Unilever Growth to Sputter as P&G Takes Market Share in India

Unilever, which sells soap to more than 500 million Indians, may see global revenue growth slow in 2010 as Procter & Gamble Co. and ITC Ltd. step up marketing in Asia's third-biggest economy.

The world's second-largest consumer products maker has relied on accelerating shipments of Surf Excel detergent in India to make up for sluggish sales in Europe. Now Cincinnati- based Procter & Gamble is stocking Indian stores with Olay skin- care products after nearly halving the local prices of Ariel and Tide detergents in 2004.

Asia and Africa, which make up about a third of Unilever's worldwide sales, will see their share of the company's growth fall to 2 percent in 2010 from 3.3 percent in 2007, according to Brussels-based brokerage Petercam SA. Revenue from the two continents rose 11.4 percent in the first nine months of last year, helping offset 1.9 percent growth in Europe and 4.2 percent in North and South America.

``Unilever is quite heavily dependent on the region for growth, so a slowdown there would hurt growth at Unilever as a whole,'' said Yann Gindraux, an analyst at Vontobel Holding AG in Zurich, speaking about Asia and Africa. He rates the stock ``sell'' and expects sales in the regions to expand by 9 percent in 2009 from 11 percent last year.

Unilever's overall sales growth will slow to 4.9 percent in 2010 from an estimated 5.3 percent in 2007, according to the median of five analysts in a Bloomberg survey.

2010 Expectations

P&G, the world's largest consumer-goods maker, will continue to gain share in the next five years in India, according to Ali Dibadj, an analyst at Sanford C. Bernstein in New York, who rates the stock ``outperform.'' Hindustan Unilever Ltd., 52 percent owned by the London- and Rotterdam-based parent, lost ground in shampoo, bath soap, toothpaste and tea in the quarter ended Sept. 30, compared with the year earlier, according to the company. Its share of the shampoo market declined by more than a percentage point to 47.7 percent, the company said.

ITC, the largest Indian cigarette maker and partly owned by British American Tobacco Plc, is also making inroads. It started selling more brands including Fiama Di Wills shampoo and Superia soap last year as the government raised tobacco taxes.

`Profitable' Cigarettes

The tobacco maker ``has a very profitable cigarettes business which will help it to invest and expand its personal- care portfolio,'' said Anand Shah, an analyst at Angel Broking in Mumbai, who has a ``neutral'' rating on the stock. ``It has the ability to take losses in this segment as long as it grows its sales. This strategy will still satisfy investors.''

Rising prices of raw materials have made it more difficult for consumer-goods makers to pass on higher costs. The price of palm oil, used to make soaps and foods, has surged 70 percent in the past year.

``Given the competition, profitability will continue to be under pressure,'' said Macquarie Securities Ltd. analyst Unmesh Sharma, who has an ``underperform'' rating on Hindustan Unilever. He expects the stock to drop to 180 rupees ($4.57) in the next year from 190.9 rupees. The company has a market value of about $11.8 billion.

India is Unilever's biggest market in Asia, generating about 6 percent of annual sales. It has sold soap in the country since 1888 and controls about half of the sales of products such as skin creams, bathing soaps and shampoo.

Cescau Sells

Chief Executive Officer Patrick Cescau has sold frozen food and perfume units to boost performance. Unilever aims for sales growth, excluding acquisitions, divestments and currency swings, of 3 percent to 5 percent annually through 2010. P&G revenue, on that basis, rose 5 percent in fiscal 2007, partly because of China and India.

Cescau is also trying to take on Nestle India Ltd. and ITC in food. Hindustan Unilever wants to convince urban consumers to shift from fresh to manufactured food such as Knorr soup. Indian packaged-food sales reached $14 billion, compared with unpackaged sales of $275 billion, according to a company presentation last year.

``As incomes increase, people will be spending more on products such as chocolates and other packaged food,'' said Suhas Naik, who helps manage the equivalent of $200 million at IL&FS Ltd. in Mumbai. ``This is where the growth will come from. The penetration of these products is still very low in India.''

Unilever's Indian operating profit as a percentage of sales declined to 14 percent in 2006 from more than 20 percent in 2003, according to data on Unilever's corporate Web site. The margins exclude restructuring costs and gains on disposals.

``It's very surprising that given their brand recognition in India, they aren't more aggressive in entering new businesses,'' said Angel Broking's Shah.

Flanker Brands

A flanker brand is a Line extension by the company. HUL having different varieties of washing powder detergent, e.g. Surf Excel for the Premium segment, RIN for the middle segment and Wheel for the lower segment.
P&G having Ariel for the premium segment and Tide for the middle segment.

A flanker brand is a new brand introduced into the market by a company that already has an established brand in the same product category. The new brand is designed to compete in the category without damaging the existing item’s market share by targeting a different group of consumers. This strategy, also called fighter branding or multibranding, is used to achieve a larger total market share than one product could garner alone. Companies with multiple brands in a single product category generally have the following types of products in their portfolios:

• A premium brand that offers high quality at a higher price.
• One or more “value” brands offering a slightly lower quality or a different set of benefits for a lower price.

Why is flanker branding important?

Flanker branding is important because it allows a company to attract new customers from various market segments. The main brand of a company’s portfolio should target the market segment containing the most consumers. Another brand can then be positioned to convert users from other market segments by using a different set of benefits or product characteristics. For example, Proctor and Gamble’s (P&G) (worldwide) Tide is an extremely successful laundry detergent. In order to appeal to consumers who desired a lower-cost detergent, P&G introduced Cheer, which is a slightly lower quality product offered at a value price. While Tide’s sales dropped slightly with the introduction of the new brand, the combined sales of Cheer and Tide were higher than Tide’s original sales alone, allowing P&G to gain a greater market share. A company’s brands should attract customers from competing brands and not each other.

There are a number of advantages to developing a flanker brand:

• Gain more shelf space for the company, which increases retailer dependence on the company’s brands.
• Capture “brand switchers” by offering several brands.
• Develop excitement within the company by monitoring sales figures of the different brands.
• Protect the company – giving a product its own unique name means it will not be readily associated with the existing brand. This reduces risk to the existing brand and/or company if the product fails.
• Companies with a high-quality existing product can introduce lower-quality brands without diluting their high-quality brand names.
  

Developing flanker brands does present challenges. Introducing a new brand is quite costly. Creating another independent brand requires name research and substantial advertising expenditures to create name recognition and preference for the new brand.

Will Flanker Branding Work for You?

Flanker branding is not for everyone. There are a number of questions that must be answered in order to make the best decision for your situation. The most basic questions include:

• Can my existing brand be changed enough that a new brand will have unique qualities that will appeal to a separate group of consumers?
• Are these new qualities believable?
• How will the new brand impact my existing brand(s)?
• How will the new brand impact competitors’ brands?
• Will the cost of product development and promotion be covered by the sales of the new brand?