have an $84 price estimate of Procter &
Gamble's stock here, which is around 30% ahead of the market
The "Chindia" Opportunity
Despite a global presence with over 32% sales already coming
from emerging economies, the mission naturally translated into
focusing on China and India. It comes as little surprise then that
P&G has launched lower-priced product extensions of its global
premium brands such as Tide and Gillette targeted atconsumers with
lower disposable income levels in these economies and expanded its
distribution network to cover the previously inaccessible rural
While the developed economies of US and Western Europe continue
to constitute over 41% and 21% of sales respectively, going forward
much of the growth is expected to come from the emerging economies,
which have been exhibiting robust double-digit growth primarily on
account of expanding middle class with rising disposable income
levels and high population growth rates.
There's no doubt that the strategy seems to have fared well
until now. While P&G continues to beat the market expectations,
further raising its outlook for sales growth to 7% for the year
ahead, other players such as Kimberly Clark have issued downside
guidance for the full year with sales growth expected to be around
2%. Amidst much optimism, what raises our concerns is P&G's
increasing exposure to China and India!
Detergents & Household Cleaning Products
The detergents & household cleaning segment accounts for
about 24% our $84 Trefis price estimate of Procter&
In 2009, P&G launched
, targeting the lowest income consumers in India and drew market
share from the regional players, which have historically led the
Tier-III consumers segment. This was also made possible by P&G
expanding its distribution network to the remote rural India.
We currently estimate a market share growth in laundry
segment from 31.7% in 2010 to 32.6% by 2016 from gaining share from
local players in China and India. If however P&G were to lose
volumes to regional players, we foresee the market share to
gradually decline to historical levels of close to 30.5% leading to
a 1 % potential downside to our current Trefis price estimate for
Procter & Gamble's stock.
While China and India do bring in volumes, what sells more here
are the lower-priced and lower-margin products. Hence, we expect
the EBITDA margins for the overall detergents & household
cleaning segment to decline gradually with increasing proportion of
lower-margin product sales in emerging economies. Also, to compete
with the local players, P&G would have to sacrifice margins for
targeting higher volumes.
We currently estimate EBITDA margins to decline from 26.4% in
2010 to 25.8% in 2016. However to match up to local competition, if
P&G were to pass on the margins to the highly price-sensitive
consumers in the form of discounted prices, P&G's expansion
into China and India could lead to a decline in EBITDA margins to
23% by 2016, resulting in another near 4% potential downside to our
current Trefis price estimate of P&G's stock.
P&G has shown a lot of confidence on the consumer markets in
China and India and invested heavily in terms of customized
products offering and an extensive distribution network. We
estimate that if the investments do not reap the expected benefits,
P&G's stand around 5-10% of our current price estimate from
only the detergents and household cleaning segment alone.
You can see our detailed
$84 Trefis price estimate of Procter & Gamble's
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