In the vast majority of developed-world households, you'll find products made by consumer-goods multinationals Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL).
These companies sell batteries, deodorant, ice cream, margarine, nappies, razors, tea, washing powder and many other goods in more than 180 countries. Both companies are therefore finely attuned to detect changes in consumer demand and sentiment throughout the world, and so their forecasts and comments are important indicators as to the performance and prospects of the global economy.
We love our brands
Consumers trust their favorite brands and often like to use them as status symbols. It's not just luxury items such as 1,000-pound handbags that fulfill this role; the products P&G and Unilever sell do something similar because most people want to let others know they can afford their goods.
As such, in tougher times, many consumers prefer to avoid switching to cheaper and inferior brands, such as supermarket own-labels. Not only do many consumers not want to change, but in many cases they are very reluctant to signal to their friends and neighbors that their real income has shrunk.
But since many people don't live within their means, they cannot cope with a falling income without reducing their spending. So they either cut back on their favorite brands or other things have to go, such as eating out and holidays.
What they said
Unilever published its second-quarter figures two weeks ago, showing that it had done well. There was a 4% increase in turnover while diluted earnings per share (EPS) advanced by 10%.
As is often the case the key remarks were in the opening paragraphs, in particular that, "Volumes were robust and in line with the market, despite having taken price increases." So Unilever was able to pass most of the increases in its input costs onto its customers who are managing to maintain their levels of spending on its goods.
This is in clear contrast to the 2008 annual report, where Unilever's comments were exceptionally downbeat, accurately forecasting the effect the global recession would have on consumers, even though the group had just announced a 37% rise in pre-tax profits and a 32% increase in EPS.
Procter & Gamble's annual report, also published two weeks ago, showed sales had risen by 10% while EPS had increased by 18%. P&G's forecast was fairly bullish, expecting net sales for 2012 would increase by between 5% and 9% with EPS rising by between 6% and 10%. Clearly P&G anticipates the world's consumers will continue to open their purses and wallets.
Tapping into emerging markets
P&G and Unilever are rapidly expanding into emerging markets, where they are experiencing double-digit sales growth as consumer incomes in these countries continue to rise. Most of the world's economic growth, and thus increases in P&G and Unilever's sales and profits, will come from these markets in the next decade as the developed world's consumers struggle to cope with their debts.
The sheer size of both companies means their shares are never going to be stellar performers, but they're not going to get into serious difficulties either unless the global economy completely tanks. I take the view they're both reasonable places to tuck away some funds for the medium and long term.
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Disclosure: Tony owns shares in Procter & Gamble and Unilever. The Motley Fool owns shares in Unilever.
