The U.S. is far from undeveloped, but P&G, Coke, L'Oréal, GM and other big marketers are seeing growth opportunities here again
The U.S. has been called a lot of things, but the description by L'Oréal Chairman-CEO Jean Paul Agon during a meeting with investors last week may have been a first: He labeled it an "emerging market."
Mr. Agon's comment, characterizing the sentiments of his managing director-North America, Frederic Roze, was only half in jest. And it had basis in fact.
L'Oréal's North American organic sales grew 7.3% in fourth quarter 2012, following 7.1% growth in the third quarter. For the second straight quarter, the most developed of markets came within a percentage point of sales growth in L'Oréal's "new" or emerging markets.
When L'Oréal two years ago named the U.S. among its five top-focus markets, along with the BRIC countries -- Brazil, Russia, India and China -- it raised eyebrows. After all, the U.S. was what most packaged-goods players were diversifying from as they chased growth overseas.
But things are changing. L'Oréal's biggest rival, Procter & Gamble Co., last year slowed its expansion into "category-country combinations" in emerging markets to focus on its top 40 most profitable existing ones -- which are disproportionately in the U.S. And as growth slows in true emerging markets like the BRIC countries, marketers such as Unilever, Coca-Cola and Reckitt Benckiser are increasingly looking to the U.S. to pick up some of the slack.
Some marketers are turning attention back to the U.S. because they've underinvested here or are responding to increased competition. P&G, for example, is under attack not only from L'Oréal but from Unilever, which launched new-to-the-U.S. brands Clear hair care and Simple facial-skin care last year, both aimed squarely at taking share in core categories on P&G's home turf.
Others have grown disillusioned with Europe and Japan due to slower growth and are encouraged by a rise in consumer spending in the U.S., where some brands have underindexed relative to the population. Also working in the U.S.'s favor are population trends, particularly among multicultural consumers.
"This U.S. market will remain very dynamic structurally because the U.S. population is growing -- 27 million more inhabitants in 10 years," said Mr. Roze in a talk with L'Oréal investors and analysts. "The percentage of Hispanics, Asians and African-Americans keeps growing. They contribute to winning elections but, more importantly, they're over-consumers of beauty products." That's one reason L'Oréal has moved up to No. 5 from No. 25 among top media spenders in the U.S., he said.
Even if the U.S. is a developed market, L'Oréal still has room to get market shares here in line with other countries', particularly in hair care. The L'Oréal Paris Advanced restage aims to do just that, said U.S. CMO Marc Speichert in an interview. "We can also grow categories and per-capita consumption," he said. "In certain categories, per-capita consumption in the U.S. is significantly lower than other countries, such as skin care."
In delivering earnings late last month, executives at Unilever and P&G noted what appear to be at least somewhat favorable sales trends in the U.S. And though his growth emphasis remains squarely on emerging markets such as China, Kimberly-Clark Chariman-CEO Tom Falk said the company is seeing signs the recession-fueled decline in the U.S. birth rate is bottoming out. For Western Europe, K-C has a dimmer view: It plans to sell its diaper business there this year.
For marketers across the board, growth in developing markets has slowed, with BRIC countries seeing gross domestic product rising from an anemic estimated 1% in Brazil to 3.4% in Russia, 5% in India and 7.8% in China in 2012, all down from years past. China, for example, has seen GDP growth slow from 10.4% and 9.3% the prior two years.
Worse still is the impact from a smaller but significant market: Venezuela. Its 32% currency devaluation last week will lop decimal points off the global growth rates of players such as P&G and Colgate-Palmolive Co., which get 2% and 5% of their sales there, respectively.
The U.S. is also looking promising relative to other developed markets. Bogged down by debt crises in Southern Europe, the eurozone saw GDP decline the past three quarters. So has Japan, which also devalued its currency recently, making things tougher for U.S. and European-based competitors.
By contrast, 2.2% growth in the U.S. in 2012 doesn't look so bad, even with a surprise 0.1% decline in the fourth quarter caused by tightened government spending and some likely headwinds from a 2% hike in payroll taxes this year.
While its 1% fourth-quarter sales growth in the U.S. wasn't torrid, Coca-Cola Co. beat the 4% fourth-quarter volume decline in China, where Chairman-CEO Muhtar Kent said consumer spending remains "quite challenged," particularly in export-driven coastal areas. But he noted that in measured retail channels, spending per person in the U.S. rose to $60 from $56 over the past three years.
The U.S. isn't just a bright spot in packaged goods. Unlike the years leading up to bankruptcy, when North American results dragged down all the domestic automakers, General Motors and others are now heavily dependent on the region. For example, even though GM's international division (China, Russia, Korea and other emerging markets) sold more cars than its North America unit in 2012 (3.28 million vs. 2.93 million), North America's pretax profit of $6.95 billion was more than triple that of international.
Laurent Faracci, Reckitt Benckiser's U.S chief strategy and marketing officer, less than two years ago asked for an assignment here rather than one in a developing market because he sees the U.S. and China as the hubs of marketing innovation. Lately, RB has shown that it's possible to produce developing-market-style numbers in the U.S. even if the flu -- which fueled sales of Mucinex and Lysol -- is largely responsible. Its sales jumped 22% in the four weeks ended Jan. 19 and 11% for the latest 12 weeks vs. only 5% for the full year, according to Nielsen data from Deutsche Bank.
That increase was the result of planning: RB has spent years repositioning brands for cold and flu in the U.S. and this year launched a campaign tying them with Lysol in a marketing program.
While RB's recent rise was extreme, it wasn't unique. Top-line sales in the U.S. for 11 of 14 major marketers tracked by Deutsche Bank improved for the most recent four or 12 weeks vs. the full year. Overall, Nielsen household and personal-care data reported by Sanford C. Bernstein for the U.S. showed 6% growth in the four weeks ended Jan. 19 -- the best month in years.
More broadly, some global marketers outside CPG are focusing on the U.S. in new ways. Walmart, after seeing more of its suppliers talk about relocating manufacturing to the U.S. as their Asian factories "near the end of their useful lives," last month launched a program to encourage the trend: It will buy at least $50 billion more made-in-the-USA merchandise over the next 10 years.
At least part of motivation for the idea, according to people familiar with Walmart, was pure business development: More people employed making stuff in the U.S. can buy it from Walmart, the biggest retailer. Or, as Bill Simon, president-U.S. put it, Walmart can "play a role in revitalizing the communities we serve."
Of course, the U.S. isn't a true developing market. It has the biggest GDP of any country on Earth. Deutsche Bank consumer-products analyst Bill Schmitz notes that the U.S. lacks key elements of actual developing markets, such as the emergence of a modern retail trade and a middle class.
But while it's not quite akin to developing countries replacing small stores with supermarkets and supercenters, the U.S. is seeing continued development of a more modern class of trade. Mr. Roze said L'Oréal's ramp-up in digital-marketing spending helped it build e-commerce sales 36% last year vs. the 10% average growth for beauty.
At the same time, more marketers are paying more attention to lower-income consumers in the U.S. (see story, P. 17), and some are looking to apply lessons or products from developing markets in the process. For example, Ilonka Laviz, marketing director-digital brand building-strategy and global e-commerce at P&G, said the company may be able to apply learning from mobile marketing in developing markets to lower-income consumers in the U.S., given that feature phones rather than smartphones remain the dominant mobile devices in both segments.