JP Morgan - Asia Consumer - HPC Competition Heats Up in Asia

In the wake of heightened competitive activity in the Household/Personal Care space in India & Indonesia, JPM Consumer Team hosted an investor call to discuss the implications and strategies of the key global players.

Key takeaways:
• Why is P&G getting aggressive? We believe P&G is strategically trying to expand its presence in emerging markets in order to achieve its stated target of acquiring one billion new consumers over the next five years. P&G would need to capture a wider audience in mass segment to do so and hence is trying to introduce low price points (like Tide Naturals detergent in India) and reducing prices across shampoos and skin creams in Indonesia. We believe this is not a short term volume grab strategy for P&G but is more consistent with its long term strategy of gaining share in emerging markets.

• Unilever is more vulnerable in India and Indonesia. While India and Indonesia together account for low single digit share of P&G’s profits, for Unilever these countries account for 12% of EBIT. Hence these markets are much more important to Unilever which will continue to defend its market share in response to any competitive challenge and in the process risk its margins in these markets.

• Emerging modern retailers and urbanization erode distribution advantage: The emergence of modern retailers and rapid urbanization will erode the competitive advantage of Unilever’s distribution. A new product launching will need only be offered to a couple of key retailers to have sizable overnight presence in the market: in Indonesia 35% of the FMCG market is sold through modern channels. A new product will only need to be launched in first and second tier cities as the population of these cities encompasses 50% of the population.

• Unilever guiding for price decline in 1H10; P&G lowers long term EPS growth target. P&G has indicated preference for topline growth over margins and even Unilever in India has mentioned defending market share as a top priority. With consumer opportunity lying in emerging markets, the market is likely to be increasingly competitive.

• Maintain UW on Hindustan Unilever and Unilever Indonesia. We would expect lower price growth (high inflation further hurting price/mix growth), high competitive spends and rising input costs to weigh on margins for Unilever in India and Indonesia in coming quarters.