Clearly, the market isn't melting down. It has more girls ages 15 to 17 than North America and Western Europe combined and its per-capita gross domestic product has more than doubled in the past 10 years.
But the double-digit sales growth that seemed almost a birthright in China for P&G and Colgate is fading as those marketers, who entered in the mid- to late 1980s, face mounting challenges. Their best global competitors, including L'Oreal, Unilever and Kao, are getting more aggressive, making acquisitions, and getting their acts together in China. And the always-feisty local competition is getting even nastier.
As a result, P&G, Colgate and smaller rival Avon Products have all posted disappointing results in China of late.
Colgate's disappointing results
Colgate, after reporting flat China volume in the first quarter compared to 18% growth a year earlier, last week reported sales were up a relatively modest 4% in the second quarter. The tepid-for-China growth was particularly surprising given that sales in the year-ago quarter were hurt by what turned out to be an unfounded, temporary scare involving interaction of Colgate's gingivitis-fighting toothpaste with chlorine in the country's water.
P&G's China results will be closely watched when the company reports its fiscal fourth-quarter earnings Aug. 2 after it acknowledged ending a long series of double-digit-growth rates in China the prior quarter. Analysts aren't hazarding country-specific guesses, although one informed executive estimates P&G results for the country will come in at about $3 billion in the just-closed fiscal 2006 year, up from $2.7 billion in 2005 (those numbers include revenue from recently acquired Gillette).
Slow growth rates
"The growth rates are going to slow," admitted P&G Chairman-CEO A.G. Lafley in an April conference call. "We're just coming off bigger bases."
The major package-goods players have all the big cities well covered and have largely exhausted the most opportune categories, said one analyst, who said the game in China must now shift to trading consumers up. Yet right now, he said, "pricing is falling, because value brands are growing and consumers are trading down."
Growth in the particularly competitive oral-care business in China -- which is bigger by volume for P&G than the U.S., though not in dollars -- has "decelerated to low-single digits" for everyone in the market, said Morgan Stanley analyst Bill Pecoriello in a research note last week. However, he does see more upside for growth in less-penetrated markets such as diapers.
Consumers demand more
"China's retail sector is more developed now," said Alfonso De Dios, associate director-media, Greater China for P&G in Guangzhou. "Customers are demanding more now and they have more power over pricing."
"You see an increasing competitiveness in all categories [in China]," said Huib Bouma, a former P&G media executive in the country who's now a marketing and global media consultant in the Netherlands. He cites the end of easy distribution gains, greater involvement by efficient but powerful global retailers such as Carrefour, and "an increasingly nasty game" by local competitors. "In the old days, you would do advertising and get distribution and it was record business," Mr. Bouma said. "Now it's getting much more complex."
Speaking in May at a Goldman Sachs investor conference, P&G Chief Financial Officer Clayton Daley said P&G still sees China as a "double-digit grower" long term, and that the company has been doing "a lot of diagnostics" on its China business. P&G has been raising prices in the country, he said, which may have caused a "temporary slowdown" either from consumers or distributors drawing down pantry inventory. But he said P&G has maintained or gained share in the country and that it still has some key categories it's yet to enter there, including dish soap and fabric softener.
Mike Amour, chairman-CEO of the Asia/Pacific region of WPP Group's Grey Global Group, believes P&G is savvy enough to overcome what he sees as a temporary slowdown. He views the quarterly results reported in April "as an anomaly rather than as a new trend."
Colgate Chairman-CEO Reuben Mark last week said that while the company's oral-care market share in China had slipped in the second quarter, Colgate still widened its lead over its "nearest competitor," which is P&G. The two haven't always seen eye to eye on share numbers, however, and P&G will weigh in this week. Mr. Mark characterized Colgate's China business as healthy, and projected stronger top-line growth there the next two quarters.
Things were much worse in the first quarter for Avon Products, which saw China sales plunge 27% to $47 billion amid a switch from boutiques to direct selling. Avon, too, has yet to report second-quarter results.
Certainly not all marketers are singing the China blues. L'Oreal, though it has stopped releasing China growth rates as it did in recent years, when the business grew in the 30%-50% range off a much smaller base, still appears to have had double-digit growth in the first half. Unilever, which has yet to report second-quarter numbers, reported double-digit top-line growth in China in the first quarter. And Kao, which bolstered its China business with the acquisition of Kanebo cosmetics earlier this year, also appears to have had first-half China sales growth at or near double digits based on its overall Asian results.