At a Shanghai store that sells baby products, the shelves are packed with diapers from Procter & Gamble Co.'s Pampers brand and Kimberly-Clark Corp.'s Huggies label. But many parents shopping there are reaching for diapers from regional manufacturers such as Japan-based producer Kao Corp., which touts the airflow and comfort of its Merries diapers in advertisements.
"Not only is the quality perceived to be better, it is priced more attractively than Huggies or Pampers in some cases," Wells Fargo analyst Bonnie Herzog wrote in a May 20 research note.
In recent visits to baby product retailers in Shanghai, store staff told Wells Fargo analysts that many customers in China prefer Kao over the competition because the company has introduced higher-end products in recent years.
"As such, we are increasingly bearish on potential growth opportunities for [Kimberly-Clark] and [P&G]," Herzog wrote.
From baby diapers to toothpaste, the world's major consumer goods makers are seeing their growth in emerging markets slow as products from regional players such as Kao gain popularity. Growth in developing economies, particularly those in East Asia and Latin America, slowed in the first few months of 2018 for companies including Unilever PLC, P&G, Colgate-Palmolive Co. and Kimberly-Clark. All four companies declined to respond to S&P Global Market Intelligence's request for comment.
In some cases, the companies' organic growth has fallen from about 10% on a year-over-year basis in early 2015 to just above zero during the first quarter of 2018, according to the data they provided. Organic sales growth excludes the impact of acquisitions, divestitures and foreign currency fluctuations.
The slowdown in emerging markets represents a new challenge for multinational companies, many of which have looked to emerging markets to compensate for sluggish sales in the U.S., Europe and other developed markets in recent years.
Some of the global players are responding by introducing more high-end offerings of their own, but analysts say winning market share will require paying close attention consumer demands in each individual developing economy — tastes that many local brands understand better.
"These companies are realizing that this is a much more dynamic marketplace [than it previously was]," Edward Jones analyst Brittany Weissman told S&P Global Market Intelligence in an interview. "Those local competitors are much more formidable than they thought."
Premium products, e-commerce represent challenges
The challenge from local brands goes beyond diapers: Colgate-Palmolive has stepped up promotion of soaps, cleaners and other products that it sells in Latin America as part of its home care business. That decision comes as brands such as Ypê, a Brazilian home care brand valued at $1.4 billion by consumer research provider Kantar Worldpanel, have expanded their business in the region.
Some of the packaged good makers' woes are due to broader economic challenges in the developing economies where they operate.
A contracting economy in Brazil, for example, has weighed on results at P&G and Unilever in recent quarters, the companies said during calls with analysts. Economic activity has slowed in the South American country over the last several months, and more consumers have defaulted on their household debts.
Still, many of the large manufacturers are making changes to their strategies in such markets, hoping that more high-quality and specialty products will appeal to increasingly affluent customers in the developing world.
In China, Kimberly-Clark is planning a launch of Huggies diapers that offer enhanced absorption, air flow and other features, President and COO Michael Hsu told analysts during an April 23 earnings call.
During a call with analysts to discuss the company's fiscal first-quarter results, Kimberly-Clark Chairman, President and CEO Ian Cook said the company plans to introduce new toothpastes, including some that target pharmacy customers in Brazil, by the end of 2018. Across all of Latin America, he said, the company wants to drive growth by introducing new products.
"We've never ducked the fact that the local brands are having an effect in the emerging markets," Cook told analysts during the April 27 call.
But with those efforts, the companies are largely catching up to local competitors, many of which have had a head-start on fine-tuning their high-end products to include features that customers want, Weissman said. Regional brands often focus the entirety of their business on the emerging markets where they operate, giving them more insight into what consumer tastes.
By contrast, the multinational companies are less able to adjust strategies quickly as local preferences change, analysts at Kantar Worldpanel wrote in a May report. Unlike local competitors, "global brands manage performance across multiple countries and continents — making them less agile and meaning overall growth is more difficult," the analysts wrote.
In the premium products case, many of the major multinational producers "didn't move up the value chain fast enough," costing them sales growth, Edward Jones' Weissman said.
In some markets, particularly China, global brands are also competing with local brands for attention on e-commerce platforms. Though many, such as P&G, already sell through Alibaba Group Holding Ltd.'s Tmall and other websites, the challenge will be adapting to changing consumer demands in a market where e-commerce options are often more developed than in the U.S., said Anna Overton, senior director and ratings analyst at S&P Global Ratings.
"They will probably have to move ... even faster than they've moved in developed markets," experimenting with multiple e-commerce and delivery options to adapt to evolving consumer tastes, Overton said during a May 3 presentation.
The importance of emerging markets to the major consumer packaged good makers is not likely to diminish any time soon. In discussing its planned €3.4 billion acquisition of Merck KGaA's consumer health unit, which includes over-the-counter medications such as nasal decongestants, P&G Chairman, CEO and President David Taylor said the company wants to capitalize on emerging market consumers "spending more to manage their families' health" as the populations of many developing economies age.
Overton said the combination of paying attention to consumer tastes, moves by local brands and e-commerce options will be key to finding success in emerging markets.
"These are the regions which will be critical for the international strategy of the multinational companies," she said.
S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.