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A recession, it is generally held, is two successive quarters of shrinking economic growth. It could also be two successive quarters of shrinking toothpaste tubes and shampoo bottles. How else are makers of fast-moving consumer goods to protect their hard-earned margins in a downturn? The ability of consumer goods companies to raise prices and sell more shower gel and detergent at the same time is proving easier for some than for others, as a comparison of Procter & Gamble and Unilever illustrates.
The two big beasts of the fast-moving consumer goods jungle produced volume growth of 2 per cent in the first three months of this year compared with 2012. But P&G managed only a 1-per-cent rise in prices compared with Unilever's 2.6 per cent. That goes some way to explaining why shares in P&G fell 6 per cent after its trading update this week, twice as much as the fall at Unilever after its own update.
Not everything is going perfectly for Unilever. Sales in its foods segment, which accounted for a quarter of its total of €12-billion ($15.9-billion) in the first quarter, fell slightly. But the Anglo-Dutch company's spread across products and geographies more than offsets this. Unilever derives 57 per cent of its sales from emerging markets, compared with 40 per cent at P&G.
Both companies should benefit from the moderation in input cost inflation from key products such as oil. The question is how they chose to deploy any savings. Unilever estimates that its commodity costs should rise in the low to mid single-digits this year, down from high single-digits in 2012. But it might want to reinvest that to protect market share in order to meet its long-term target of €80-billion in annual turnover – 60 per cent more than sales in 2012.
P&G could be tempted to pocket the savings as earnings to meet quarterly guidance, something that Unilever, thinking longer term, does not do. P&G needs to be careful, however. Its market share fell 39 basis points over the first three months on a global weighted average basis, according to UBS.
Unilever has closed the historical valuation gap with P&G for both companies' shares to trade on a heady 19 times this year's earnings. In the current climate, they look like safe havens. With other downturn-resistant options, such as gold, looking volatile, and corporate bonds looking expensive, investors could do worse than pay up for their consumer staples.