Are Consumer Defensives under threat?

Thursday, Aug 09 2018 by
Are Consumer Defensives under threat

In recent years consumer defensives have helped fund managers like Terry Smith and Nick Train power ahead of rivals. Warren Buffett has delivered robust returns in no short measure due to his exposure to companies like Coca-Cola. However, consumer brands are more vulnerable than ever before with a number of new companies rapidly taking market share.

In this article I’m going to look at the drivers of consumer defensive outperformance and highlight three emerging challenges. Blue chip UK defensive stocks include Reckitt Benckiser, Unilever, Diageo, Imperial Brands and British American Tobacco.

Consumer defensive paradox: high returns & low risk

If a new investor were asked how to make a fortune in the stock market, they would be unlikely to pick toothpaste, toilet cleaner and lipstick. It is a paradox that companies making basic goods have delivered such impressive returns.

The book What Works on Wall Street (James O’Shaughnessy, 2012) lists the performance of US sectors from 1967 to 2009. Consumer staples (i.e. defensives) had the highest annual return over the period at 13.57%.

Shares in toothpaste group Colgate were trading at less than US$1 in 1981 and currently trade at around US$67. Shares in the leading global cosmetics group L’Oreal were trading at less than €10 in 1991 and currently trade at €212.

The consumer defensive sector has been a sector tortoise in a race against higher risk hares. When high-risk sectors have occasionally experienced major meltdowns the consumer defensive sector has continued to plod along.

Shopping for high returns

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Consumer defensives: five return drivers

The main investment driver of consumer defensives has been the sectors enduring profitability. Brands have generally maintained their appeal, which has allowed profit margins and the return on capital to remain robust.

A second driver has been a shift into premium categories with Diageo, for example, selling more premium spirits. The sector has also benefited from emerging markets, with Western brands generally seen as high quality.

The fourth driver of outperformance has been acquisitions, with deals generally working out well. Reckitt Benckiser has done a series of large deals since 2000 while the tobacco sector has become increasingly consolidated.

A fifth driver is that many consumer defensive groups have been flush with cash and undertaken share buybacks. If you believe that their valuations were below intrinsic value, then this has created shareholder…

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Unilever PLC is a fast-moving consumer goods (FMCG) company. The Company's segments include Personal Care, which primarily includes sales of skin care and hair care products, deodorants and oral care products; Foods, which primarily includes sales of soups, bouillons, sauces, snacks, mayonnaise, salad dressings and margarines; Home Care, which primarily includes sales of home care products, such as powders, liquids and capsules, soap bars and a range of cleaning products, and Refreshment, which primarily includes sales of ice cream and tea-based beverages. The Company's geographical segments include Asia/AMET/RUB, The Americas and Europe. Its brands include Axe, Dirt is Good (Omo), Dove, Hellmann's, Knorr, Lipton, Lux, Magnum, Rexona, Sunsilk and Surf. The Company operates in more than 100 countries, selling its products in more than 190 countries. The Company operates approximately 310 factories in over 70 countries. more »

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Diageo PLC is an alcoholic beverage company. The Company operates in various categories, including spirits and beer. Its geographic segments include North America; Europe, Russia and Turkey; Africa; Latin America and Caribbean, and Asia Pacific. Its principal products include Scotch whisky, Gin, Vodka, Rum, Beer, Irish Cream Liqueur, Wine, Raki, Tequila, Canadian Whisky, American Whiskey, Progressive Adult Beverages, Cachaca, Brandy and Ready to Drink. It manages its operations from various locations, including the United Kingdom; Ireland; Italy; Turkey; the United States; Canada; Brazil; Mexico; Australia; Singapore; India; Nigeria; South Africa; East Africa, and Africa Regional Markets. It also produces a range of ready to drink products mainly in the United Kingdom, Italy, South Africa, Australia, the United States and Canada. more »

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Reckitt Benckiser Group plc is a manufacturer and marketer of health, hygiene, post-natal and home products. The Company's segments include ENA and DvM. The ENA segment consists of Europe, Russia/Commonwealth of Independent States (CIS), Israel, North America, Australia and New Zealand. The DvM segment consists of North Africa, Middle East (excluding Israel) and Turkey, Africa, South Asia, North Asia, Latin America, Japan, Korea and the Association of Southeast Asian Nations (ASEAN). Health, Hygiene, Home and Portfolio Brands categories are split across the geographical segments of ENA and DVM. Its range of hygiene products includes disinfectant cleaners, automatic dishwashing detergents, pest control, depilatory products and acne treatments. The Company's portfolio of brands includes Durex, Mucinex, Scholl, Strepsils, Cillit Bang, Clearasil, Dettol, Harpic, Lysol, Mortein, Veet, Air Wick, Calgon, Vanish and Woolite. more »

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16 Comments on this Article show/hide all

Andrew L 9th Aug '18 1 of 16

Anyone want to share their shopping habits? Shifting away from established brands? In beverages it seems less of an issue: Tesco Beer anyone. Although Waitrose does do a line of beers. But new beer entrants have done very well. BrewDog etc. Probably because the old guys were complacent.

For tobacco the issue is vaping I guess. Speaking to smokers and there are mixed views. Some say vaping doesn't give the same feel as cigarettes. Others say it has weaned them off cigarettes.

Food appears to be feeling the brunt of own brands and also low-end drinks like £BVIC's Robinson's brand. People will happily by Tesco cornflakes etc. Or own brand cheese.

Household and personal care are two very different areas. For household products the risk remains that people will shift to own brands in a big way. Personal care is more about brands. Apparently people don't want to shift towards own brand toothpaste or indeed lipstick etc.

If own brands are always reasonable quality then maybe there will be a big shift:
But heading to a social gathering I am sure a lot of people wouldn't countenance taking Aldi beer. The hosts might interpret that as being a cheapskate!!! I think Buffett said as much about See's Candy (Californian chocolate brand/retailer).  If you give a date a lesser quality candy there won't be a second date!!!

Fund manager Nick Train has done very well off branded defensives: Unilever (LON:ULVR), A.G.Barr (LON:BAG). Terry Smith had significant exposure to this space when he started but there has been a shift towards healthcare and technology.

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shipoffrogs 9th Aug '18 2 of 16

Everybody on here knows the story of Fevertree Drinks (LON:FEVR) but I was still fascinated to see the vast amount of shelf space devoted to their mixers in the local supermarket a couple of weeks back - and those shelves had been nearly stripped bare - not often you see bare shelves in supermakets. The other day they were fully stocked again but yesterday - quite depleted.
Their shelves were around eye level, whereas the room given to Schweppes was markedly less and around knee height.

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Andrew L 9th Aug '18 3 of 16

In reply to post #389719

Fevertree Drinks (LON:FEVR) is an incredible story. I don't want to take anything away from its founders. However, it appears to me that Schweppes was caught napping. Some old style consumer defensive groups have been run to make fat margins and have not innovated. They have just relied on advertising and established brands. But consumer preferences change.

Schweppes, which pretty much owned the mixer space, completely missed the change in consumer preferences. Their mixer products probably haven't changed much for 20 years. Still using pretty nasty ingredients (in my view). It was this gap that allowed the Fevertree Drinks (LON:FEVR) founders to rapidly take market share.

My personal image of Schweppes tonic water is of one of those large plastic bottles that have gone flat and where the tonic water has a chemical type aftertaste. Sorry Schweppes! Supermarkets only give shelf space to things that sell so it is telling Fevertree Drinks (LON:FEVR) is on the top.

The big debate seems to be on whether Reckitt Benckiser (LON:RB.) can be disrupted. When I am ill I can't help buying Nurofen even though I know the own brand is exactly the same product!! Doh. When it comes to household products (toilet cleaner) I am a sucker for the brands.

If you look at the magazine Which a lot of the general own brand products are better than brands. Finish was I think in fifth place and I think Morrisons had the best dishwasher tablet! The reality is that in a supermarket there are about 100 choices to make on say price to quality and we end up playing it safe.

I read that only 10% to 15% of us buy own brand toothpaste as we instinctively don't trust it as much as brands (myself included). If human beings were rationale perhaps all these brands would be suffering more than they are.

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shipoffrogs 9th Aug '18 4 of 16

I have given up trying to persuade my daughters that expensive shampoo only differs from cheap shampoo in the branding. And the price. But I can now source a massive bottle of men's shampoo in the local Spar for £1.
It's lasted ages too. Maybe I should use it to refill the expensive empty bottles in the bathroom.

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Andrew L 9th Aug '18 5 of 16

In reply to post #389749

Hope the below is not too much information!!!!!:

I think it is sometimes a myth that own brands are always as good or better. I was on Waitrose own brand soup for ages and gave up. It didn't taste as fresh or as nice as Covent Garden Soup. If I look at basics I buy I often go for brands. Fairy liquid, Nescafe, Twinnings.

Inspecting my cleaning products cupboard and about 95% are brands. Dettol, Mr Muscle, Cillit Bang. My washing machine tablets are Fairy. For the bathroom I have Original Source, Simple (face wash) Nivea, Alberto Culver shampoo etc.

If I am anything to go buy many of these branded companies are safe. Although I do buy own brand medical stuff sometimes as the branded stuff feels like such a rip off. I.e. Ibuprofen instead of Nurofen.

With regard to food stuff I have tried Tesco/Waitrose own brand orange juice and it usually isn't as good. I personally wouldn't buy own brand tea as I love Pukka tea.

The odd thing is that we all say we are rationale etc but if you look in our cupboards they are usually all stuffed with brands. People who shop frequently are often a lot wiser (those shopping for a family etc).

Cillit Bang adverts are just fantastic.  They seem cheesy but they get the brand in your head and make you smile: "bang and the dirt is gone."  Mr Muscle adverts aren't bad either.

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JohnEustace 9th Aug '18 6 of 16

Buying efficiently in supermarkets is made very difficult by all the offers. If you pay full price you're being ripped off.

So we buy whenever our preferred product is on offer and stock the cupboards. Heaven forbid we ever pay full price for dishwasher tablets.

I prefer the Aldi/Lidl approach of keeping things simple. Also the Costco own brand products are good value and quality and come in such large packs you only need to buy a couple of times a year.

Oh, and there's nothing wrong with Aldi's drinks. I enjoy their IPA and a bottle of Toro Loco is fine for any barbeque. There's plenty of us middle class Aldi bores out there.

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Andrew L 10th Aug '18 7 of 16

In reply to post #389774

Unfortunately I haven't got an Aldi/Lidl near me so I can't really judge it. But I agree I like their concept of just low prices for everything (like Ikea). I did try walk into one once and it felt like a different planet. No brands I was familiar with and it was so busy it was very stressful. If one was near me I would probably use it.

Supermarkets have a strategy to make you think you are getting a good deal. Hence all the offers. They are such a stress as you end up buying loads of stuff you don't need. I think the reason the supermarkets do these offers is A) to confuse you and B) to make you think they are your friend.

If a supermarket can do low price with style then it would get my vote. An Ikea of the supermarket space. I really liked the idea of that Brandless online company in California.  I too always buy washing machine tablets on discount and shower cleaner etc etc. (Cupboards stuffed to the brim with surface cleaner).

Someone in retail once told me that they had a product at £10 one week and it didn't sell. Then somehow later they had it at £10 as part of a sale (somehow they legally did this) and it sold like hot cakes. Most of us don't know the original price and fell a winner grabbing a bargain.

The thing about consumer defensives (food, beverages, home & personal care and lastly tobacco) is what are they? Are they utilitarian, commodity type items or are they branded items that give us pleasure. If they are branded items that give us pleasure then we may go for brands.

Some of this sounds ridiculous. But if your family have always used Fairy liquid it may have a familiarity and reassuring brand for you. If your friends have always drunk a certain beer etc.   Brands are about trust, feeling, prestige and status.  

Some people spend thousands on a Burberry coat.  I am guessing they don't buy own brand washing up liquid.  Would you buy a Aldi Toaster or a Lidl coffee?  Many do but many also love the branding/feel of Nescafe.

What we hate is to spend £3 on a low ticket item and to find out it is rubbish. Hence the safety of brands. Would you pay £1 less for an own brand soup that may taste disgusting and annoy you for the rest of the evening? 

 On small ticket items we are less likely to research and quibble on price. On a car purchase we will think about it for months.  In dishwasher tablets the own brands are apparently ahead, though, according to Which Magazine. 

 When it comes to toothpaste only about 10-15% is own brand I read. This says that we don't trust own brands for health products so much. This could help Reckitt continue to perform well.  

I was speaking to some medical people and they all said they avoid the branded health goods.  This is because they are trained as scientists and know the non-brands are the same.  So they have trained to be rationale.

A particular interest for me in terms of human behaviour and are irrationality is bottled water.  It probably is not better for us and costs a huge amount of money.  But we have been conditions through advertising to think it is good.  Marketing genius!!!

Bottled water has been labelled as the "biggest con-trick in history."  But it has powered Danone's business and is increasingly important to Nestle. 

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JMLDutch 10th Aug '18 8 of 16

Interesting article and good comments so far!

In relation to 2) Threat of changing consumer preferences (demand) and 3) Threat of new distribution channels (including own brands) - I wonder if Unilever (LON:ULVR) has been less affected by these threats to date due to ULVR's emerging market exposure. Of course, it is probably only a matter of time before these trends would hit emerging markets as well.

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Andrew L 10th Aug '18 9 of 16

In reply to post #389874

Good question on Unilever. There are local consumer defensive good companies in countries like India. But there also tends to be more trust in Western brands due to quality control etc. Companies like Unilever tend to buy fashionable upstarts such as Ben & Jerry's. Whether Unilever can be successful in the long-term in emerging markets is key to the investment case.

If you look at Unilever's sales growth in emerging markets it has been reasonable. They don't really split out their top brands, though, in the way that Reckitt does. Personal care & beauty is a big selling point for Unilever in my view. Higher margin, higher growth and stronger brand loyalty.

If you look at Terry Smith's FEET fund there are lots of Indian consumer defensives doing well. But Unilever has been shifting towards and learning about emerging markets for decades. So it should have reasonable knowledge on how to succeed on the ground.

Taking a broader view, and for me the whole area is fascinating. Have any of us brushed our teeth and said: this stuff is great I should invest in toothpaste? The best investments have been products we use everyday. Forget banks, insurance, car makers etc etc. Lipstick is where it is at!! Kind of painful but the best investments have been right under our noses!

I think Nick Train has an anecdote that a respected fund manager told him that if you eat something and really like it "buy the shares." Not sure on Irn Bru myself though. A.G.Barr (LON:BAG). I have to also say that I found Vimto pretty disgusting. Nichols (LON:NICL). Fevertree Drinks (LON:FEVR) products I like.

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herbie47 10th Aug '18 10 of 16

In reply to post #389784

Interesting comments. I do use Aldi quite a bit and Lidl occasionally, actually I'm going off Aldi because some of their products such as hand cream and shampoo they have stopped and replaced with more expensive and inferior products, fortunately Lidl has similar products at the lower prices. Also some foods difficult to obtain now in Aldi such as frozen salmon.

Re view on brands, I have a different opinion, I don't trust many brands, I consider them a rip-off and I'm paying for their marketing to get people to buy them, yes a few brands are better than non brands but on the whole I find non brands as good or some even better, take washing-up liquids and washing powders/detergents. Also many other items in tests come out top.
Yes I buy coffee from Aldi, I never liked Nescafe anyway. Not keen on advertising, I know what it did to the beer market.
Yes generic medicines are just the same and often about 20% of the price.

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Andrew L 12th Aug '18 11 of 16

In reply to post #389889

If you subscribe to Which Magazine it is amazing how well the non-brands do in tests. Often as you say they are much better than the brands. Dishwasher tablets are a good example. I was amazed that Finish tablets finished about fifth. The supposed market leader isn't even close to being the best product.  These kind of results give the impression that brands are a con.

Some more information on my shopping habits!!!!!

At the same time I tried a few own brands once and had bad experiences. Waitrose own brand soup wasn't as good as Covent Garden Soup. Waitrose own brand shower spray seemed to have very nasty chemicals in it that left me with a sore throat. Waitrose own brand face wash wasn't very good in my view. The branded orange juice was also, in my view, much better than the own brand. So these experiences put me off the own brands. But Tesco own brand soup is very good.

I am usuing Waitrose as an example because they should have some of the best own brands. I think I would probably turn away from brands if there was an Alid/Lidl near me. But for something like clothes washing I don't want to risk an inferior product ruining my clothes.

The thing about health products is that I usually buy them when I am ill and not thinking straight. So I will just buy the Nurofen as the marketing is good. There may be a placebo effect. None of this is rational but then human beings rational. I don't think I would buy an own brand toothpaste. When it comes to things we put in our mouths, we are driven by trust and we tend to trust brands.

As someone previously commented, I tend to just get all these brands when they are own sale which is about once a month. So I personally don't feel too ripped off by the advertising and higher prices.

I don't consume tobacco but apparently smokers have incredible brand loyalty. I don't consume much in the way of branded beverages. However, I love the Feel Good Drinks brand (you have to try it as in my view it is amazing). I couldn't really bring myself to buy Tesco beer (sorry Tesco). If you take products such as zero alcohol beer it is likely that the brands will do it best as this is a tough product to make.

With regard to food I love the 9 Bar brand. I also can't bring myself to buy Tesco tea. If a supermarket tried to do Marmite that would have no chance. There is only one Marmite.

Boots is an interesting company as they are trying to push their own brand products in cosmetics. Not least the No. 7 brand. Not sure I would go for their products myself. In personal care I nearly always buy brands. Gillette is ripping me off but I'm just going to have to live with it!!! I usually also buy branded household cleaning products.

If you take Dettol, as an example, there is actually a high trust element in the ability to kill germs etc. This is not least the case if you have a family. I am also worried that the own brands may have chemicals in them that are damaging to our health. I actually asked a cleaner once about the brands and she said Cillit Bang was very good.

I think my attitude would be different if I spent a lot of time shopping and hunted for bargains all the time. My consumer product shopping is based on a "get in and get out" as quickly as possible approach.

Judging by the posters here and most Stockopedia users are much more rational then me when it comes to shopping. However, own brands have been around for quite a while.  Yes they are selling well but they certainly aren't dominating the shopping aisles.

In my view, it is partly about how we value our time. There was a TV show called I think Shop Well For Less where a family was shifted to own brand products. They largely couldn't tell the difference in terms of quality.

But a lot of us can't be bothered to try out competing products. It is a similar story with banking where few of us change accounts. Similarly, many of us can't be bothered to switch utility provider etc. We also tend to stick with our investment platform even if it is one of the most expensive.

The decision to buy brands usually means there isn't a significant downside in terms of product quality and experience. The decision to buy non-brands can be a risky and I have sometimes bought terrible own brand products. I bought a Tesco value pizza that sat like cement in my stomach for days. It may have been cheap but it wasn't good value! That one experience put my off own brand foods.

To find out which toilet cleaner or surface cleaner is best we would have to test both over a period of a month or so. A lot of us can't be bothered and just stick with the brands. However, if a new competitor is cheaper and has the same quality then the existing brands may be in trouble. I.e. Dollar Shave, Halo Top etc.

If people were rational then none of us would buy Nurofen. The own brands can be 10% of the price of Nurofen. But Nurofen continues to fly off the shelves. It will be interesting to see if the shift to online shopping changes that.  I am guessing that consumer behaviour will remain irrational for sometime to come.

What I personally find is that the world of own brands is confusing.  Tesco has a basic range and  a finest range.  I end up buying the low quality one by mistake and regretting it.

What Ikea did is it offered a low cost product and where the quality was consistent.  So you felt that you could trust the Ikea brand.  If there was a similar thing for household groceries then I might switch.  I.e. like  However, I am not sure the mainstream supermarkets can do that.  They rely on the brands to get the shoppers in.  If they shifted mainly to own brands then companies like Unilever may refuse to sell products through them.

When I have looked at Aldi/Lidl I haven't been too sure.  The chocolate quality, for example, appeared to be very mixed.  Chocolate is an interesting product as it is one where brands really does play a role.  

The cheaper chocolate products just shove them full of sugar as it is cheaper than cocoa butter.  When you go to the supermarket there is a significant array of chocolate and the temptation is to buy something cheap.  

However, this isn't great because the sugar content will be high.  So in terms of trust we often just go for chocolate brands.  The lower quality companies are hooking us in with the price and then selling us inferior products (high in sugar).

In my view, this is where Hotel Chocolat has done very well.  Its mantra is more Cocoa and less Sugar.  So their chocolate is expensive but you know they are not trying to rip you off with cocoa butter being replaced by sugar.  Chocolate is an area where the brand, as an indication of quality or trust, is very helpful.  But I only buy Hotel Chocolat products when they are discounted!

Another very interesting area are sandwiches.  In supermarkets these are lower quality products with a best-before date etc.  They have been made in a factory a day or so previously.  Pret A Manger makes them fresh every day and gets rid of left overs at the end of the day.  So they have no best before dates.  In this category the supermarket products are inferior in terms of quality.

If you also look at fruit and vegetables the supermarkets also tend to be inferior.  If you go to a high street fruit and veg shop the quality is much better.  Sandwiches and fruit/veg aren't really branded areas but they can highlight in the consumer mind that supermarkets aren't always best for product quality.  

Hence supermarkets may have a problem selling own brands given their consumer perception.  It is like buying a holiday from easyJet, Ryanair.  The airlines brands are based on low prices, treating customers badly and poor customer service.  That is fine for a flight but not for holiday accommodation.

Another area that I think is about trust is food.  Lower quality brands can stuff their products with salt and sugar.  As consumers we find products with lots of salt and sugar nicer tasting.  However, both ingredients aren't good for our health.  I personally can't be bothered to check the sugar/salt content of every food product I buy.  So I do tend to rely on brands I trust.

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AnonymousUser252054 12th Aug '18 12 of 16

Lidl and Aldi seem to use 'other branding' to mask the fact they are actually filling their shelves with their own brands - and use packaging which mimics branded products incredibly closely to the point where I wonder why there has been no legal challenge.

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Andrew L 12th Aug '18 13 of 16

In reply to post #390199

Yes that is true. Aldi/Lidl pretty much try to "rip off" the brands. An own brand version of Robinsons and Aperol which is given a brand name but that is owned by Aldi/Lidl. They also do a similar own brand version of Pimms. Again they don't label it as Aldi/Lidl they just create another "brand" but in reality it is made by Aldi/Lidl.

It reminds me of all the supermarkets creating these "Farmed from X" brands for their farm products. In reality no farm existed and it was just to give products like potatoes a more homely feel.

For products like Pimms and Aperol I think there is a degree of snob value and there will be significant brand loyalty. For products like Robinson's I don't think that is the case. Parents usually buy Robinson's for their childern.

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T D Gilchrist 16th Aug '18 14 of 16


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brucepackard 17th Aug '18 15 of 16

Really interesting. I'd like to know your thoughts on why the likes of Unilever (LON:ULVR) has done so well, but superficially a very similar company PZ Cussons (LON:PZC) has been a rather poor performer over the last 10 years.

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Andrew L 17th Aug '18 16 of 16

Bruce - Good to hear from you and I hope all is well (in Berlin?). Firstly if we look at the financials of PZ Cussons (LON:PZC) we can just see that it is just a much weaker company than Unilever (LON:ULVR). The operating margin for Unilever is about 15% while it is just over 10% for PZ Cussons. The ROCE for PZ Cussons has averaged about 14% in recent years while for Unilever it has averaged about 24%. Annualised revenue growth for Unilever over the last 5 years is 0.9% but for PZ Cussons revenue has declined about 2.7% a year.

Just mentioning these statistics as I personally think it is worth going directly to the financials for evidence of franchise power. They provide an a priori indication that a company has a good franchise. Qualitative factors are easy to debate but the financial numbers are the financial numbers.

Moving onto your question: why does Unilever appear to have a much stronger franchise than PZ Cussons? (as indicated by the ROCE and the operating margin). After all PZ Cussons has a strong position in personal care (about half of revenue) and this is potentially one of the most profitable areas within consumer defensives. You can probably find much of the answers in the group's final results presentation. A few reasons I can think of are below:

Geographic profits

PZ Cussons (LON:PZC) operating margins in Africa - These were only, 8.5% in fiscal 2016, 7.6% in fiscal 2017 and fell to 2.2% in fiscal 2018. This reflects difficult trading in Africa and the sale of lower margin items like electrical products. Emerging markets can sometimes be more profitable than developed markets (beer for example) but this isn't the case here.

Operating margins in Asia - This is a similar story with the operating margin low over the last few years. It was 8.7% in fiscal 2016, 7.1% in fiscal 2017 and 8.7% in fiscal 2018. Asia is not the mainstay of the group but it is interesting that margins here are also modest.

It is really Europe that the group relies on to make good margins. The operating profit margin in Europe was 22.3% in fiscal 2016, 21.6% in fiscal 2017 and 22% in fiscal 2018. So it is in the relatively mature European block that PZ Cussons makes the majority of its profit.

A key question then is why PZ Cussons hasn't made good profits in emerging markets.  In my view, it may reflect a lack of global brands.  Unilever, by contrast, has global brands in areas such as ice cream i.e. Magnum, Ben & Jerry's etc.  If you go on a beach in Rio de Janeiro you can, I understand buy Magnum ice cream.  Having strong global brands helps to deliver profitable growth in emerging markets. 

Product type

I am not an expert on PZ Cussons' product range but lots of their personal care products appear to be in price competitive areas such as shower gel.  But having said that they do have market leading brands like St Tropez and their margins in Europe are good.  I am not sure that their higher end brands have been taken up in emerging markets.  In any event, the average income per head in Nigeria is fairly low.

Some of PZ Cussons' product lines are fairly utilitarian: home care, electricals and food.


PZ Cussons has grown partly through acquisitions such as 5:AM in Australia.  This reduces the return on capital employed for shareholders. It is much better to develop a market leading brand that you can take around the world (i.e. Coca-Cola).  Buying lots of local brands is more costly and reduces returns.

Africa/Nigeria issues

PZ Cussons has historically generated a lot of its revenue from Nigeria.  Unilever, by contrast, is diversified in terms of its emerging market exposure.  This has made Unilever a much less volatile investment.  Nigeria is also not the best emerging market to be exposed to given the high level of corruption.  India is a much more attractive emerging market.  Issues in Nigeria have been ongoing for decades (corruption, terrorism, poor infrastructure).  By contrast, India is a comparatively well run country.  If the group's exposure was say in Brazil, India and China then it would be more profitable and the rating would probably be higher.


If emerging markets are faster growing for PZ Cussons this will tend to reduce the group's operating margin.  This is because the exposure to lower margin emerging markets goes up over time.  Unilever generates about 58% of its revenue from emerging markets.  However, its operating profit margin is still 15.8%.  Unilever's operating margin has increased in recent years.  This suggests that Unilever's emerging markets are fairly profitable.  Perhaps as profitable or more profitable than its Western exposure.  This contrasts to PZ Cussons which will get less profitable as emerging markets become a larger part of its business.

Management strategy

I am not sure about a £1bn group having operations around the world (Asia, Africa etc).  I don't know how well someone in Manchester (I think that is the HQ) can run the business in Indonesia.  This may be an unfair criticism but acquisitions and expansion in Asia do appeared to have lowered returns.  Unilever, by contrast, has the scale and history to be a truly global company.

Broad overview

Your question is really why is one company able to generate a 24% ROCE when selling its products and the other company only able to generate a 14% ROCE.  (One company also has higher operating margins).

In a competitive market place it is likely to be because the higher ROCE company has stronger brands, lower costs etc.  Fevertree Drinks (LON:FEVR) has an ROCE of 41% which suggests it has a strong competitive position.  

The bottom line for PZ Cussons (LON:PZC) is that its competitive position is generally weaker than that of Unilever (LON:ULVR).  Or at least this is the case in emerging markets where Unilever is doing well but PZ Cussons is making low margins and low returns.  To get a better handle on this I would have to visit the emerging markets where PZ Cussons and Unilever are present.

If we look at tobacco and the large group's have rolled out strong Western brands around the world.  PZ Cussons doesn't appear to have many strong global brands.  By contrast, Unilever has a number of global brands such as in ice cream.

When it comes to growth the most profitable route is to have a market leading brand that will sell well everywhere Fevertree Drinks (LON:FEVR).  The weakest route is to undertake acquisitions of a disparate number of brands.  These deals may not work out well and will make a business less focused and less profitable.

Having a global business in household products and personal care seems to deliver higher returns for investors.  Size doesn't always help but in some areas it does generate good economies of scale in terms of marketing and costs.

So if I had to summarise the divergent fortunes of Unilever and PZ Cussons I would probably say this.  Unilever has global brands, stronger positions in emerging markets, is profitable in emerging markets and is also growing in emerging markets.  PZ Cussons has weaker brands, weaker emerging market exposure, is less profitable in emerging markets and has seen emerging market sales decline.

Bruce - as an aside if you have a look at my other report on UK Consumer defensives in the comments section I think I referenced your mum.  You said that she invested in Unilever (LON:ULVR) in the 1980's I think and is up something like 100X since then.  Do correct me if I am wrong in that but I remember you saying she bought Unilever (LON:ULVR) ages ago and has done very well.  Forget gold mines, make a fortune in soap and marmite!

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