Brand loyalty is forged over years of decision-making on behalf of the consumer. Identifying the unique needs of these consumers is not an easy task, especially in new and emerging markets. Diversified Anglo-Dutch multinational Unilever (NYSE: UL ) has set out to do just that in China. Will investors feast on the fruit of its decision?
Journey beyond the Great Wall
Unilever, like many other Western and Eastern giants, already has a strong presence in China, and is now pushing its products deeper into the mainland. However, Unilever's decision could be studded with challenges, since rivals Procter & Gamble (NYSE: PG ) and Switzerland's Nestle have already built substantial bases in those areas. According to the China Condiment Industrial Association, for example, Nestle's joint venture Shanghai Totole Food controls nearly 45% of the Chinese compound condiment industry (think granulated chicken stock). In comparison, Unilever's Knorr has only 25% market share in China.
Unilever also faces strong competition from global confectionery leader Kraft Foods (NYSE: KFT ) , which is in the midst of introducing items like cakes and tarts into the breakfast segment.
For Unilever, the path is strewn with foreign competition. The growing popularity of Colgate-Palmolive's (NYSE: CL ) oral-care products is also weighing heavily on Unilever's prospects in emerging markets. China is booming, but the country is also a crowded space these days, with many international brands trying to woo consumers into their fold.
Hardships in China
China has been trying to get a grip on rising inflation as booming real estate and commodity prices have shown no signs of abating. Rising inflation in China is pushing up Unilever's production costs, too. To bear the increasing costs, Unilever had planned to raise prices of its products. However, the company shelved those plans after the government requested it reconsider. None of this is great news for a company that is attempting to steal market share while maintaining the satisfaction of its shareholders.
For now, Unilever is compensating by providing innovative and low-cost products to build that crucial sense of brand loyalty. However, this obviously requires Unilever to develop a deep understanding of Chinese consumers, which is not yet apparent.
Progressive economic development in China has propelled the spending abilities of consumers. And this is attracting more players into the Chinese markets. To scale up its efficiency, Unilever has started boosting its spending on research and development to get an in-depth knowledge of the demands and needs for a wealthier China.
Strategies in China
Though not exactly related to the company's product efforts, Unilever is, interestingly enough, the first European company to raise capital in Mainland China through renminbi-denominated "dim-sum bonds." These bonds, which were launched by China to promote the Chinese currency, are used by the multinationals to support the internationalization of the currency. These bonds are expected to raise $45 million for the European company, which will support its expansion in China. Dim-sum bonds have already been launched by U.S. companies such as McDonald's (NYSE: MCD ) and Caterpillar (NYSE: CAT ) to raise capital. I think it's fair to say this was a significant step for the company in the direction of stronger Chinese ties. It might even be a nice PR campaign for the company.
The Foolish outlook
In 2010, Unilever saw revenue growth of 11.1% over the previous year. A major chunk of its revenues comes from the emerging markets of Asia and Africa, which have been growing consistently in comparison to revenue growth in the West. Therefore, it looks absolutely wise for Unilever to get established in China before competitors put up further barriers. But, as discussed, that will clearly represent a great challenge for the company.
On a P/E basis, Unilever commands the lowest forward multiple of its major competitors, but my instinct tells me to wait and see how well this company is able to penetrate the Middle Kingdom and other emerging markets.
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