Emerging-Market Growth War Pits Global Brand Giants Against Scrappy Local Rivals

It's No Zero-Sum Game as P&G, Unilever, K-C Battle Each Other as Well as Indigenous Brands in China, Latin America, India

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BRIC by                                                                    BRIC graphic
Source: Euromonitor, Goldman Sachs / Photos: Bloomberg

Packaged-goods players have been aggressively piling into developing markets, raising a natural question: How can anyone win when everyone is following the same strategy?

Despite the appearance of a zero-sum game, some believe big multinationals can all come out winners, not just because of the rapid growth in those markets, but also because they can collectively steal share from another lucrative source -- indigenous locally based competitors with plenty of share to give.

Procter & Gamble Co., Unilever, L'Oreal, Colgate-Palmolive Co. and Kimberly-Clark Corp. -- among many others -- are all trying to pile into new markets at once. P&G, long the industry leader in China, in recent years has stepped up activity in India and Brazil and is starting to ramp up business in Indonesia and sub-Saharan Africa. Unilever, long dominant in Brazil and India through its 52%-owned Hindustan Lever subsidiary, is stepping up the attack in China.

It's a bruising battle in some markets, such as oral care in Brazil and Mexico and laundry in India, where P&G has been slugging it out with Colgate and Unilever.

But a March 2011 Goldman Sachs report said the focus on such Goliath-on-Goliath combat overlooks how the multinational "Goliaths" are increasingly overtaking emerging-market "Davids." After locally based competitors outperformed multinationals for much of the past decade, the tide has begun to turn. Sales growth for six locally focused competitors fell to 15% in 2009 from 35% in 2005. Sales growth for multinationals in developing markets also slowed, but only from 24% in 2005 to 12% in 2009.

Commodity-cost inflation is also worse for local competitors who have less buying power and global scope to manage price hikes, according to Goldman.

P&G in December 2010 outlined a plan for expansion over the next five years that encompasses 9,000-plus category, country, price-tier and retail-channel combinations, weighted heavily, but not exclusively, toward developing markets. In many cases, P&G is either planning to launch new categories or enter ones where its principal global competitors don't already play, said Chairman-CEO Bob McDonald.

Long term, Goldman Sachs estimates that emerging markets can fuel 90% of the growth for household and personal-care companies, with emerging-market categories averaging 8% to 9% annual growth over the next 40 years.

That's the bullish case for multinationals. But there's also a limit to growth. In some of the sought-after BRIC (Brazil, Russia, India, China) markets, multinationals already dominate local players. And all four countries have feisty, savvy local marketers, some with international ambitions of their own. Brazil's Hypermarcas and India's Dabur are tough competitors, particularly when it comes to acquisitions, and could ultimately pose threats to U.S. and European-based multinationals in markets outside their own home bases -- even in developed markets.

"History has not shown that you can just come in and beat up on the local competitors," said Sanford C. Bernstein analyst Ali Dibadj. "The local player typically understands the local consumer better and how to distribute in a complex distribution environment better."

They also may be more willing to sacrifice margins to hold onto share, he said.

And increasingly, developing-market players are entering other developing markets. India's Dabur, Godrej, Wipro and Marico have begun making acquisitions or expanding in Africa and other Asian markets.

Mike Polk, president-global foods, home and personal care for Unilever, which leads all multinationals in getting 56% of its sales from emerging markets, says sometimes competition is good in markets with low per-capita consumption. "It's not a share game in those markets," he said. "It's a market-development game."

Annual per-capita spending on household and personal-care products is only $44 in emerging markets. That figure is highest in Latin America -- $150 -- but still a fraction of spending in North America ($382) and Japan ($561).

But the game is changing. "You can't simply focus on the multinationals," Mr. Polk said. "The local competition is more regional than they've been before, and quite formidable competitors. That's where you really have to leverage your scale in how you build brands, use technology and R&D."

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