Cleaning Up
Unilever is the leader in liquid laundry detergent in emerging markets with market share of more than 25%. Unilever’s Lifebuoy hand-washing programs have reached over 119 million people since 2010, helping its Lifebuoy soap brand generate double-digit growth. The company’s Pureit in-home water purifiers are bringing safe, affordable drinking water to millions of people in India and other emerging markets. ADRs of Unilever NV (“UN”) and Unilever PLC (“UL”) trade on the NYSE.
Henkel AG & Co. KGaA—a Germany-based producer of laundry and home-care products, beauty care products and adhesive technologies—markets soaps in North Africa and Latin America that are easier to rinse out with less water, says Kalus-Bystricky.
It also uses smaller, less expensive packaging. “They work with how people live on a hand-to-mouth basis,” she says. “They are definitely focused on affordability.” While Henkel may not be making a lot of money on these products, “it’s an investment in the future,” she says. The company generated 43% of its overall 2012 sales in emerging markets.
But Henkel’s big growth driver is its adhesives business, says Kalus-Bystricky, who describes the company as “the go-to adhesives producer” and held its shares in both of her funds as of September 30. Henkel is focusing on new applications for adhesives, including carbon fiber airplanes that must be able to withstand heat, cold and vibrations. Bloomberg consensus growth is 9.8% for one year, 8.5% for three years—numbers she thinks may be low given the strength of Henkel’s adhesives business and how deep a recession Europe is coming out of.
Henkel, which imports and produces chemicals, is also ahead of the curve on using certified, safer chemicals, so it’s less likely to have to pull its products as chemical regulations tighten in Europe, she says. Its ADRs trade over the counter in the U.S. under the symbol HENKY.
Tolson of Boston Common Asset Management says it’s easier to transition household and personal products to the developing world than food, which is more regional and harder to adapt to local preferences. “Taste helps drive the decision-making process,” she says, “and companies have to really understand local needs and resources.”
When analyzing companies, Tolson looks for robust end-market growth, leading market share positions and strong innovations (as measured by R&D and the percentage of revenues coming from products introduced in the last three years), as well as the companies’ advertising efforts. In emerging markets, this includes visiting communities to explain products’ health benefits and introducing consumers to inexpensive single-use items that can create loyalty. She notes that Colgate-Palmolive Co. has made such efforts in Latin America for decades. “Colgate is sort of the poster child,” she says.
As incomes rise in emerging markets, she expects to see greater consumer interest in products that are more convenient, healthier and geared for personal hygiene and appearance. Strategies used in emerging markets, such as smaller, more affordable packages, can also be an effective way to reach lower socioeconomic status consumers in developed markets, she says. “For a lot of consumers, it’s not the cost of what’s inside the bottle but the bottle itself,” she says, noting that plastic is tied to oil prices.
Other consumer companies she says are making efforts in the developing world include Mondelez International (spun off from Kraft Foods in 2012) and Procter & Gamble. “For example, Tang, a Mondelez product offered in powdered and ready-to-drink forms, can also be used as a medium to deliver health benefits including vitamins and minerals tailored to regional needs,” she says. P&G’s innovations are driving its pricing power and unit growth, she says.
To make their efforts in emerging markets sustainable, consumer companies must collaborate with local authorities, microfinance institutions and other organizations, says Menou. However, “when you want to contribute positively through your investment, you do not necessarily have to invest in small-scale microenterprises and microfinance projects,” she says. “You can invest in large-cap equities that are actually doing things to improve nutrition or health.”