Last week, I advised Fools not to touch Tesco with a barge pole, since it looked to me like the supermarket retailers management was completely lost. That turned out to be pretty greatadvice.
Given that Tesco today announced an overstatement of its sales, and that the retailers new CEO David Lewis comes fresh off a 27-year stint at Unilever (LSE: ULVR)(NYSE: UL.US), its worth taking a closer look at whether Unilever is as safe as many assume.
Is Unilevers competitive position really as securedright now as its reputation for having 2 billion global customers justifies? I dont think so. In fact, there are signs that this companys somewhat inflated growth might be starting to backfire.
Unilever has increasingly pursued an overseas strategy in the past 5 years, most aggressively in emerging markets, which account for over half of itsannual sales. Within the emerging markets, the bulk of these sales are madein Asia.
That alone should sound warning bells, whatever the broad direction of emerging market growth looks like. Thats because fast-growingeconomies will tolerate foreign market-share dominance on their home turf for as long as they are not able themselves to provide identical products via their own homegrown brands.
So while you might have some chance at staying the long haul profitably in such markets if you are a pharmaceutical giant with complex patents under your belt, or a high-technology company with a uniqueproprietary software to offer, if soaps, skin and hair care products, tea and savory snacks are all you have going for youthen the competition is only goingto get hotter and quickly.
A Recent Chinese Whisper
For example, while in China its true that in the past few years Unilever has achieved market share dominance in the cosmetics range with its Lux, Ponds and Dove and Clear brands, by far the majority of this has been in top-tier cities such as Shanghai and Beijing.
Which has beengreat, but thatstrategy is not likely to deliver the company a significant increase in growth going forward, since the major untapped market share now lies in many of the second-tier industrial cities such as Dalian, where workers are finding themselves more flush than ever before as a result of increased demand for their services as available labour has dried up in light of the exporters recent manufacturing boon.
For these customers, who are much more traditional in their product discernment tastes, local rivals such as Inoherb and Bawang have been ready at the gate to snatch up the newly hygiene-conscious teenagers and early-20s consumers dashing to the supermarket to pick up a skin moisturiser before their Friday night date.
In many cases, what this means is that foreign firms eyeing the market segment are partnering with the local brands, which is a deal that favours the home team, as you might expect. (Shanghai Jahwas two-year old partnership with Kao is a case in point).
Homegrown Hygiene Habits
The examples above focus on mainland China of course, but this sort of pattern is not just restricted to the Chinese mainland: its the case with many fast-growing markets which have zoomed ahead in previous yearsand are now flush with international investment.
The evidence of this trend is born out in Unileversearnings: sales fell a sizeable 5.5% to 24.1 billion last quarter.
The company attributed this to a cooling off of emerging market spending, which is especially worrying, since it suggests that management doesnt understand why its emerging market sales have cooled some 40%. Its true that emerging economies are slowing down, but not so much that consumers are opting out of their hygiene!
They are just buying their own homegrown brands, thats all. And local competitors are using the edge they have now to erode margins of foreign rivals.
Make A Million, Not A Mistake
Today I am directing your attention to our report on making a million in the market. By utilizing the kinds of key information points such as the ones that I have described in today’s analysis of Unilever, you can become a much more successful investor that avoids costly mistakes made as a result of making broad assumptions (e.g. that non-cyclical companies are safe bets) and instead turbo-charge your portfolio so that you harness information to make huge returns.
Daniel Mark Harrison has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.