Even though the household and personal-care products sector is still seeing steady growth, it is facing two key challenges. First, brand loyalty in the industrialized world has declined rapidly, particularly among household products. And, second, the best way to increase prices — and, thereby, profits — of key staple household and personal-care products is to launch new brands and improved versions of existing merchandise.
Product innovation in this sector comes in many forms, including detergents containing fabric softeners and bleaches; products aimed at specific cleaning jobs; anti-aging products; new toothpaste and mouthwash flavours (although people tend to stick to the same brand for most of their lives); and products to whiten teeth.
The sector, though, does have one big growth area in industrialized countries. Sales of beauty products such as skin-care potions, hair dyes and cosmetics are rising as aging baby boomers seek ways to look as good as possible — and they are prepared to pay high prices in order to do so. Although primarily aimed at women, more products are also being launched that are targeted at men.
In emerging markets, there is strong growth because use of household and personal-care products — such as toothpaste and laundry detergents — that historically have been low are rising. In these markets, success is measured by capturing as big a share as possible of sales of basic products as incomes rise.
Revenue growth in the sector is expected to be 6%-10% a year over the next three years, says Charles Burbeck, head of global equities a HSBC Halbis Partners in London. But companies have to spend a lot on advertising and marketing, and they must also deal with high costs for key supplies, such as oil, aluminum, plastic and pulp, says Patricia Fee, money manager at IG International Management Ltd. in Dublin.
Many companies offer both household and personal-care products, but there are number of firms that participate solely in the personal-care side, selling products for skin care, hair treatments and cosmetics. Some of these firms, though, have been acquired; others are takeover targets.
For example, Cincinnati-based Procter & Gamble Co. bought Gillette Co., the dominant brand in razors, in October 2005. This not only gives P&G a big presence in razors, but also allows for the exchange of best practices, says Stéphane Champagne, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto. For instance, Gillette is excellent at innovation and marketing, while P&G’s strength is distribution.
Two other companies that analysts think P&G would be interested in are Paris-based L’Oréal Group and New York-based Estée Lauder Cos. Inc.
Here’s a closer look at the three companies:
> Procter & Gamble CO. This is UBS Ltd. ’s top pick among global consumer staples, according to a Feb. 28 report issued by the firm’s New York office. The “buy” recommendation comes with a hefty 12-month target price of US$80 a share, which is a significant increase from the US$62 the shares were trading at in mid-March on the New York Stock Exchange. The UBS report notes its conviction on the upside potential for P&G has “never been stronger.”
New York-based Argus Research Co. also has a “buy” on the stock, but with a lower price target of US$72 a share — and it’s also the top pick for both Champagne and Fee.
P&G is the largest company in the household and personal-care sector, with US$38.5 billion in net sales in the six months ended Dec. 31, 2006. That was up 16.3% from US$33.1 billion in the same period the year prior, mainly as a result of P&G’s US$53.4-billion acquisition of Gillette. Earnings during those six months were US$5.6 billion vs US$4.6 billion the previous year. Long-term debt stood at US$23.6 billion as of Dec. 31.
The Gillette integration is on track and almost complete. As a result, UBS expects P&G to beat the high end of its projected US$1 billion-US$2 billion in cost savings for fiscal 2008, which ends June 30, by as much as US$200 million. UBS believes investors “still underappreciate the level of learning P&G is extracting from Gillette in terms of best practices.”
Champagne also anticipates more synergies, while Fee thinks the end of the Gillette integration will free management to focus on the rest of the business, such as other cost–cutting measures.
@page_break@UBS believes P&G’s revenue can rise an average 6% a year through 2010, with earnings per share increasing 13% annually. UBS also thinks investors are not appreciating the shift in P&G’s product mix. Higher margins in beauty, health and personal-care products accounted for 51% of sales in fiscal 2006, vs just 36% in fiscal 1998. If the fiscal 1998 product mix still applied, in UBS’s opinion, the stock would be worth about US$66 rather than the US$80 it expects P&G’s stock to reach within the next 12 months.
P&G’s brands include Tide and Ariel laundry detergents; Pampers diapers; Always, Whisper and Tampax feminine-care products; Bounty paper towels; Charmin bathroom tissue; Pantene, Vidal Sassoon, Clairol and Wella hair products; and Crest toothpaste.
Champagne expects more acquisitions, which should continue to shift the product mix in the right direction. He is among those who mention the possibility of P&G eventually buying L’Oréal or Estée Lauder.
Other positive factors include what Argus calls in its Mar. 9 report P&G’s “competitive advantage,” due to its significant advertising and R&D spending, as well as its continued success with new products.
In addition, Argus is impressed with P&G’s innovation centre, which includes a mock grocery store and a range of model homes.
Champagne also mentions P&G’s ability to finance the heavy advertising and marketing initiatives required to sell these kinds of products. In addition, he notes the firm’s ability to bargain with both suppliers and retailers, given its critical mass in every region of the world.
Another positive thing going for P&G is its snacks and coffee business. Although these products don’t seem to fit with the rest of the company’s lineup, Argus notes that they are profitable and rapidly growing businesses in which P&G is likely to invest further.
> L’oréal Group. Fee believes L’Oréal is too expensive at the 78 euros a share at which it was trading on Euronext Paris in mid-March. However, Bernstein Investment Research and Management in New York rates L’Oréal a “market perform” with a 12-month target price of 84 euros a share. UBS has a “buy” on the stock with a 12-month target price of 90 euros a share.
Champagne believes L’Oréal will be taken over at some point by either P&G or Switzerland-based Nestlé SA, which already owns 27% of L’Oréal’s 658.8 million shares as of April 26, 2006. P&G would add to its already strong skin-care, hair and cosmetics businesses if it acquired L’Oréal, while those product lines would be a new business for Nestlé, whose focus is primarily food.
A takeover of L’Oréal becomes more likely after April 2009, with the end of an agreement that forbids Nestlé or the Bettencourt family — which owns 28% of Nestlé’s shares — to sell their shares in L’Oréal unless there’s a public tender.
Champagne likes L’Oréal’s fundamentals and strategy. It has good products and good brand loyalty. It is launching more premium products and putting a greater focus on products for men. He believes earnings per share will increase 12%-15% annually over the next three years, while Fee expects them to rise only 11%-12% annually.
Fee is concerned about L’Oréal’s lack of momentum and its execution issues in the U.S. She notes that, as of June 30, 2006, the company owns 10.3% of Paris-based pharmaceutical firm Sanofi-Aventis Group. She expects this holding will be sold at some stage but, even if that were imminent, she still considers L’Oréal’s stock to be too expensive.
Yet UBS, in a Feb. 15 report from its London office, calls L’Oréal’s stock underpriced, based on “strong fundamentals and improving growth momentum going into 2007.”
UBS is impressed with Jean-Paul Agon, who was appointed L’Oréal CEO in April 2006. Agon’s strategy includes focusing on fewer but bigger technological developments and product ideas, and leveraging brand power by expanding product lineups and/or geographical reach by introducing European brands into North America and emerging markets and making acquisitions.
L’Oréal has made many acquisitions over the years, including Britain-based Body Shop International PLC, which it bought on July 1, 2006, for £652 million (US$1.1 billion).
In fiscal 2006, ended Dec. 31, L’Oréal had net earnings, excluding non-recurring items, of 1.8 billion euros, up 12% from 1.6 billion euros the year prior. Revenue was 15.8 billion euros, up from 14.5 billion euros the year before. Net debt as of Dec. 31 was 3.3 billion euros.
> Estée Lauder Cos. Inc. Cham-pagne recommends buying this stock on weakness. Fee is also not enthusiastic; UBS rates it “neutral” with a 12-month price target of US$44, which is lower than the US$48 at which the shares were trading on the New York Stock Exchange in mid-March.
Champagne calls Estée Lauder a “good brand” that is starting to penetrate and do very well in emerging markets. If the company can diversify geographically, into Europe as well as emerging markets, he believes it should do very well.
It’s also a takeover target attractive to P&G, although he admits such a move could be years away.
Fee says the concern is how much it’s going to cost Estée Lauder, at the end of the day, to get into emerging markets. She also notes that the brands are generally sold in U.S. department stores, so prospects depend on an acceleration of sales in those stores. The company will also have difficulties if the strong sales growth that its M.A.C. and Bobbi Brown cosmetic lines have been experiencing do not continue. In addition, fragrance sales have not accelerated particularly strongly, Fee says.
Another concern for the company is that the Estée Lauder brand is considered to be an old one that is less attractive to the 16- to 35-year-old age group, says Champagne.
Yet another problem is management, which Champagne rates no higher than “OK,” adding that Estée Lauder “could be run better.” The company is run by the Lauder family, which owns 10.5% of the Class A common shares (one vote each) and all the Class B common shares (10 votes each). He does believe, however, that there’s been improvement recently, including a small restructuring, and that management is on the right track.
Estée Lauder had net income of US$266.7 million in the six months ended Dec. 31, a significant increase from the US$140.2 million the year prior, when discontinued operations had a loss of US$72 million. Net sales were US$3.6 billion vs US$3.3 billion. Long-term debt was US $439.3 million as of Dec. 31. IE
Steady growth for household and personal-goods companies
But the companies in this sector must answer challenges relating to brand loyalty and pricing
- By: Catherine Harris
- April 3, 2007 October 31, 2019
- 11:52