Stiffest competition from local business, says Unilever chief

Unilever's biggest competition is from fast-growing local companies, according to the head of the Anglo-Dutch group, in a sign of the mounting challenge to multinational consumer groups from homegrown emerging markets operators.

"We don't see Procter & Gamble as our toughest competitor," Paul Polman, a P&G former veteran, told the Financial Times in an interview. "People still have this framework - that you compete with these three [global] companies - it's just not true any more. Most of our competitors in the emerging markets are regional players."

Speaking from Unilever's Art Deco headquarters overlooking the Thames, Mr Polman was responding to a question about whether Colgate-Palmolive would be an attractive takeover target.

The US personal care group and the UK's Reckitt Benckiser are seen as potential targets, according to bankers, as they would accelerate Mr Polman's strategy of transforming Unilever into a personal care and home products group, reducing the drag from slow-growth food.

"We always look at possibilities. Many people are focused on what they know of companies in the developed world, but there are many new companies that are coming along," the chief executive said.

Stiff competition from local companies is one reason why sales at the top 50 fast-moving goods companies have fallen to 2.9 per cent from 5.6 per cent in 2012, according to a study published this month by OC&C, the consultant that has dubbed them "local dynamoes".

Unilever has already bought some local companies - in China it bought Qinyuan, a water purifying business, and a few years ago acquired Kalina, a Russian beauty group.

But these were small deals and have not satisfied some analysts that want to see the company be more acquisitive.

"We have been disappointed that brand acquisitions such as Alberto Culver have not materialised over the past 18 months," said David Hayes at Nomura, referring to Unilever's last big acquisition - the US haircare business bought for $3.7bn in 2010.

The right merger could add momentum to the company, which has hit a roadblock, making its shares look fully valued given short-term growth prospects, according to some analysts.

They argue that it is not so much profitability - last week Unilever reported a 15 per cent rise in first-half pre-tax profits - but growth. Sales dropped 5.5 per cent, underscoring the tough growth environment in developed markets and weaker currencies in emerging markets that now account for 57 per cent of sales.

Mr Polman, who joined Unilever five years ago from Nestle, the Swiss food group, believes the emerging markets slowdown is temporary - that money from the US quantitative easing programme created easy growth in some of these markets. New leaders in countries such as India and Indonesia have demonstrated awareness of the need for structural reform, he says, that will help propel growth.

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Emerging markets currency weakness has hit the bottom he believes.

His goal of deriving 75 per cent of sales organically in emerging markets - "don't mention the exact year; people will again get myopic" - is: "a deliberate strategy. Eighty per cent of the world's population is going to live in the emerging markets. We don't run this company for two minutes - we run it for the long term."

Mr Polman's bet on emerging markets is also driven by a weak US recovery and his belief that Europe is in for 10 years of slow, protracted growth.

To tackle the squeeze on middle incomes in developed markets, Unilever is appealing to wealthier consumers with new products that "are more premium in price but offer significantly better benefits".

These include the launch of products such as an enamel-repairing toothpaste, Knorr jelly bouillons that "taste better" and a line of Ben & Jerry's ice cream with a core of fudge, raspberry or caramel.

<>Mr Polman has also been clearing slow-growth foods from the larder - selling €2.5bn of brands, including Ragu pasta sauces, Wishbone dressings and Slim-Fast products. But he has also bought €3bn in sales from personal care acquisitions.

Still, a quarter of first-half sales was in so-called spreads, such as margarine, that operate in a declining market.

Selling spreads - worth about €5bn on some analysts' estimates - would go a long way to eliminating the growth drag from such foods given their exposure to Europe, and raise cash to plough into personal care acquisitions, analysts say.

Mr Polman points to the high profit margins of this business that help fund the dividend. Losing that would command a price that, it seems, no potential buyer has been prepared to pay.

"Even if you don't like a business - and I'm not saying we don't - can someone else run it better than you? Otherwise, if you sell it and you don't get enough for it, it would not be the right thing," he says.

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