Procter & Gamble Co. has been chasing growth in developing markets -- as many other marketers have -- but at a steep cost. One of P&G's key business units in India lost so much money last year that it wiped out the prior six profitable years combined.
The results for the 12 months ended in March, released just last month, show that the home-care unit (which handles P&G's key laundry detergent, hair, skin-care and feminine-care products) increased sales 35%, to $533 million. But P&G lost $66.4 million, mainly as a result of a laundry detergent battle with global rival Unilever . It also lost money in beauty care as it launched or expanded the Pantene and Olay lines. Only the relatively small feminine-care business was a winner for Home Care.
According to the results report, the sales boost came with an 83% hike in advertising and promotion spending, to $154 million -- in itself more than sufficient to account for the loss.
That P&G lost money while making an aggressive push in India isn't surprising, though the size of the loss was, according to Sanford C. Bernstein analyst Ali Dibadj.
While the move hurts short-term profits, the company may have no other choice, Mr. Dibadj said. India is too valuable for P&G to wait to establish a significant presence. The country lacks the economic clout or growth of China, but it has a far younger population and is projected to lead all major developing markets in population growth for decades.
Mr. Dibadj suspects that P&G is also incurring losses in a similar effort in Brazil, where it's playing catch-up with entrenched players Unilever and Colgate-Palmolive.
In India, P&G is dwarfed by Unilever , whose Hindustan Lever subsidiary has annual sales of nearly $4 billion. Unilever and other competitors target the higher levels of the market's economic pyramid, so P&G's best strategy is to undercut rivals by appealing to lower-income consumers, Mr. Dibadj said.
"We think it's the right strategy to get into emerging markets, even the way they're doing it now, which hurts profits," Mr. Dibadj said. "But they can't do it successfully unless they cut [prices]."
P&G did that with the introduction of value-priced detergents like Tide Naturals in 2010. Mr. Dibadj said the company effectively beat pricing in the Indian category by 40% by pricing a product 25% below Unilever 's leading brand, then increasing the package size 23% after the Anglo-Dutch giant shaved 28% off its prices.
Hindustan Lever's margins were down 1.9 points for the year ended March 2011, to 12.2%, though the unit did make money. Indian household- and personal-products rivals took an even bigger hit, with operating margins cut by an average 2.7 points, according to Bernstein research.
P&G is probably prepared to lose money in markets such as India and Brazil for five to 10 years in the interest of building substantial businesses, according to Deutsche Bank analyst Bill Schmitz. That doesn't mean that emerging markets as a whole are unprofitable, however -- even in the short term, he said. P&G has large and highly lucrative businesses in China, as well as in Central and Eastern Europe.
Overall, P&G has indicated that operating margins in developing markets are 20% to 21%, Mr. Schmitz said. While that 's not as good as the 28% to 29% in the U.S., it's far better than the 8% the company has had in Western Europe. After-tax margins in developing markets can be comparable to those in the U.S., he added.
The question is whether every emerging market is worth the pain.
"India is not China, and that 's where people get lost," said one analyst. While India has strong long-term growth prospects, it could take 20 years for the country to approach the size or profitability of China's consumer-products market, the analyst noted, adding that Unilever will do everything it can to defend against P&G.
It all comes as P&G faces stiffer competition on its own U.S. turf. In a December investor presentation, Unilever CEO Paul Polman said the company had added 0.4 points of market share in India's detergent market in 2011 and added 1.6 share points in skin-cleansing products in the U.S.
Meanwhile, L'Oreal has made the U.S. one of its top three priorities, after China and India. In a presentation in December, L'Oreal Chairman-CEO Jean-Paul Agon expressed a particular satisfaction on succeeding against a major rival in its home market.