Industry Surveys Household Nondurables Joseph Agnese, Consumer Staples Sector Equity Analyst

SEPTEMBER 2014

Current Environment ...... 1

Industry Profile ...... 16

Industry Trends ...... 16

How the Industry Operates ...... 25

Key Industry Ratios and Statistics ...... 32

How to Analyze a Household Nondurables Company ...... 34

Glossary ...... 38

Industry References ...... 39

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Topics Covered by Industry Surveys

Aerospace & Defense Electric Utilities Metals: Industrial Airlines Environmental & Waste Management Movies & Entertainment Alcoholic Beverages & Tobacco Financial Services: Diversified Natural Gas Distribution Apparel & Footwear: Foods & Nonalcoholic Beverages Oil & Gas: Equipment & Services Retailers & Brands Healthcare: Facilities Oil & Gas: Production & Marketing Autos & Auto Parts Healthcare: Managed Care Paper & Forest Products Banking Healthcare: Pharmaceuticals Publishing & Advertising Biotechnology Healthcare: Products & Supplies Real Estate Investment Trusts Broadcasting, Cable & Satellite Heavy Equipment & Trucks Restaurants Chemicals Homebuilding Retailing: General Communications Equipment Household Durables Retailing: Specialty Computers: Commercial Services Household Nondurables Semiconductor &Equipment Computers: Consumer Services & Industrial Machinery Supermarkets & Drugstores the Internet Insurance: Life & Health Telecommunications Computers: Hardware Insurance: Property-Casualty Thrifts & Mortgage Finance Computers: Software Investment Services Transportation: Commercial

Lodging & Gaming

Global Industry Surveys

Airlines: Asia Foods & Beverages: Europe Pharmaceuticals: Europe Autos & Auto Parts: Europe Media: Europe Telecommunications: Asia Banking: Europe Oil & Gas: Europe Telecommunications: Europe Food Retail: Europe

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

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CURRENT ENVIRONMENT

Global macroeconomic demand remains sluggish for household nondurable companies in 2014

Household nondurable companies are generally less sensitive to economic conditions than other sectors, because the products they produce, such as soap, toothpaste, and bathroom tissue, remain staples of everyday life. However, in the slowly recovering US economy, there is still a challenging competitive environment for these companies, as they battle for a share of limited consumer spending.

Fortunately, some signs of economic improvement have been manifesting themselves, and we think the outlook for the US consumer has strengthened slightly in early 2014. While job growth is mostly just keeping up with population growth, real wages (i.e., adjusted for inflation) remained positive for most of 2013 (mainly due to slower inflation), even accelerating more recently on lower energy costs. In our view, this has been providing consumers with a little extra spending power. In addition, despite rising mortgage rates that adversely affect affordability for many consumers the housing recovery appears to be on course, with home prices continuing their upward trajectory after bottoming early in 2012. Lastly, the headwind of a 2% increase in payroll taxes that consumers faced throughout 2013 is finally behind us.

On the other hand, household savings are still likely depressed due to the impact of the 2008–2009 recession, and higher stock prices have benefited a smaller, wealthier segment of the population, in our view. The unemployment rate remains elevated, and we think recent declines are more a function of discouraged workers ceasing their job searches and exiting the labor force, as opposed to more people getting jobs. We also think the quality of new jobs has been below average.

For 2014, we see new headwinds coming from the expiration at the end of December 2013 of the extended federal unemployment benefits, affecting 1.3 million Americans. Another 1.9 million people were expected to lose their benefits in the first half of 2014, as Congress barred the renewal of benefits. Additionally, on November 1, 2013, expanded benefits provided by the American Recovery and Reinvestment Act of 2009 (ARRA) ended for the Supplemental Nutrition Assistance Program (SNAP), commonly known as the Food Stamp Program. This affected approximately 47 million participants in the program, who saw benefits reduced by about 5.5% on average, or up to $36 per month for a family of four. We see some negative impact on household products through most of 2014 as those affected by the cuts divert more money toward food expenditures.

As of August 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) forecast that real personal consumer spending would slip to 2.3% in 2014 from 2.4% in 2013. This trend in personal consumer spending would help drive real gross domestic product (GDP) growth to a projected 2.1% in 2014, down from 2.2% actual GDP growth in 2013.

In our view, developing markets outside the US continue to offer better growth opportunities, even if some markets have been experiencing modest slowdowns in economic growth rates. Many of the household products manufacturers are cautiously optimistic, and we expect their organic sales growth (excluding the impact of acquisitions, divestitures, and foreign currency movements) in 2014 to be slightly better than it was in 2013. S&P Capital IQ (S&P) also anticipates that profitability in 2014 will be helped by limited cost pressures from raw materials (such as ingredients), similar to trends in 2013, and greater cost savings from recent restructuring programs, partly offset by higher marketing expenditures required to effectively compete in the current environment.

High unemployment discourages household formation, relocation Household formation typically occurs when couples start careers, marry, move into a new house, and have children. This process can be beneficial for household products manufacturers, as people stock their homes

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 1

with products, such as cleaning supplies and personal care items. However, we think that labor and housing market dynamics have hurt household formation since the recession.

The US unemployment rate, which reached a recent peak of 10.1% in October 2009, has moderated, but it remains relatively high. In July 2014, the unemployment rate was 6.2%, a slight decline from the 6.1% witnessed in the prior month and down more than one percentage point from July 2013. As of August 2014, S&P Economics was forecasting the unemployment rate to average 6.3% in 2014, an improvement from 7.4% in 2013. However, we think that the decline in the unemployment rate has been overstating the recovery in the jobs market. In our view, the decline in the unemployment rate mirrors a decline in the workforce participation rate. That is to say, a greater number of people are giving up on finding jobs and subsequently leaving the workforce. The employment-to-population ratio, which measures total employed persons relative to the total population, reached 59% in July 2014—0.3% higher compared with the prior year. This ratio has remained at or near long-term lows, in the 58%–59% range, since the end of the recession in June 2009. This measure peaked at 63.4% in December 2006.

Affordability of home prices has been hurt by rising mortgage rates, although home prices remain well below their levels in 2006–2007. While rates are still well below their historical averages, they began increasing in mid-2013 in anticipation of the Federal Reserve tapering its monetary stimulus programs. We think these factors, along with tightening credit standards and a lack of savings, have limited the number of people who can qualify to buy a home. In July 2014, housing starts, an economic indicator that helps capture economic strength, reached 1.1 million, climbing 15.7% from the previous month and 21.7% from the previous year.

A drop in US fertility rates has also been sparked by the recent economic environment. According to the latest data from the preliminary report of the National Center for Health Statistics published in May 2014, in terms of overall births, the fertility rate declined in 2013 by 1.0% from 2012 and 9.2% from 2007 to 62.9 births per 1,000 women aged 15 to 44 (versus 69.3 in 2007 and 63.0 in 2012). The total number of live births increased slightly in 2013 by 0.1%, following steady declines in the number of births between 2007 and 2010, according to the National Center for Health Statistics. The pace of decline slowed between 2010 and 2012.

Apart from births to Asian or Pacific Islander women, which declined 2%, all population segments saw a slight increase or unchanged fertility statistics in 2013. The fertility rate for Hispanic women was flat, which is significant because the Hispanic segment accounts for almost 25% of US births and around 50% of US population growth. We think these trends generally continued into 2014.

The drop in US fertility rates has made companies catering to baby care categories more cautious regarding the near-term prospects for their domestic businesses. Recognizing that births have been slowing in the country, Kimberly-Clark Corp. CEO Tom Falk stressed that demand for the company’s Huggies training pants is weakening. Similarly, Procter & Gamble Co. (P&G) also turned to adult diapers because of the low fertility rates.

We see continued sluggishness in categories weighted toward toddlers, like training pants, because of the drop in birth rates over the last several years and the lagging nature of those categories, and we think sales growth in these categories will take years to increase significantly.

Value products still in favor In our view, as consumers feel the squeeze in their purchasing power, slow growth in income levels and a lackluster job market have led to a continuing emphasis on value products. While we think the expiration of payroll tax cuts in 2013 strained consumers’ budgets, we think reduced SNAP benefits and a failure to renew extended federal unemployment benefits will be additional headwinds for certain consumers throughout 2014. According to results from market research firm Information Resources Inc. (IRI)’s MarketPulse Survey conducted in the second quarter of 2014, consumers are still finding it difficult to maintain their desired lifestyles and are struggling to make ends meet. This struggle is manifest in the 39% trying new brands that are priced below their regular brands, but this is already a decline from 46% in the same quarter in 2011, thereby showing an improvement in consumer purchase of their regular brands. In addition, as of the second quarter of 2014, there are fewer consumers (35%) who feel that their financial

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situation is worse today than it was a year ago, which is 5 percentage points less than what was reported in the same quarter in 2011.

We still see a greater focus on quality per dollar spent, with consumers less likely to buy costlier brands if they are able to get almost the same quality at much lower prices, even though we think some of the external pressures facing the consumer have been offset by slowing inflation, including lower gas prices. Based on data from the MarketPulse Survey conducted in the second quarter of 2014, while most consumers are still price- sensitive, fewer consumers are giving up some of their favorite brands (31% in the second quarter of 2014 and 39% in the second quarter of 2011). More consumers are purchasing only their preferred brands, even though other brands are cheaper (15% in the second quarter of 2014 and 12% in the second quarter of 2011). Further, the survey highlighted that in the second quarter of 2014, 51% of the respondents were cutting back spending on non-essential products, down from 60% in the same period in 2011.

Household product companies, such as Church & Dwight Co., have reaped the benefits of consumer preference on value products. In the company’s second-quarter 2014 earnings conference call in August, CEO James Craigie revealed that Church & Dwight is the only company in the laundry detergent business whose shares grew every year over the last five years. One of the company’s key drivers is its value pricing. Additionally, Church & Dwight’s unit volume in its domestic consumer segment grew faster than nearly all of its household-product manufacturing peers over the last four quarters in 2013, at 4.2%.

While Church & Dwight appeals to price-conscious consumers, the company faces price competition from rivals such as P&G. After losing significant market share in the automatic dishwashing detergent and powdered laundry detergent categories following price increases in the summer of 2011, P&G began reducing price gaps in both product categories in the second half of 2012. In February 2014, the company rolled out a low-cost detergent called Tide Simply Clean & Fresh—a less expensive version of premium-priced Tide— to regain consumers who shifted to lower-priced competitor products. In a September 2013 investor presentation, P&G highlighted the introduction of several mid-tier–priced products in the US in order to lure price-sensitive customers looking for high quality at a lower price. The company had previously launched Olay Fresh Effects, Bounty basic, and Charmin basic in the mid-priced product segment.

Not to be outdone by competitors, Clorox Co. in its third-quarter fiscal 2014 earnings call in May 2014 stated that it is planning to introduce more value-sized packs and products with value-added benefits. In the first half of 2014, the company launched new national advertising campaigns focused primarily on delivering value to its customers.

S&P thinks that many consumers actively look for the best price before making a purchase—making use of promotional offers, discount coupons, and websites that offer price comparisons and daily deals. For example, the website nextag.com provides a price comparison tool for all categories of household products: Consumers can enter a product name, see a list of prices at which it is available across online stores, and then choose the lowest price. Coupons have really caught on with consumers in the current economic environment. In February 2014, NCH Marketing Services, a provider of marketing solutions, released the Annual Topline US CPG Coupon Facts Report for 2013. The report showed a 3.3% increase in the number of distributed coupons for consumer packaged goods (CPG) products, which totaled 315 billion, up from 305 billion in 2012. However, savings achieved by consumers using coupons declined 5.4% in 2013 to $3.5 billion from $3.7 billion in 2012.

Private labels still lure consumers We still see some private label brands continuing to gain popularity, thanks to their great emphasis on value. We think private label brands are often viewed as offering similar quality, but are less expensive largely because the advertising and marketing expenditures on these brands are negligible compared with national brands. This price differential works to the advantage of private label products, particularly in a weak economy.

According to the International Food Information Council (IFIC) Foundation’s 2014 Food and Health Survey, price is almost as important an influence on purchase decisions as taste. The survey found that, although 90% of consumers still give primary consideration to taste, 73% said that price influences their

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 3

decision on what to buy. Also stressing the importance of price and the appeal of private label products, a report published by IRI in December 2013 noted that the private label share of spending increased modestly from 14.5% in 2012 to 14.6% in 2013. Furthermore, IRI highlighted that private label products were priced 22% lower, on average, than branded products in 2013. While this discount has narrowed somewhat in recent years (it was 24% in 2010), we think this partly reflects the increasing quality of private label products, which in some cases may even be superior to national brands. Less than 20% savings is offered by one-third of private label products compared with their national brand counterparts.

The gain of household private label products comes at the expense of some household companies offering higher prices than their private label counterparts. For example, Clorox cited in its fourth-quarter fiscal 2014 (ended June 30) earnings call in August that the company’s market share weakness can be attributed to the pricing discrepancy of its products compared with private label products. CEO Donald Knauss mentioned that Clorox competes in some categories where private label is the primary competitor.

S&P expects private label brands to pick up more market share from second- or third-tier brands than from the category leaders. One reason is that, in our view, top-tier branded companies have more financial resources, including increased marketing dollars and new product development outlays, to protect their market share. These companies spend heavily on building a strong image for their brands, which they believe will help them in strengthening customer loyalty. For second- or third-tier brands battling with private label manufacturers, lowering prices and taking advantage of promotional activities is a possibility, but that would mean brands would have to bear lower margins and a potential loss of perceived value.

Inflationary pressures expected to rise in second half of 2014 Although food inflation was relatively low overall in the first seven months of 2014, it was still high in certain categories. For example, the BLS reported that meat and dairy saw a year-over-year increase in July 2014 of 7.6% and 4.3%, respectively. For the rest of the year, the US Department of Agriculture (USDA) expects food inflation to rise 2.5%–3.5% overall. Meat products are expected to rise 3.5%–4.5%, and dairy products are expected to rise 3.0%–4.0%. This trend in 2014 is likely to intensify pressure on consumer spending, particularly on lower-income consumers. We think that higher food prices in the second half of 2014 will have an even more regressive effect on consumer spending, as the level of disposable income directly affects consumer demand.

Accentuating the importance of inflation trends in the industry, Wal-Mart Stores Inc., in conjunction with its fiscal 2015 second-quarter earnings release in August 2014, stated that grocery inflation accelerated by 1.8% in the second quarter of fiscal 2014 compared with the previous quarter. Further, the company faced price deflation in certain areas, such as dry grocery. Kroger Inc., in its first-quarter 2014 call held in June, stated that it witnessed a consistent grocery inflation increase of 1.8% in the first quarter, excluding its pharmacy business.

Gasoline is another commodity that could affect general consumer demand even for household products. According to the US Energy Information Administration (EIA), a statistical and analytical agency of the US Department of Energy, regular gasoline prices have been in a deflationary trend. Gasoline prices averaged $3.51 per gallon in 2013, down 2.7% from 2012. Prices increased 2.3% in 2012, following 18%–26% increases in 2010 and 2011. As of August 12, 2014, the EIA was forecasting gasoline prices to average $3.50 per gallon in 2014 (a 0.3% decrease from 2013). We note that these forecasts can change, sometimes significantly, depending on movements in the price of oil. With oil prices generally in the $90–$110-per- barrel range in 2013, we have not yet seen any reason for significant changes in the outlook. However, if the global economy does begin to accelerate in the remainder of 2014, we would expect oil prices, and thus gasoline prices, to rise. In such a scenario, we think consumers overall would be better equipped to handle an increase, though lower-income consumers might still feel pressure.

DIVESTITURES COULD BE A BIG STORY IN 2014

We think there is a good chance that the household nondurables industry could experience an increased number of divestitures in 2014. Over the past few years, the industry has seen a significant number of divestitures of consumer food businesses. These include the following transactions: Unilever NV’s sale of its

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global Skippy business to Hormel Foods in November 2013 for about $700 million; P&G focusing on its core brands; Energizer planning to split into two firms; and Kimberly-Clark planning a spin-off of its healthcare business in 2014. With companies determined to focus more resources on their core business or geographies, shed underperforming businesses, raise capital for better growth or investment opportunities, and boost shareholder value, divestitures have been a popular alternative that we think will continue in 2014.

Procter & Gamble to focus on core brands P&G has divested various brands in the past, and we expect it to continue pruning its brand portfolio going forward. According to data from Capital IQ, the branch within S&P Capital IQ that provides business and financial information, P&G has divested over 26 businesses since its merger with Gillette in 2005, including:

. Its electric toothbrush business to Church & Dwight for $105 million in 2005 . Certain deodorant brands to Dial Corp. for $420 million in 2006 . Folgers coffee to J.M. Smucker Co. for $3.7 billion in 2008 . Its pharmaceutical business to Warner Chilcott for $2.9 billion in 2009 . Its Pringles snack foods business to Kellogg Co. for $2.7 billion in May 2012, which marked P&G’s exit from the food business.

More recently, in April 2014, the company announced that it would sell its pet food brands to Mars, Inc. for $2.9 billion. The acquisition of IAMS, EUKANABA and NATURA brands in North America, Latin America, and other markets was completed on August 1, 2014. Mars also announced that it would exercise its option of owning P&G’s pet food business in emerging markets, e.g., Asia and the Middle East.

P&G will continue trimming down its portfolio in 2014, as CEO Allan George Lafley announced the divestiture of 90–100 non-core brands during the company’s earnings call on August 1, 2014. This will help the company strategically focus on 70-80 core brands. The CEO further noted that focusing on core brands would be beneficial for the company, considering that these core brands amassed 90% of company sales and more than 95% of profit over the last three years.

Energizer plans to split into two companies Energizer Holdings, Inc. announced on April 30, 2014 that it would split its Household Products and Personal Care divisions into two separate companies. CEO Ward Klein said he expects that “Household Products will be well-positioned to leverage its leading brands and product portfolio to generate significant cash flows.” Klein also noted that the “Personal Care business has achieved scale to be able to enhance its focus on continuing innovation and to drive top-line and market share growth.” The spin-off is planned for the second quarter of fiscal 2015, and it will enable the two companies to have greater brand focus in specific markets.

Kimberly-Clark is seeking to spin off its healthcare business in 2014 On November 14, 2013, Kimberly-Clark announced that it was pursuing a tax-free spin-off of its healthcare business. The company cited three primary reasons for the spin-off. First, it noted that the strategic fit and growth priorities of the healthcare business have changed over time, with many of its categories having different business models and market dynamics, as well as limited operational overlap with its other segments. Second, it believes a spin-off would allow the healthcare business to optimize its own performance, providing it with the flexibility to pursue value-creation opportunities as a pure-play healthcare company. Lastly, a divestiture would allow the company to improve focus on its other core businesses, primarily on its personal care, consumer tissue, and professional brands. Kimberly-Clark’s healthcare business posted $1.6 billion of sales in 2012, representing about 8% of its total revenues.

In May 2014, the company revealed its decision to form a new healthcare division, Halyard Health, Inc. The company expects the spin-off to be completed in the second half of 2014. The transaction will enable Kimberly-Clark to focus on its core operations and bolster its market position.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 5

EMERGING MARKETS REMAIN A GROWTH DRIVER WHILE EUROPE EXPERIENCES SLUGGISH RECOVERY

The household nondurables industry is tapping into a divided world. On one hand are the developed markets (such as the US and Western Europe), which have matured and offer less scope for growth and expansion. On the other hand are the developing markets (e.g., much of Asia and Latin America), where growing populations and, more importantly, a rising middle class, are fueling growth. We see the major CPG players focusing on opportunities outside their home markets.

Developing economies, such as those in Asia and in Central and South America, offer CPG players a huge potential to diversify geographically. The rising middle-class population is the key growth driver in the Chinese and Indian markets. The World Economic Forum’s “Top 10 Trends for 2014” ranked growth in Asia’s middle class in the eighth position. The report noted that China and India are expected to be the world’s second- and fourth-largest consumer economies, respectively, by 2020. In addition, Asia’s middle-class population (currently 500 million) is expected to reach 1.75 billion by 2020, propelling growth in consumption.

Italy falls back into a recession in mid-2014 The macroeconomic outlook for Europe is slightly positive, according to S&P Economics, with recession gradually receding from the region. The Eurozone witnessed an expansion in the first quarter of 2014, but GDP growth stalled in the second quarter. A meaningful recovery still appears some way off, with S&P expecting European economic growth to remain muted and uneven in 2014. While the Eurozone does show early signs of improvement, the road to recovery is expected to be long and arduous. S&P estimates that Eurozone GDP contracted by 0.4% in 2013, but expanded by 1.0% in the first half of 2014 due to the prospect of a modest recovery. According to the European Commission, the executive body of the European Union (EU), the easing of fiscal pressure is bolstering growth in this region.

The region, however, remains a tale of many countries, with some yet to return to their pre-recession levels of economic activity. For example, Germany suffered a contraction (a 0.2% decline compared with the previous quarter) while France’s GDP was unchanged in the second quarter of 2014. However, the biggest driver of slower growth in the European region is the fact that Italy has fallen back into recession. The country’s GDP plummeted 0.2% in the second quarter of 2014 compared with the first quarter.

Varying labor market conditions across Europe have been a major factor in the GDP forecasts for individual nations. The overall unemployment rate in Western Europe was estimated by IHS to have increased modestly in 2013 to 11.3%, from 10.7% in 2012. Fourteen of the 20 countries in the region that have forecasts are believed to have experienced rising unemployment, including recovering economies like France, which is projected to experience a 0.7% increase in the unemployment rate. Still, the level of unemployment varies significantly across the region. The unemployment rates for Germany, the UK, and France were estimated at 6.9%, 7.7%, and 10.9%, respectively, for 2013, compared with 26.4% for Spain, 12.2% for Italy, and 27.7% for Greece. Interestingly, IHS is only projecting a 0.1% decline in unemployment, to 11.2%, for Western Europe in 2014, which we think underscores the slow nature of the recovery.

Asia and Latin America remain growth drivers Sales growth in Asia and Latin America is offsetting the generally weak performance in Europe. For example, in the second quarter of 2014, Colgate-Palmolive reported year-over-year growth in organic sales of 8.0% and 3.0% in Latin America and Asia, respectively, compared with only 2.5% in the Europe/South Pacific region. Further, Colgate-Palmolive’s overall organic sales grew faster than Europe/South Pacific region with 4.0% growth. Colgate-Palmolive reported second-quarter 2014 organic sales growth of 6.5% in emerging markets, which is significantly higher than the 1.5% in developed markets.

Other household nondurable companies, such as P&G and Unilever, are not experiencing the same growth in Asia and Latin America. P&G’s organic sales grew 2% in the fourth quarter of fiscal 2014 (ended June 2014), and 3% in fiscal year 2014. The company indicated that a challenging macro environment as well as the slower levels of market growth in developed and developing regions drove this rate of organic sales. In addition, in fiscal 2014, Asia and Latin America contributed 28% of P&G’s total sales. Unilever’s growth in

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organic sales reached 3.6% during first-quarter 2014, down from 4.1% growth in fourth-quarter 2013. Furthermore, organic sales in emerging markets rose 6.6% in the fourth quarter of 2014, but the preceding quarter yielded an 8.4% growth. Slower growth in the emerging markets was partly driven by poorer performance in Asia compared with Latin America and China. Unilever also posted weak performance in developed markets in the fourth quarter of 2014.

As the industry remains volatile in developed and emerging markets, we think companies should pursue stronger innovation and cost-saving strategies. This would help allow companies to offset the negative effects of weaker currencies and uncertain consumer demand.

Emerging markets are susceptible to a slowdown  China. Following the efforts of the Chinese government in spending and freeing more money for loans in the last quarter of 2013, China’s GDP rose 7.5% in the second quarter of 2014 compared with the same period a year ago. The Chinese government hopes to further facilitate growth in terms of domestic consumption rather than rely on trade and investment. Consumer spending in China also increased 12.1% in the second quarter of 2014 compared with the same period in 2013.

According to The Conference Board, an independent business membership and research association, China’s GDP is expected to drop to 7.0% in 2014 from 7.7% in 2013. S&P thinks that China’s problems with rising credit growth and debt levels will further weaken economic growth of this emerging market.

 India. With real GDP growth slowing from 10.3% in 2010 to only 4.7% in 2012 and 5.0% in 2013, India is another emerging economy that has been experiencing a slowdown. In April 2014, the IMF projected that this emerging market would reach 5.4% in 2014. India’s slowing growth can be partly attributed to the slowdown in consumption among consumers, according to an Ernst & Young article published in April 2014. In 2013, India’s real consumer spending stood at 3.1%. Despite the slowdown in consumer spending, Nielsen Holdings NV, a market research company, reported in April 2014 that India has the second highest consumer confidence index (121) in the Nielsen Global Survey of Consumer Confidence and Spending Intentions conducted between February 17 and March 7 of 2014. This may help support consumer spending in the country.

 Brazil. Brazil is another important emerging economy that slowed significantly in 2012, with 0.9% GDP growth, compared with 2.7% in 2011 and 7.5% in 2010. However, in 2013, Brazil’s GDP growth reached 2.3%, albeit still far from the 4%–5% annual growth experienced by the country over the last decade. In April 2014, the IMF projected 1.8% real GDP growth in Brazil for 2014 because of weak infrastructure and low private investment reflecting lack of confidence in industry.

AFTER STRONG HEADWINDS IN 2012 AND 2013, FOREX EXPECTED TO PRESSURE 2014 RESULTS MODESTLY

Following the recession in 2009, the US dollar generally began rising in value in the second half of 2011 against a basket of other currencies. Since a stronger currency can reduce international profits when they are translated back into dollars, and can make purchases more expensive for non-US customers, US dollar valuation can be unfavorable for some companies operating in international markets.

A dollar index, released by the Federal Reserve Economic Research Division, measures the value of a dollar relative to a trade-weighted basket of currencies. This dollar index rose from a low of 94.0 on July 27, 2011, to a high of 102.8 on June 6, 2012, a 9.3% increase. The strengthening dollar index continued between 2013 and the first half of 2014, reaching a high of 103.3 and 103.7 on July 7, 2013 and February 5, 2014, respectively.

According to a December 27, 2013, article in The Wall Street Journal, the dollar’s value is expected to appreciate further in 2014, due to the Federal Reserve Bank’s announcement that it would begin tapering in January 2014 by cutting back on its $85 billion-a-month bond-buying program. Additionally, it noted that the strengthening US economy and loose monetary policy are expected to favor the dollar, with further appreciation expected in 2014.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 7

LATIN AMERICAN CURRENCY DEVALUATIONS MAY CONTINUE TO AFFECT RESULTS

For some time, Venezuela and Argentina have been expected to devalue their currencies in order to control fiscal deficits. The Argentine pesos and bolívar fuerte (VEF) had been steadily depreciating against the US dollar. According to the IMF’s World Economic Outlook published in April 2014, both these Latin American countries have loose macroeconomic policies, which lead to high inflation and “a drain on official foreign exchange reserves.” While these two countries adjust their exchange rates, significant policy changes are required to stave off disorderly adjustments that are partly attributable to the gap between official and market exchange rates.

Argentine president Cristina Kirchner promised not to devalue the currency for her remaining tenure in May 2013. Nonetheless, the peso had been steadily depreciating against the dollar for several years, with the pace recently accelerating. Kirchner’s government made an about-face on January 23, 2014, and stopped selling foreign currency reserves to bolster the peso. Following a 15% decline in early trading, the central bank stepped back in, limiting the peso’s loss to about 8%. According to a Wall Street Journal article dated on that day, the peso traded at 13.10 per dollar on the black market, versus the official interbank rate of 7.75. The current premium stands at about 70%, wider than the 50% premium in late December. The article indicated that few economists were expecting pressure to diminish on the peso, as citizens would likely try to get their money out of the country by any means possible. Further, it noted that Argentina is struggling with surging inflation, which economists estimate was running around 25%–30% in 2013, more than twice the official figure of 10.9%, which could contribute to social unrest.

On February 8, 2013, the Venezuelan government devalued its currency by 32%, moving the exchange rate from 4.30 to 6.30 VEF per US dollar. According to a Reuters article dated October 18, 2013, many economists had been predicting a further currency devaluation following the December elections. The article also highlighted that Bank of America Merrill Lynch expected the VEF to move to 14.6 VEF per US dollar (more than a 50% devaluation) in order to bring the country’s fiscal deficit to less than 3% of GDP. While the government has denied any such devaluation in the near future, on January 22, 2013, it restricted access to the official rate for certain types of transactions, including outbound tourism and airlines, instead requiring that they access dollars on a parallel auction market. The rate on this market is about 11.30 VEF to the dollar, a devaluation of more than 40%. Another problem affecting the economy is the inflation rate, which rose to 56.2% in 2013, following a 20.1% rate in 2012. According to a Wall Street Journal article published on December 30, 2013, sharply rising consumer prices have aggravated conditions further, leading to the strong possibility of another devaluation in early 2014. Finally, on January 24, 2014, the Venezuelan government implemented additional changes to the country’s foreign exchange system.

S&P expects that US-based companies operating in Venezuela will experience negative operational impacts from two key factors. First, sales and profits earned in bolívars will now be translated back into US dollars for financial statement reporting purposes at a less favorable exchange rate. For example, 1 billion VEF, which were worth $232 million at the pre-devaluation exchange rate, will now be worth only $158 million, a 32% reduction. The second factor relates to manufacturers’ need to purchase imported raw materials, many of which are priced in US dollars. They will now require more bolívars to purchase the same quantity of raw materials, thus compressing gross margins. Typically, companies would raise prices in the local market to offset the rising local currency input costs. However, the expansion of price controls by the Venezuelan government in 2012 may limit manufacturers’ ability to increase prices.

The devaluation impact varies by company Some of the companies operating in the industry are taking the hit of currency devaluations in foreign markets like Venezuela. A New York Times article published in July 2014 stated that because of the current currency situation in Venezuela, the country, which was once a profit center for multinational companies, increasingly looks like a “financial black hole.”

In the first quarter of 2014, Colgate-Palmolive and P&G saw their profitability threatened because of the devaluation of the Venezuelan bolívar. Colgate’s profits dropped 16% in the first quarter of 2014 compared with the same period a year ago. P&G increased its market share in Venezuela, but shares still declined by 10

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cents per share in the first quarter of 2014. S&P thinks currency devaluation continues to be important, as household nondurable companies often operate outside the US and hence face currency risks in their operations. Simply put, currency devaluation in Venezuela shrinks the profits, after translating to US dollars, of companies operating in the country.

STREAMLINING EFFORTS CONTINUE

After facing continued high commodity costs, and with retail consolidation and inventory reductions forcing them to focus on their best brands, most of the household and personal care companies in our coverage universe began significant restructuring programs in 2011–2012 to cut costs and winnow product lines. These programs follow a series of restructurings by many of these companies between 2005 and 2010 in an effort to slim down organizations that had become bloated after a spree of acquisitions over the previous two decades.

Previous restructuring programs expanded at several companies  Kimberly-Clark. Kimberly-Clark initiated a pulp-and-tissue restructuring plan in January 2011 to allow it to exit its remaining integrated pulp manufacturing operations and improve the underlying profitability and investment returns of its consumer tissue and K-C Professional businesses. The restructuring, which was completed by the end of 2012, included the sale, streamlining, or closure of six manufacturing facilities globally. As a result of the restructuring actions, Kimberly-Clark expected that by 2013 annual net sales would decrease by $250 million to $300 million from 2010, but that operating profit will have increased by at least $75 million in 2013 and $100 million in 2014. However, Kimberly-Clark’s actual full-year 2013 performance deviates from the estimates, as net sales increased by a modest 0.4%, whereas operating profit increased by 19.4%.

Kimberly-Clark also decided to make strategic changes in its Western and Central European businesses in order to improve underlying profitability and to focus the company’s resources and investments on its strongest market positions and growth opportunities, which can deliver more sustainable returns. These changes include the exit from the diaper category in most of Western and Central Europe, and the divestiture of or exit from some lower-margin businesses in certain markets, mostly in the consumer tissue segment. To align its cost structure with these strategic decisions, Kimberly-Clark intends to streamline its European manufacturing footprint and administrative organization. It plans to sell or close five manufacturing facilities, which would reduce the workforce by 1,300 to 1,500.

Restructuring costs for these actions will be incurred through 2014 and are expected to total about $350– 400 million (pretax). The businesses that will be exited or divested generate annual net sales of approximately $500 million, but negligible operating profit.

 Procter & Gamble. In February 2012, P&G announced a cost-reduction program intended to generate savings of $10 billion over five years, on a base of about $85 billion in expenses. The company planned to reduce the cost of goods sold (COGS) by about $6 billion, reduce overhead expenditures by about $3 billion, and achieve marketing efficiencies of $1 billion. To reduce the COGS, the company will reduce capital cost per unit of volume through efficiencies in product design and formulation. Overhead costs will be reduced mainly by shrinking the non-manufacturing headcount by 10% by June 2016. As of August 2014, P&G had reduced the non-manufacturing headcount ahead of schedule, reducing roles by 16% as of July 1, 2014. The company’s marketing has also become more efficient and effective with greater digital, mobile, search and social presence as opposed to its previous reliance on traditional marketing, such as television and advertising.

P&G expects to incur restructuring charges of $4.5 billion between fiscal 2012 and fiscal 2016, and estimates that it will incur 62% of the total cost in fiscal 2014. As of fiscal 2014, $2.8 billion had already been incurred under the restructuring program.

Although it is not clear how much of the $10 billion savings is truly incremental compared with normal course-of-business efforts, we think these new initiatives could have a negative impact on the company’s

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competitors. P&G, known for its innovation and marketing expertise, could use the savings to accelerate its innovation activities and/or lower its prices, thus increasing competition.

More recent restructuring programs announced to bring future cost savings  Energizer Holdings. Energizer announced preliminary results of a comprehensive review of its cost structure and operating model in September 2012. In November 2012, the company revealed additional details of a multiyear restructuring program intended to increase cash flow, raise gross margins, and reduce overhead expenses.

Energizer expects to achieve gross annualized pretax cost savings of approximately $225 million by its fiscal year ending September 2015, three quarters of which will be used to improve profitability, with the remainder to be reinvested in the business. As of November 2013, the company noted that the restructuring program was ahead of schedule and the pretax cost savings are expected to be realized through fiscal 2014. In January 2014, Energizer expanded the scope of its restructuring plan by focusing more on savings from the company’s Personal Care division. Additional savings are expected to reach $75 million by fiscal 2015 and 2016, despite having a one-time cost of $100 million.

 Colgate-Palmolive. In October 2012, Colgate-Palmolive announced a four-year Global Growth and Efficiency Program that is aimed at helping the company ensure continued worldwide growth in unit volume, organic sales, and EPS, and enhance its global leadership positions in its core businesses. The program involves expanding the use of shared services to streamline global functions, consolidating single- country subsidiaries into regional hubs, and optimizing the global supply chain through manufacturing and warehousing efficiencies. Implementation of the program is expected to result in cumulative pretax charges of between $1.1 billion and $1.25 billion. Savings are projected to range from $365 million to $435 million annually by the fourth year of the program. It is expected that the company’s global workforce will be reduced by approximately 6% by the end of 2016. In 2013, the company incurred $371 million (pretax) of restructuring costs.

In the company’s earnings call on July 31, 2014, CEO Ian Cook highlighted that the restructuring is still on track. He stressed that the restructuring efforts could allow the company to gain $90–$110 million in after- tax savings.

PRODUCT INNOVATION REMAINS AN IMPORTANT DRIVER OF SALES

Slow growth in the US population and the number of households means that the development of new products and categories remains important to growth in the consumer products industry. New products can lift profits: Innovation keeps consumers from defecting to less expensive private label products that do not have the same features and may benefit from the historical consumer trend of trading up to better products that cost more.

Because of the importance of product innovation in driving sales, companies such as P&G and Clorox have been tapping innovation opportunities in the industry. For example, P&G’s CEO said in the company’s earnings call on August 1, 2014 that the company “had already started reallocating research and development (R&D) resources and budgets, cutting out low-value activity and doubling down on its most promising product innovations.”

P&G’s strategy includes four categories of innovation: first, commercial innovation (exploits current benefits to drive new levels of trial); second, sustaining innovation (includes upgrades and line extensions to help grow market share in existing categories); third, transformational sustaining innovation (big breakthroughs on existing brands); and, fourth, disruptive market innovation (creates new categories or segments). Conversely, the former Vice President of Investor Relations of Clorox said in the company’s earnings call in August, “We delivered three percentage points of top-line growth from innovation for the third consecutive fiscal year, consistent with our long-term strategic target.”

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Industry players are continually being pushed toward product innovation. S&P thinks that failure to innovate in a fast-moving industry such as household nondurables would hinder company success in this highly competitive environment.

What is a new product? In this industry, talking about “new” products typically includes everything from a completely new formula or concept to improvements in existing products and brand extensions. Extending a well-known brand name to a new product often lures shoppers who already use the core brand. In 2013, the top 10 “pacesetters” in the non-food category (i.e., as defined in IRI’s 2013 New Product Pacesetters report, latest available) earned $1.2 M AJOR HOUSEHOLD PRODUCTS COM PANIES AND BRAND NAM ES billion in aggregate first- COMPANY PRODUCTS/BRAND NAMES year sales. HOUSEHOLD PRODUCTS COMPANIES Church & Dw ight Arm & Hammer, First Response, Nair, Orajel, OxiClean, Spinbrush, Trojan, XTRA, Companies innovate to AIM, Arrid, Mentadent, Vitafusion, L'il Critters, Cameo, Kaboom, Orange glo, address competition from Parsons, Scrub free,Snobol,accuflora, Close up,Pepsodent,Answ er,Lady private label and other choice,Naturalamb, Carter's Laxative, Ultramax, Ladies choice, Trojan Vibrations, Simply Saline. branded players Clorox Burt's Bees, Clorox, Ever Clean, Formula 409, Fresh Step, Glad, Green Works, Innovation in new products Hidden Valley, K C Masterpiece, Kingsford, Liquid-Plumr, Match Light, Pine-Sol, helps consumer product Scoop Aw ay, SOS, Tilex, Brita, Soy Vay, gud, Chux, Poett. makers ward off lower-cost Colgate-Palmolive Ajax, Caprice, Colgate, Fabuloso, Hill's Science Diet, Irish Spring, Murphy's Oil Soap, Palmolive, Protex, Sanex, Softsoap, Soupline, Speed Stick, Suavitel, Lady competition. According to speed stick,Afta, Skin Bracer, Dermassage, Hill's Ideal Balance. research in more than 20 Energizer Holdings Banana Boat, Carefree, Diaper Genie, Energizer, Eveready, Haw aiian Tropic, countries published in o.b., Playtex, Schick-Wilkinson Sw ord, Stayfree, Wet Ones, Personna, Edge, Advertising Age, product Skintimate, Binky Henkel Dep,Table Dial, Fa, B05: Loctite, Major Persil, Purex, Renuzit, Soft Scrub, Mir, Perw oll, Sil, Spee, categories with low Vernel,household Bref, Pril, Pur, products Somat, Syoss, Taft, Schw arzkopf. innovation activity show a Kimberly-Clark Andrex,companies Cottonelle, andDepend, brand Poise, Plenitud, Hakle, Page, Petalo, Scottex, Viva, private label market share Wondersoft,names Thick & Thirsty, Huggies, Kimcare, Kleenex, Kotex, Pull-Ups, Scott, that is 56% higher than Viva, Camelia, Subtelle, Lidie, Intimus Gel, Snugglers, Kleen Bebe, DryNites, Little categories with many new Sw immers, GoodNites,WypAll, Kimtech, Jackson Safety, Neve, Tela. Procter & Gamble Alw ays, Ariel, Cascade, Charmin, Cheer, Clairol Professional, CoverGirl, Crest, products. According to the Duracell, Febreze, Gillette, Head & Shoulders, Iams, Ivory, Olay, Oral-B, Pampers, article, as soon as branded Pantene, Pepto-Bismol, Scope, Secret, Sw iffer, Tampax, Tide, Vicks, Rejoice, manufacturers stop rolling Whisper, SK-11, Wella, Braun,Fusion, mach 3, Ace,daw n, dow ny, gain, bounty, out innovative new Hugo Boss, Herbal Essences. products, they allow private Reckitt Benckiser Air Wick, Calgon, Dettol, Finish, Harpic, Lysol, Resolve, Strepsils, Vanish, Woolite, cillit bang, French's Mustard, Scholl, Veet, Cillit Bang, Clearasil, Durex, label makers to catch up. Mortein, Nurofen, Mucinex, Gaviscon. According to an Unilever Axe, Comb-Thru, Consort, Dove, FDS, Just for Me, Kleen Guard, Lux, Molly Advertising Age article McButter, Motions, Mrs. Dash, Nexxus, Noxema, Pond's, Soft & Beautiful, St. dated August 7, 2013, 95% Ives, Static Guard, Suave, SugarTw in, Sun Light, Sunsilk, Surf, TCB, TRESemme, Vaseline, Cif, Comfort, Domestos, Radiant, Knorr, Rexona, Ben & Jerry's, Lipton. of marketers surveyed by Forrester Research (a HOUSEWARES COMPANIES Fortune Brands Aristokraft, Decorá, Diamond, Homecrest, Kemper, Kitchen Craft, Master Lock, market research firm) Moen, Omega, Schrock, Simonton Window s, Therma-Tru, Waterloo, Fypon, agreed that they have American Lock, Dynasty. achieved positive returns on New ell Rubbermaid Aprica, Calphalon, Dymo, Goody, Graco, Irw in, Lenox, Levolor, Paper Mate, investment (ROI) due to the Parker, Rubbermaid, Sharpie, Waterman, Uni-ball, Tupperw are Armand Dupree, Avroy Shlain, BeautiControl, Fuller, NaturCare, Nutrimetics, innovation programs they Nuvo, Tupperw are implement. PERSONAL CARE COMPANIES Avon Products Advance Techniques, Anew , Avon Color, Avon Naturals, Mark, Skin-So-Soft, Better Homes and Gardens Solution, Avon Sun, Clearskin, Feeling Fresh, Liz Earle, Silpada, Tiny tillia, magazine, in conjunction Footw orks. with market research firm Estée Lauder Aramis, Aveda, Bobbi Brow n, Bumble and bumble, Clinique, Donna Karan BrandSpark International, Cosmetics, Estée Lauder, La Mer, MAC, Origins, Tommy Hilfiger (fragrances and cosmetics) has been giving the Best Revlon Almay,Ciara, Charlie, Gatineau, Jean Nate, Mitchum, Revlon, Revlon Colorsilk, New Products Awards Ultima II (BNPA) as part of its Source: Company reports. American Shopper Study

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 11

since 2009. For the 2014 survey, conducted in late 2013, some of the best health and personal care products included Dove Men+Care Cool Silver Deodorant, Secret Clinical Strength Stress Response, and Crest 3D White Arctic Fresh. Winners in the beauty category included Pantene AgeDefy, Olay Pro-X Tone Correcting Protocol, and Gillette Venus & Olay Sugarberry Razor.

 Procter & Gamble. In IRI’s 2013 New Product Pacesetters report, P&G captured 73% of the total sales of the top 10 pacesetters in the non-food category. In 2013, P&G won several accolades for its strong innovation programs. It entered the Thomson Reuters Top 100 Global Innovators list. The P&G Thailand team won the My World outreach award for Asia-Pacific and Oceania by the United Nations. P&G also won the Gold Stevie award for the most innovative company (in the over-2,500-employees’ category) in the 11th Annual American Business Award. Additionally, its ranking in the Boston Consulting Group’s Most Innovative Company jumped to 23rd from 49th earlier.

The company also supports its Connect + Develop program to develop partnerships with companies working in innovative technology, packaging, design, marketing models, engineering, and business services. The company notes that more than 50% of product initiatives involve significant collaboration with outside developers. P&G spends around $2 billion annually on R&D and another $400 million in consumer research to explore more opportunities to innovate. Showing its commitment to innovation, P&G unveiled its Singapore Innovation Center in March 2014, and this facility will house more than 250 advanced research laboratories.

 Kimberly-Clark. In May 2014, Nielsen named Kimberly-Clark as one of the US Breakthrough Innovation winners for 2014, specifically for the Depend Silhouette Briefs for Women and Depend Real Fit Briefs for Men. Depend is not a new brand, but according to the company’s CEO, “Because these products work so much better, we picked up 9 to 10 share points behind a more expensive product offering.”

 Energizer. In the company’s fiscal 2014 third-quarter earnings call on July 30, 2014, CEO Ward Klein discussed the fact that growth of the different categories in the company is anchored on innovation. Klein mentioned that the company has been focusing on innovation in the company’s battery category.

 Colgate-Palmolive. Optic White, the first toothpaste to contain hydrogen peroxide, is being rolled out in foreign markets, and in 2013, Colgate-Palmolive introduced new versions of Optic White toothpaste and Colgate Total toothpaste. In the second quarter of 2013, the company launched its Colgate Total Advanced Pro-Shield mouthwash in the US, expanding its presence in the US mouthwash category.

EASING COMMODITY COST PRESSURES

Following declines in 2012, prices of commodities generally eased throughout 2013. Average fiber prices fell 2.3% in the first seven months of 2014 compared with the average in the same period in 2013, according to the PCI Synthetic Fibres Index. In 2013, the index averaged $318.4, a 1.1% increase from $315.05 in 2012.

Growth in prices of plastics and resins has generally been moderating as well. In 2013, the producer price index (PPI) for plastic and products increased 1.1%, less than half the 2.3% increase in 2012 and significantly below the 7.0% increase in 2011. As of July 2014, the PPI for plastics and rubber products reached 186.0, a 0.5% increase compared with the index a year ago. Prices of some commodities, such as wood pulp, inedible fats and oil, and paper, were either up moderately or even down from a year ago.

The World Bank’s commodity indexes for both energy and non-energy also mirrors the easing cost pressure in commodities. The energy index was down slightly, year over year, in 2013 and 2012, after experiencing 25%–30% increases in 2011 and 2010. The non-energy index (which includes items like food, timber, fertilizer, metals, and minerals) declined by 7% in 2013, after a 9% fall in 2012. This followed about a 20% increase in each of the two prior years of 2013.

CPG companies typically have used two major weapons to counter rising commodity costs: price increases and cost reductions. Despite the more benign cost outlook, these efforts continue. We think some companies have turned to smaller packaging to increase prices. While consumers pay the same amount of money for a

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product, they often may not notice the smaller quantity of the product in the pack. Companies might put the new weight or volume on the cover, but keep the packaging largely the same. For example, in July 2013, Kimberly-Clark reduced the number of sheets in various Cottonelle bathroom tissue rolls by 6% to 10%, or about 10 to 15 sheets per double roll, although it increased the bulk and strength of the product.

Although companies seemed to have had a more difficult time raising prices in the first half of 2014, S&P thinks that increasing prices seemed to work somewhat in 2013 as the consumer situation, particularly in the US, improved. Given the benign commodity environment, we think retailers have generally been unwilling to accept meaningful price increases from manufacturers unless additional benefits accompany the price increase. We also think consumer challenges and a generally competitive environment have limited the ability of household product manufacturers to drive price increases. Fortunately, easing commodity pressures have allowed them to expand their gross margins.

On the cost-reduction front, companies have continued to focus on initiatives to reduce logistics and manufacturing cost to improve their profit margins. For instance, Colgate-Palmolive continues to achieve hundreds of millions of dollars of savings each year through its “Fund-the-Growth” initiative. In the fourth quarter of 2013, gross margins benefited by 2.9 percentage points from the initiative. Church & Dwight’s “Good to Great” cost savings program has helped the company increase its gross margin by 5 percentage points over the past five years, significantly more than most of its peers.

HEALTHY BUT WEAKENING CORPORATE RESULTS

The results reported in June 2014 were generally positive for the CPG majors (with the exception of Energizer), although by some measures weaker than in recent quarters. Organic sales growth (OSG) was roughly in line with the prior quarter’s rate for the major household product manufacturers on average, although results varied by company. For example, Kimberly-Clark experienced acceleration in OSG to 3% in the June 2014 quarter, which is the same rate of ORGANIC SALES* GROWTH TRENDS increase as in the previous two quarters, although we (Quarter-to-quarter percent change) think this was due in part to easier comparisons in the SEP. DEC. MAR. JUN. year-ago period. On the other hand, Energizer saw a COMPANY TABLE B06:2013 2013 2014 2014 2.8% decline in organic sales (following a 6.1% decline Procter & GambleORGANIC4.0 SALES*3.0 3.0 3.0 in the March 2014 quarter) as a result of a sharp 10.9% Colgate-PalmoliveGROWTH6.0 TRENDS2.0 6.5 4.0 decline in its household products business in this quarter Kimberly-Clark 5.0 3.0 3.0 3.0 compared with the same period in 2013. Clorox 3.5 NA NA NA Church & Dw ight 1.6 NA NA NA The drivers of OSG tend to be roughly balanced between Energizer (1.1) (8.3) (6.1) (2.8) volume increases and price increases over time. Unilever 3.2 4.1 3.6 3.8 However, more recently, we think the mix shifted *Sales excluding impact of acquisitions and divestitures, somewhat to volume increases in the first half of 2014. A foreign currency fluctuations, and other unusual events. notable exception is Clorox, which has been passing Source: Company reports. through price increases in recent quarters, particularly related to its concentrated bleach product, resulting in generally weak volume growth. Clorox has also experienced weak weather-related volume trends in its charcoal business.

As the magnitude of gross margin expansion waned in the first half of 2014, compared with the second half of 2013, the companies’ ability to translate better sales trends into profits was weaker than it had been over the prior few quarters. While commodity prices continue to ease, as discussed previously, the magnitude of the year-over-year change has diminished compared with recent quarters. Additionally, margin benefits from higher pricing have diminished. Lastly, we think operating challenges in Venezuela and Argentina from currency devaluation, coupled with price controls, have had a significant impact on several household product manufacturers.

We think operating margins were pressured by increased marketing spending on new product launches given a competitive environment, despite corporate expense leverage. That said, results varied somewhat by company, often due to the timing of restructuring programs and marketing expenditures.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 13

Year-over-year EPS growth in 2013 slowed meaningfully from recent trends, which we attribute to greater foreign currency headwinds, less gross margin expansion as commodity cost benefits wane and higher marketing expenditures. EPS growth in 2012 for a group of household products manufacturers was 10.7% in 2013, versus about 25.9% in 2012.

OUTLOOK FOR THE REMAINDER OF 2014

For the household products sub-industry, our fundamental outlook for the next 12 months is neutral. Overall, we see a number of crosscurrents in the household nondurables and personal products industry. These include some indication of a two-tier consumer environment in which wealthier people are willing to pay premium prices, but with most of the population remaining much more cost-conscious.

We expect consumers to remain somewhat cautious in their spending, although economic conditions are significantly better than they were in the depths of 2009, and there are early signs of further improvements. While the unemployment rate has been declining, it remains relatively high by historical standards and we think it masks more difficult underlying conditions. We therefore see a heightened sense of job insecurity among people who are working. In addition, we think that most of the recent job growth has been created primarily in age cohorts that suggest part-time labor and low-paying jobs. Despite recent compromises in Congress, including the passage of the Murray-Ryan budget, we think political uncertainty exists in the US. Clearly, 2013 was affected by sequestration-related cuts in federal spending, the October government shutdown, and the standoff over raising borrowing limits so the country can pay its bills. We think some of this carried over into 2014, including the impact of the expiration of extended federal unemployment benefits and SNAP food stamp benefits, and the implementation of healthcare exchanges as part of the Affordable Care Act. That said, consumers no longer faced the headwind to their paychecks that they did in 2013 following the 2% increase in payroll taxes.

Recent trends in The Conference Board’s Consumer Confidence Index were indicative of gridlock in Washington in the fall, followed by détente at the end of the year. The latest reading in August 2014 reached 92.4, up 13.0% from 81.8 at the same time last year. December 2013’s reading of 78.1 (1985=100) also reflected a solid improvement from 72.0 in the prior month. While confidence generally increased over the course of 2013 and the first half of 2014, which we attribute to improving job growth and rising home and stock prices, it fell for three consecutive months starting in September. That said, it remains meaningfully below the 103.3 it averaged in 2007 prior to the recession.

We do not expect tax increases for the wealthy to have a significant impact on spending for household goods. We expect that some of the frugal behavior consumers have adopted in recent years—purchasing less expensive private label products and increased use of discount coupons, for example—will remain in place in the near term.

We note that results have been volatile in as far as the labor market is concerned. The economy added an average of 182,000 jobs per month in 2013, although activity was at its lowest in December with only 74,000 new jobs. Nonetheless, recent job growth has only kept up with growth in the overall population, as the employment-to-population ratio has remained in the 58%–59% range for the past four years, down from about 63% prior to the recession.

S&P Economics has a bullish outlook on the labor market for 2014. As of August 2014, it was projecting the unemployment rate to decline to 6.3% in 2014 from 7.4% in 2013, although we note that the July 2014 unemployment rate was already at 6.2%. Embedded in this forecast was the addition of 2.4 million new jobs, or an average of 200,000 per month. S&P Economics was also projecting a 2.3% increase in real consumer spending in 2014 (a deceleration from the 2.2% growth in 2013). We think household nondurable manufacturers will participate somewhat in this accelerated growth, but we see much of the upside going to more discretionary categories that had experienced greater cutbacks in recent years.

Branded companies battle with private label products for market share in some markets. In our view, this competition, as well as the leverage of large retailers, has often limited general price increases for household products. With the possibility of rising costs in 2014 after a benign 2013, we see more limited margin

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expansion opportunities. Key raw materials used in the household products sub-industry include natural gas, crude oil, pulp, and resin. We think that a number of companies will continue to look for ways to operate more efficiently, in part to offset any pressure from higher input costs. In addition, we expect rising demand for packaged products that consumers could previously not afford in emerging markets, notwithstanding a slight deceleration in economic growth rates in certain markets over the past year.

For major US-based household nondurables and personal care product manufacturers, we expect that for the remainder of 2014 OSG rates, on average, will modestly exceed our estimates for 2013, but we think that profits (excluding some special items) will increase at a slightly lower rate. Specifically, we look for most companies to experience OSG (excluding the impact of foreign currency and acquisitions/divestitures) of 3%–4% in 2014, versus about 3% on average in 2013.Overall, we think volume growth will drive the majority of sales growth, with limited ability for companies to increase prices, particularly in the first half of the year.

For most companies, we expect modest profit-margin pressure from input (commodity) costs in 2014, similar to the amount in 2013. We note that late 2011 and early 2012 saw more significant commodity cost increases. We think cost savings from recently implemented restructuring programs at several companies will accelerate into 2014, helping to drive better gross margin expansion compared with 2013, despite limited benefits from price increases. We think retailers will resist any meaningful new price increases by manufacturers, given the benign commodity cost environment and their cost-conscious customers.

In our view, a competitive environment will encourage companies to invest a meaningful portion of cost savings into higher marketing expense, through either traditional advertising spending or increased trade promotions. We think this will offset some of the gross margin improvements discussed above. As discussed previously, we think currency will cause a modest drag on reported results in 2014, depending on each company’s mix of overseas business.

We expect companies to report a wide range of EPS growth rates in the remainder of 2014, though somewhat narrower than what we expected in 2013. 

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INDUSTRY PROFILE

Consumer nondurables: a global business

Consumables, or nondurable consumer goods, consist of manufactured products that usually last a period of three years or less. These products can be divided into two categories: household and personal care. [Note: Sales data in this section are for the 2013 calendar year, unless otherwise indicated. In some cases, company totals may include sales of products in categories other than consumer nondurables.]

LEADING HOUSEHOLD PRODUCTS/ The top worldwide producers include Procter & Gamble PERSONAL CARE COMPANIES Co. (P&G; sales of $83.1 billion in fiscal 2014, ended (Ranked by sales) June); Unilever NV (an Anglo-Dutch conglomerate with NET sales of $66.1billion in 2013, about 54% of which came FISCAL SALES INCOME from household and personal care products); France-based COMPANY YEAR END (MIL. $) (MIL. $) L’Oréal SA (sales of $30.5 billion in 2013); and Kimberly- Procter & Gamble†TABLEJun. B03: '14 83,062 11,643 Clark Corp. (sales of $21.2 billion in 2013). Unilever LEADINGDec. '13 66,143 6,991 L'Oréal HOUSEHOLDDec. '13 30,519 3,933 For the purposes of this Survey, household products Kimberly-Clark PRODUCTS/Dec. '13 21,152 2,142 include such items as household cleaning supplies, laundry Colgate-Palmolive Dec. '13 17,420 2,241 PERSONAL detergents and additives, room deodorizers, storage bags, Reckitt Benckiser Dec. '13 15,710 2,722 CARE garbage bags, paper plates, cat litter, and the like. Along Kao Dec. '13 13,490 357 COMPANIES with the companies mentioned above, leading producers in Estée Lauder Jun. '14 10,969 1,204 these categories include Colgate-Palmolive Co. (sales of Avon Dec. '13 9,764 (56) $17.4 billion in 2013), London-based Reckitt Benckiser Plc Shiseido Mar. '14 7,816 268 ($15.7 billion in 2013), and The Clorox Co. ($5.6 billion Clorox Jun. '14 5,591 558 in its fiscal year ended June 2014). Energizer Holdings Sep. '13 4,466 407 Church & Dw ight Dec. '13 3,194 394 Personal care products encompass six major categories: Revlon Dec. '13 1,495 (6) hair care, color cosmetics (makeup) and fragrances, skin †From continuing operations. care, deodorants, oral care, and miscellaneous (a category Source: Company reports. that includes shaving preparations, sun care products, nail products, and hair colorants). This segment is more fragmented and diverse than household products. The top producers in these categories are Unilever, P&G, L’Oréal, Colgate-Palmolive, Avon Products Inc. (sales of $9.8 billion in 2013), Estée Lauder Cos. Inc. ($11.0 billion in its fiscal year ended June 2014), and Revlon Inc. ($1.5 billion in 2013).

Most of these companies’ products are sold to end-users through retail specialty stores, department stores, drug and grocery chains, mass merchandisers, and warehouse clubs. One exception is Avon, which relies heavily on a direct sales force.

The household nondurables industry is large and fragmented, and estimates vary as to the size of the market. Some primary markets, such as industrialized nations in North America and Europe, are mature and highly competitive. Emerging markets, though currently smaller, are seeing rising levels of wealth, making them more attractive to household nondurables companies.

INDUSTRY TRENDS

It has become more difficult for consumer products manufacturers to achieve significant sales gains considering the low rates of population growth and household formations in developed markets (such as the US). In response, these companies are attempting to stimulate sales in varying ways, such as entering new markets, creating new product categories, adding new distribution channels, and acquiring (and divesting) businesses. Most companies are also undergoing, or have already undergone, restructurings to cut costs and

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boost profit margins. Because of these efforts, the industry should continue to consolidate, and consumers will likely see more product choices at more points of purchase.

M&A PICKS UP IN 2014 AFTER FALLING SUBSTANTIALLY IN 2014

Merger and acquisition (M&A) activity in the household nondurables sector started to pick up from a slowdown in 2013. According to data from Capital IQ, the business within S&P Capital IQ that provides business and financial information, there were 22 announced transactions (valued at $25 million or more) globally, worth $10.1 billion in the household and personal products industries in 2013. This was below the 41 transactions worth $20.9 billion in 2012, excluding cancelled or withdrawn transactions, such as Coty Inc.’s offer to acquire Avon Products Inc. in early 2012. In our opinion, most of the deals in 2013 and 2014 were “tuck-in” acquisitions and less transformative in nature.

Several M&A activities were initiated in the first seven months of 2014. In March 2014, Unilever NV acquired a majority of stake in the leading Chinese water purification business, the Qinyuan Group Co., Ltd., for an undisclosed amount. On July 18, 2014, L’Oréal SA announced its decision to acquire NYX Cosmetics for an undisclosed price. This transaction is expected to help strengthen L’Oréal’s makeup offerings in North America.

The largest announced transaction in 2013 was an open offer by Unilever to increase its stake in its Indian subsidiary, Hindustan Unilever Ltd., from 52.5% to 75.0%. After receiving approval from regulators, the tender period began on June 21 and closed on July 4. Unilever paid a total of £2.45 billion for the shares tendered (representing a 14.8% interest), thus increasing its interest in Hindustan to 67.3%. The second largest transaction was the October 2013 acquisition of a 78% stake in Vinda International Holdings Ltd., a Hong Kong-based consumer tissue company, by a subsidiary of Svenska Cellulosa Aktiebolaget SCA, a Sweden-based personal care product manufacturer, for the equivalent of about $1.2 billion.

Other transactions in 2013 include the following: . In November 2013, Permira Advisers Ltd., an investment fund, announced an agreement to acquire Atrium Innovations Inc., a health and nutrition products manufacturer for a total value of about $1.1 billion. The transaction was completed in February 2014. . In October 2013, Energizer Holdings Inc. completed the acquisition of Johnson & Johnson’s feminine hygiene business for $185 million. . In October 2013, Revlon, through its wholly owned subsidiary Revlon Consumer Products Ltd., completed the acquisition of The Colomer Group (beauty and professional product manufacturer) for $665 million. . In August 2013, L’Oréal announced the proposed acquisition of Magic Holdings, a skincare brand in China, for $844 million. China’s Ministry of Commerce approved the acquisition in January 2014, and the transaction was completed in April 2014. . In January 2013, Hong Kong’s Li & Fung Ltd. acquired UK-based Lornamead Acquisitions Ltd., the maker of Finesse shampoo, for $190 million. Before executing a deal, some companies show interest in acquisitions and search for the preferred price, structure, and strategic rationale. For instance, Colgate- Palmolive has noted its interest in acquisitions in the oral care, pet nutrition, and personal care segments, and is waiting to target the right opportunity before making an acquisition. Church & Dwight’s CEO, James Craigie, indicated that the company still sees many opportunities and cites the vitamin business as an example.

S&P thinks M&A activities will enable household nondurable companies to focus on their core operations without failing to tap opportunities in different markets and businesses.

GROWTH POTENTIAL IN EMERGING MARKETS

With established markets in US and Western Europe at relatively mature points, and increasing levels of wealth making developing markets more attractive, manufacturers are actively pursuing growth overseas. Household nondurables companies are investing in developing and emerging markets in places such as Central and Eastern Europe, China, and India, where recent trends in economic and population growth

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bode well for the consumption of home and personal care products. In a number of countries, increases in gross domestic product (GDP), disposable income, and population are outpacing those of the US and Western Europe.

By 2020, emerging markets are projected to account for five of the 10 largest economies by GDP, up from four in 2010, according to a July 2010 report from the IMF. These include China (No. 1; up from No. 2 in 2010), India (No. 3), Russia (No. 5), Brazil (No. WORLD'S M OST POPULOUS COUNTRIES 7), and Mexico (No. 10). S&P thinks the long- (Estimated, in millions) term economic outlook for these regions is 2014 2050 generally favorable. RANK/ COUNTRY POPULATION RANK/ COUNTRY POPULATION 1. China Table1,364 1. India 1,657 Companies are also experiencing increased sales 2. India WorldPop:1,296 2. China 1,312 in “Emerging Europe” (that is, the 3. United States World’s318 most3. Nigeria 396 Commonwealth of Independent States, Central 4. Indonesia populous251 4. United States 395 Europe, the Balkans, and Turkey). In this area, 5. Brazil countries203 5. Indonesia 365 market researcher IHS Inc. projects a GDP 6. Pakistan 194 6. Pakistan 348 increase of 3.1% in 2014 compared with 2.0% 7. Nigeria 177 7. Brazil 226 8. Bangladesh 158 8. Bangladesh 202 in 2013, and a compound annual growth rate 9. Russia 144 9. Congo, Dem. Rep. 194 (CAGR) of 3.9% from 2013 to 2018. For Latin 10. Japan 127 10. Ethiopia 165 America and the Caribbean, plus Mexico, IHS Source: Population Reference Bureau. projects 3.3% growth in 2014 (versus 2.7% in 2013), and a five-year projected CAGR of 3.8%. Overall, IHS looks for 5.4% growth in “Emerging Markets” in 2014, up from 4.7% in 2013, and a five- year CAGR of 5.7%. In contrast, it forecasts real GDP growth in “Advanced Economies” of 2.0% in 2014, up from 1.2% in 2013, and a CAGR of 2.3% through 2018.

Growing economies tend to be characterized by increased consumption and a shift in the consumer product mix. As consumers find themselves with more disposable income, they tend to spend an increasing percentage on discretionary items, and a lesser portion on basic household and personal care products. This is positive for companies in these industries, as they seek to increase their sales of higher-margin discretionary items.

In a report entitled The Age of the Affluent: The Dynamics of China’s Next Consumption Engine published in November 2012 by The Boston Consulting Group, China’s population of affluent consumers will increase from 120 million in 2012 to more than 280 million by 2020. This reflects more than a doubling of the affluent population, which is expected to represent 35% of China’s urban population (or 20% of China’s total population) in 2020. The report further noted that total purchasing power of the affluent would reach $3.1 trillion by 2020 compared with $590 billion in 2012. Another consulting firm, McKinsey & Co., projected in August 2012 that by 2020, annual consumption in emerging markets will reach $30 trillion.

Examples of household and personal care companies doing business in developing markets follow.

 Procter & Gamble. P&G is a global leader in its four primary product categories: fabric and home care, beauty care, baby and family care, and over-the-counter healthcare. In the fiscal year ended June 30, 2014, the company generated about 61% of its sales outside North America: 18% from Western Europe, 18% from Asia, 10% from Latin America, and 15% from Central & Eastern Europe, the Middle East, and Africa. In P&G’s definition, developing markets include Latin America, Central & Eastern Europe/Middle East and Africa, Greater China, and Australia/India/Korea. Developing markets represented about 20% of sales in 2000, but increased to 39% in 2013.

Distribution capability or the lack thereof, becomes more of an issue and is more expensive in less developed markets. In addition, products typically have to be sold in smaller sizes to accommodate smaller- sized homes and stores and to increase affordability.

For instance, as of June 30, 2014, P&G estimates its oral care segment has a market share of approximately 20%, which positions it second after Colgate-Palmolive (globally). However, it has a smaller market share in India and other developing markets because of relatively high prices. In July 2013, P&G entered the

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toothpaste segment in India with the launch of Oral-B Pro Health toothpaste. In its fiscal 2014 fourth- quarter earnings call in June 2014, the company noted that it will continue to grow and expand its business in the developing markets in the remainder of 2014.

 Colgate-Palmolive. For several decades, the maker of Colgate toothpaste, Irish Spring soap, and Ajax dish detergent, among other products, has operated in developing markets. Sales outside the US accounted for approximately 80% of the INTERNATIONAL SALES EXPOSURE company’s total sales in 2013, with (In percent, as of most recent fiscal year end) emerging markets accounting for over TABLE B01: 50%. In emerging markets, Colgate- FISCAL NORTH LATIN REST OF INTERNATIONAL Palmolive works at the store level to COMPANY SALESYEAR EXPOSUREAMERICA EUROPE AMERICA WORLD Avon Dec. '13 15 29 49 8 ʬ promote its brands. In India, the Colgate‡ Dec. '13 20 22 ** 33 25 £ company initiated an awards program Estée Lauder Jun. '14 42 † 38 * † 20 ʬ for shop owners to recommend Colgate- Procter & Gamble Jun. '14 39 18 § 10 33 Palmolive products to shoppers. Sales in Unilever Dec. '13 33 27 § † 40 emerging markets typically grow at a Note: Some numbers may be approximate or estimated, based on company reports. †North American sales include all Americas. *Includes Europe, Middle East, and Africa. faster rate than in North America and **Includes South Pacific. §Westerm Europe only. ʬAsia Pacific. £Includes Asia, Africa Western Europe. and Eurasia. ‡Excludes revenue from pet business. Source: Company reports; S&P Capital IQ estimates.  Avon Products. In the first six months of 2014, Avon Products derived about 48.5% of its sales from Latin America and about 7.8% from the Asia-Pacific region. Compared with the prior year, sales in Latin America and Asia-Pacific plummeted by 11.5% and 14.8%, respectively, in the first half of 2014.

In 2013, Latin American revenues dipped 3.1% year over year, excluding the impact of currency, compared with flat constant-currency sales for the company overall. Asia-Pacific revenues fell 16.0% on this basis, primarily attributable to operating challenges in China related to the direct selling model. Avon’s 2013 revenues in China fell 42% over the prior year. We note that in 2013, China accounted for less than 2% of Avon’s sales, down from almost 4% in 2009 due to a difficult transition to the direct selling model, which, with some modifications, has been permitted by China only since 2006.

 L’Oréal. A global leader in personal care, L’Oréal reported that in the first nine months of 2013, cosmetics sales in its New Markets category (which excludes North America and Western Europe) accounted for 39.8% of overall cosmetics sales (down slightly from 39.0% in 2012). On a like-for-like basis (excluding the impact of foreign currency exchange), New Markets, such as Africa and the Middle East (14.3%), Asia- Pacific (8.4%), Eastern Europe (8.2%), and Latin America (11.5%), grew more significantly ahead of North America sales growth of 3.8% and Western Europe growth of 1.9%.

MARKETING: NOT A DISCRETIONARY EXPENSE FOR HOUSEHOLD NONDURABLES COMPANIES

Marketing, in all its varied manifestations, is essential to branded consumer products companies. Marketing includes, but is not limited to, media advertising, coupons (traditional, online, and mobile), in-store and point-of-sale signage, trade promotions, sponsoring of musical HOUSEHOLD NONDURABLES COM PANIES groups, product placements in TV shows, product or brand LEADING NATIONAL ADV ERTISERS—2013 websites, and Internet advertising. The accompanying table ranks TABLE B02: EXPENDITURES household nondurables companies based on their global ad COMPANY HOUSEHOLD (MIL. $) expenditures in 2013. Procter & GambleNONDURABLES 4,991 L'Oréal COMPANIES 2,335 In the US, Procter & Gamble was the largest advertiser in 2013 for Unilever LEADING 1,291 the eleventh consecutive year, based on data or estimates from Estée LauderNATIONAL 953 Kantar Media, a firm that tracks ad spends, and Advertising Age, a Kimberly-ClarkADVERTISERS 397 weekly trade publication. P&G’s US advertising expenditures in Clorox 396 2013 totaled an estimated $4.99 billion, an 3.33% increase in Source: Advertising Age. spending over 2012. The company’s spending increase is heavily concentrated on P&G’s laundry, household cleaning, and paper products. P&G’s spending in 2013 was

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more than twice the advertising expenditures of L’Oréal ($2.33 billion), which is ranked second. The total advertising expenditures of Unilever, which ranked third, were $1.29 billion.

The Internet and social media open up new marketing avenues Internet and social media is a major mode of non-traditional marketing in which companies are investing a larger percentage of their marketing budgets. In our view, this new direction in marketing reflects companies’ desire to extend their reach to younger consumers, and at a lower price than conventional advertising. However, the marketing world is still trying to determine which kinds of ads, coupons, and campaigns work online and how to measure their impact.

As part of P&G’s $10 billion cost savings plan discussed earlier, it highlighted plans to constrain marketing costs by $1 billion between 2012 and 2017 versus letting costs grow in line with sales. Notably, P&G does not plan to make significant cuts in marketing spending behind its brands; the company notes that marketing is the third-largest spending pool after people and materials costs, and critical to its success. Instead, P&G’s goal is to increase the reach, frequency, and effectiveness of its marketing dollars and advertising impressions with consumers. In its fiscal 2014 fourth-quarter earnings call in August 2014, P&G management indicated that it was continuing to increase its marketing presence in the digital, social media, and mobile spaces, and estimated that these new channels represent about 30% of overall marketing spend. The company thinks that the use of these channels will more effectively target consumers through one-on- one relationships and will provide a higher return on investment because the company can often get free impressions as consumers share content with friends.

At the other end, P&G’s rival Unilever allocated 17% of its media spending to digital in 2013, according to Marketing Week. Reflecting the importance of marketing in the industry and cost efficiency in a highly competitive environment today, Unilever’s management mentioned in the second quarter of 2014 earnings call in July that shifting investment on digital spending had increased results for the company.

Colgate-Palmolive’s Chief Marketing Officer indicated in an October 2013 meeting that advertising in digital channels has increased in recent years, and now stands at about 17%, although the percentage varies according to geography and product category. The company noted the increasing importance of digital channels, such as mobile advertising and social media, in emerging markets such as India, China, and Brazil, where mobile communication is growing rapidly. For the remainder of 2014, the company’s management highlighted in its second-quarter 2014 earnings call in July 2014 that its integrated marketing will continue to combine digital marketing with other platforms.

We think the strength of digital marketing and its significantly lower cost compared with other marketing platforms has made it popular among industry players.

DIVERSE DISTRIBUTION CHANNELS FOR PRODUCTS

While household nondurable companies cannot ignore the importance of larger retailers for the distribution of their products, they are also increasingly utilizing the Internet and direct selling model for personal care or household products. Companies are relying on multiple and SALES TO WAL-M ART* BY TOP HOUSEHOLD AND diverse channels to achieve greater penetration. PERSONAL CARE PRODUCTS M ANUFACTURERS FISCAL % OF TOTAL Large retailers important COMPANY YEAR END NET SALES Large retailers such as Wal-Mart account for a significant Clorox Jun. '14 26 proportion of the total sales made by major consumer Energizer B10: SALESSept' TO 13 20 packaged goods (CPG) companies. For example, in each Procter & GambleWAL-MARTJun. '14 14 company, fiscal 2014 (ended June 2014) sales to Wal-Mart Kimberly-Clark Dec. '13 12 and its affiliates accounted for around 14% of total net sales *Includes associated companies of Wal-Mart. Source: Company reports. for P&G and around 26% for Clorox. Furthermore, for fiscal 2013 ended September 2013, sales to Wal-Mart accounted for 20% of total company sales of Energizer. According to data from IRI, in the 52 weeks ended April 15, 2012 (latest available), 73.9% of households had shopped at a supercenter, compared with 98.5% who had

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purchased at a grocery store. We saw a rise in the penetration level for supercenters since 2010, which we think reflected increased cautiousness or price sensitivity among consumers.

Where people shop is changing With the onset of recessionary conditions, the shopping behavior of consumers with respect to the channels they are using is also showing interesting trends. In addition to the growth in the popularity of large suburban supercenters, retailers such as Wal-Mart and Target are planning smaller outlets at more urban locations. Further, in 2011, Wal-Mart piloted an online grocery shopping service with a local store pick-up option called Walmart To Go in San Jose and San Francisco before expanding the service to Denver in October 2013.

Given consumers’ value-conscious behavior, the Internet has also become a popular shopping channel. According to an April 2013 report from market research firm eMarketer, e-commerce in consumer packaged goods is estimated to grow at a 15% annual rate from 2012 through 2017. Despite the Internet being a fast-growing channel, a May 2014 article from Nielsen suggested that “e-commerce is still in its infancy, accounting for roughly 4 percent of total CPG sales.”

Some of the factors adding to the popularity of the Internet as a shopping channel are convenience of 24-hour availability, easy-to-compare prices, and home delivery. Even if consumers do not buy online, a majority of them use online tools to get information on the best prices. With consumers showing a greater interest in online coupons, the competition in this industry is heating up. For example, Google Offers, a competitor to sites such as LivingSocial and Groupon, has partnered with 14 other deal providers, such as Gilt City, PopSugar Shop, Plum District, and Juice in the City, to offer daily discounts on various products and services. In November 2011, Google Inc. launched a Google Offers mobile app for Android phones. This app is expected to alert consumers to deals that are of interest to them and to let consumers look up and redeem deals through their mobile device. LivingSocial and Groupon had launched their mobile apps earlier.

Direct selling model used in international markets The direct selling model is gaining popularity for products such as personal care and household items. The model is being widely used in emerging economies due to the demographic factors in these countries. The model provides greater access and convenience to consumers who may not have as many other ways to shop for goods. Further, direct selling has opened up a huge avenue for employment of women in many of the developing economies. They can sell these products working on a part-time basis, which fits their lifestyle. According to the Direct Selling Association (DSA), total direct retail sales in the US amounted to $32.7 billion in 2013, a 3.3% increase over 2012. Further, there were an estimated 16.9 million direct sellers in the US in 2013, up from 15.9 million in 2012.

S&P thinks the direct selling model has helped boost revenues for many companies in India. Tupperware, which uses the direct selling model extensively throughout the world for its housewares and cosmetics businesses, recorded local currency sales growth in 2013 of 7.2% in emerging markets in Asia, and nearly 17.4% in South America, including Brazil and Venezuela. In comparison, its sales in developed markets declined by 1.1% and 2.2% in Europe and US, respectively.

DEMOGRAPHICS, LIFESTYLE SHIFTS SPUR DEMAND

The US Census Bureau projected that by 2050 the US will be the world’s third most populous country, after India and China. The Census Bureau expected the US population to increase 33% and to reach 420 million by 2060, up from 316 million estimated in 2013. Life expectancy at birth is expected to increase to 84.8 years by 2060, from an estimated 79.5 years in 2015. The portion of the population at least 65 years old is expected to reach 21.9% of the total population by 2060, as compared with 14.1% in 2013.

The aging US population has been a driving force behind manufacturers’ creation of new products. For example, Colgate Total was the first toothpaste approved to fight gingivitis, a gum problem common among older people. More than 40% of the US population was over age 45 in 2012, according to US government projections—a share that will grow to more than 45% by 2060 (with the fastest growth by far seen in the 65-and-over group). Thus, it is likely that the trend toward targeting that population segment will continue for the next few decades. Skin care is the fastest growing segment in beauty care, and anti-

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aging products are proliferating. For decades, it has been said that the beauty care industry sells “hope in a jar,” and this is still true today.

The largest category increase in the “Racial Composition” categories is expected in “Hispanic,” going from 17.5% of 2014 population to 21.9% in 2030, reflecting a 45% increase in the absolute size of the Hispanic population. Additionally, strong growth is also US RESIDENT POPULATION PROJECTIONS* expected in the Asian population, although from (In thousands) ---- % CHANGE ---- a much lower base. AGE GROUP 2014 2020 2030 2014–2020 2014–2030 Under 5 yrs. 20,731 21,808 22,252 5.2 7.3 These population shifts have implications for % of total 6.5 6.5 6.2 personal care products in particular. P&G’s 5 to 14 yrs. TABLE41,070 USPOP1:41,923 44,815 2.1 9.1 Hispanic advertising spending reached $335 % of total US RESIDENT12.9 12.6 12.5 million in 2013, up 36% from 2012, according 15 to 19 yrs. POPULATION20,949 20,806 21,946 (0.7) 4.8 to Hispanic Fact Pack published in July 2014 by % of total PROJECTIONS6.6 6.2 6.1 Advertising Age. In the same report, Hispanic 20 to 24 yrs. 22,809 21,651 21,940 (5.1) (3.8) % of total 7.2 6.5 6.1 media spending growth in 2013 reached 8%. In 25 to 34 yrs. 43,411 46,271 46,052 6.6 6.1 another article published by Advertising Age in % of total 13.6 13.9 12.8 March 2011, the publication quotes a survey 35 to 44 yrs. 40,378 42,230 47,826 4.6 18.4 commissioned by the Spanish-language media % of total 12.7 12.6 13.3 company Univision that shows that Latino men 45 to 64 yrs. 83,365 83,238 80,865 (0.2) (3.0) “over-index almost 2-to-1 in their weekly usage % of total 26.1 24.9 22.6 65 yrs. & over 46,179 55,969 72,774 21.2 57.6 of hair styling products, moisturizer and % of total 14.5 16.8 20.3 fragrance; 68% of Latinos say price is not a Total population 318,892 333,896 358,471 4.7 12.4 driver in their decision making process (vs. 49% Racial composition (%): of non-Latinos).” White 77.6 76.5 74.7 Black 13.2 13.4 13.7 A survey conducted by Mintel, a market Asian 5.2 5.7 6.4 research firm, in 2011 showed that lower- Other 4.0 4.4 5.2 income, Spanish-dominant Hispanics in the US Hispanic (any race) 17.5 19.1 21.9 are still buying name brand personal care Note: Totals may not add due to rounding. products at a higher rate than their English- Source: US Census Bureau. dominant counterparts in such categories as shower gels, lotions, facial cleansers, toothpaste and mouthwash Finally, in its December 2013 Hispanic and Retail report, Mintel highlighted that Hispanics often shop with family and friends, which is why recommendations from friends and family are “the single most influential factor for Hispanic buyers.”

Colgate-Palmolive began to import its Palmolive Caprice shampoo and conditioner from Mexico to the US in 2010, using the name recognition developed in a less expensive media market. This followed the earlier introduction into the US of two other Colgate brands popular in Mexico—Suavitel fabric softener and Fabuloso household cleaners.

Appealing to Baby Boomers Many new products clearly target Baby Boomers (the approximately 77 million Americans born between 1946 and 1964). Marketers say this group is keenly sensitive about their looks. Thus, skin care and hair coloring are two categories that have shown strong sales increases in recent years. Especially in skin care, most of the major beauty companies are claiming science-backed rationales for their products. DNA repair is the new anti-aging frontier. According to a January 2011 report from Mintel, more than one in four beauty industry launches globally in 2010 involved anti-aging claims, up 5% over 2009.

In early 2013, L’Oréal Paris launched the Age Perfect Cell Renew product, which uses stem cell technology. L’Oréal is said to have studied skin cell biology for around 20 years to come up with this new, patented technology. In January 2010, P&G added a wrinkle-fighting body wash to its Total Effects line, which is aimed at menopausal women who want to address surface signs of aging. More recently, in January 2013, the company added Olay Regenerist Micro-Sculpting Eye & Lash Duo, specifically designed to fight signs of aging. Avon did not pass up the opportunity to tap the baby boomer market with products such as Anew Reversalist, its successful line of skin products, which promise eternal youth to the generation that once

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urged, “Never trust anyone over 30.” In February 2011, Avon announced the introduction of Anew Solar Advance with RepairShield Technology, calling the line “revolutionary” and a breakthrough in anti-aging sun care.

Finally, in October 2010, Johnson & Johnson’s ROC line launched E-Pulse Skin Electro-Stimulation Technology that promises to mimic the bio-electric currents found naturally in young, healthy skin, to “stimulate the skin’s rejuvenation process,” thus taking anti-aging technology to a whole new level.

Tapping the younger generations While Baby Boomers are a generation that marketers are paying attention to, companies are also catering to the younger population. According to the US Census Bureau, the number of female teenagers (ages 15 to 19) in the US was an estimated 10.4 million in 2012, a 5.1% increase from 9.9 million in 2003.

Avon is one company that aims to take advantage of this growth. In August 2003, it launched the Mark brand, which has attracted new customers (in this case, from an age bracket that is new to the company) and sales representatives. Avon believes the earnings potential of selling Mark products is far more attractive than many service and entry-level jobs available to women in this age bracket. The new brand sells at higher price points (comparable to drugstore brands) than typical Avon products. The company claims that Mark is the No. 2 “trend brand” in the world.

According to a January 2010 article in The New York Times, there are “more than 40,000 Mark girls in North America, mainly 18- to 24-year-old women who are changing the nature of direct sales by using the brand’s personalized e-boutiques, iPhone app, and new Facebook e-shop, one of the beauty industry’s first forays into Facebook e-commerce.” Annemarie Frank, director of digital media and strategic alliance of Mark at Avon said, “The viral nature of Mark’s brand presence is what the company executives are after. Mark girls can advertise their ability to sell products right on their Facebook profiles, and the widget functionality of Mark’s e-shop enables us to drop the shop into other places to give the brand a presence wherever people hang out online.”

In August 2010, Mark introduced the Mark Fair Trade Body Collection, tapping into this generation’s interest and loyalty to environmentally sustainable products. The four-item collection sources ingredients from Fair Trade farmers around the globe. Each product is certified by TransFair USA, a US-based nonprofit organization and an independent third-party certifier of Fair Trade products. According to TransFair USA, Fair Trade certification is a market-based model of international trade that includes a network of more than one million farmers and farm workers in 58 developing countries across Africa, Asia, and Latin America.

Other marketers are going after girls as young as preteens, typically eight to twelve years old. However, Leslie Gibbs, marketing director of Aspire Brands Inc. (Bonne Bell product line), says that “girls start cosmetic usage as young as 6.” In 2010, Target Corp. began selling Hello Kitty Cosmetics, priced from $2 to $10, and, in 2011, Target expanded the distribution of the e.l.f. makeup line, with items retailing from $1 to $3, but with kits and sets as high as $40.

GROWING PET INDUSTRY IN THE US

According to 2013/2014 survey statistics from the American Pet Products Association (APPA), 68% of US households owned a pet, which equates to 82.5 million homes. In 1988, the first year in which the survey was conducted, 56% of US households owned a pet. Dogs were owned in the most number of households (56.7 million), followed by cats (45.3 million), fish (14.5 million, including both freshwater and saltwater fish), birds (6.9 million), reptiles (5.6 million), horses (2.8 million), and “other small animals” (6.9 million). Although dogs were owned in the greatest number of households, the total number of cats was higher (95.6 million, versus 83.3 million for dogs). Cat owners have a higher propensity than dog owners for multiple pets of the same species.

US pet industry expenditures were expected to total $58.5 in 2014, a 5% increase from 2013, according to the APPA. Spending in 2014 is estimated to be broken down in the following categories: food (38.7% of the

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total, and 4.9% higher than in 2013), veterinary care (26.1%; 6.1%), supplies/OTC medicine (23.4%; 4.4%), pet services such as grooming and boarding (8.1%; 7.3%) and live animal purchases (3.7%; 1.8% decline). We also note that total spending has increased at a CAGR from 2003 to 2013 of 5.5%, even growing near this level in 2008 and 2009 at the depths of the recession. We think this has been one of the faster-growing categories within consumer packaged goods in recent years.

Colgate-Palmolive is among the household product manufacturers that participate meaningfully in the pet food market through the brand Hill’s Science Diet (Colgate). Church & Dwight participates mainly through its Arm & Hammer brand cat litter products, and Clorox through its Fresh Step and Scoop Away brands of cat litter. Other leading participants are primarily food companies, including Mars, Nestlé’s Purina, and Del Monte Foods.

CATEGORY PERFORMANCE

With competition remaining at a high level throughout the industry, we think there are eight categories that should be of particular interest to investors. IRI, a market research firm that collects product data from checkout-line barcode scanners, is the source of the market share and category information presented below. [Note: The data reported below are for US scanned products only in the food, drug, and mass merchandiser retail channels. Certain categories, where noted, are for “all outlets,” including dollar stores and warehouse clubs.] For all categories detailed below, the data collection period is the 52 weeks ended December 29, 2013. Market share data is given in dollar value terms.

 Batteries. There are two major branded players: Duracell (owned by P&G) and Energizer, which held market shares in all outlets of 37.4% and 33.1%, respectively. Category sales decreased 4.2%, year over year, in the 52-week period ended December 29, 2013, with volume down 4.2% and pricing about flat. While battery unit sales tend to be somewhat cyclical depending on the state of the economy, the category also faces secular headwinds from the rise of devices with built-in rechargeable batteries.

 Razors and blades. The dominant player by far is Gillette (owned by P&G), with 55.5% of the razor market and 80.8% of the razor refill cartridge market in all outlets. Schick (owned by Energizer) is second, with market shares of 31.2% in razors and 17.3% in cartridges. Sales in the razor category declined 7.0%, year over year, with volumes down 0.7% and pricing down 6.3%. In the cartridge category, sales declined by 2.2% from the year-earlier period, with volumes down 7.3% but pricing up 5.5%. We note that refills account for nearly three and a half times the sales volume of razors.

 Laundry detergent. P&G is the behemoth in this category, with a 60.0% share driven primarily by its Tide brand, but also by sales of Gain. Church & Dwight Co. ranks second with 13.1% market share for its Arm & Hammer and Xtra brands. Sun Products Corp., which includes brands such as All and Wisk, is third with a 12.6% share, and Henkel (Purex) a distant fourth at 6.7%. Category dollar sales were down 3.1%, with volume falling 2.0% and pricing down 1.1%. We attribute volume declines in part to the introduction and growth of the unit-dose packaging (pods), which we think limits the amount of over-usage on the part of consumers.

 Toothpaste. P&G, with its Crest brand, and Colgate-Palmolive, with Colgate, are the major players in this category, with market shares of 42.3% and 30.2%, respectively. GlaxoSmithKline, through its Sensodyne brand, had a 15.6% market share. Church & Dwight is a smaller player, with a 6.4% market share for its Arm & Hammer and Aim brands. Category dollar sales increased by 1.1%, while volumes were down 1.9%, but pricing was up 3.0%

 Disposable diapers. P&G and Kimberly-Clark are the major branded players in this category, primarily under the Pampers and Huggies brands, respectively. P&G’s market share in all outlets was 47.4% versus Kimberly-Clark’s 32.0%. The category’s dollar sales increased by 0.6%, with volume down 0.1% but pricing up 0.7% from the year-earlier period. Private label products had a 19.9% market share of this category.

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 Deodorant. P&G and Unilever are the leaders in this category, each with multiple brands. P&G’s market share was 37.8%, and Unilever’s was 33.6%. Other participants include Colgate-Palmolive (8.3% share) and Henkel (6.6%). Total category sales increased 2.4%, year over year, as volume increased by 1.1% and pricing was up 1.3%.

 Toilet tissue. P&G, Koch Industries, and Kimberly-Clark are the major branded participants in this category, with all-outlet market shares of 28.7%, 26.1%, and 24.9%, respectively. P&G markets the Charmin brand while Kimberly-Clark markets the Cottonelle and Scott brands. Koch Industries operates through its Georgia Pacific subsidiary and markets the Angel Soft and Quilted Northern brands. Additionally, private label brands account for 18.9% of the market. Total category sales were up 0.9% from a year ago, with a 3.1% increase in volume, offset by a 2.2% decrease in pricing.

 Shampoo. P&G holds the largest share in this category with 35.4% of the market in all outlets, followed by Unilever (26.7%) and L’Oréal (12.7%). This category is very fragmented with each company marketing multiple brands. Total shampoo sales were up 2.2%, year over year, with volume falling 1.1%, while pricing was up 3.3%.

 Feminine care. This category, which includes sanitary napkins and tampons, is led by P&G with a 49.5% market share through its Tampax and Always brands. Energizer has a 19.0% share through its Playtex brand, as well as three brands acquired from Johnson & Johnson in 2013 (o.b., Carefree, and Stayfree). Kimberly-Clark, through its Kotex brand, has an 18.1% market share. Total category sales fell 0.3%, reflecting a 0.5% volume decline, partly offset by a 0.2% increase in pricing.

HOW THE INDUSTRY OPERATES

Household nondurables companies (often referred to as consumer staples companies) develop and manufacture a variety of everyday household items that have limited life spans. The industry can be segmented into household products and personal care products. Household products include soaps and other detergents, such as laundry detergents and bleaches; polishes and sanitation goods, including waxes and trash bags; and other cleansing agents. Personal care products consist of personal cleaning products, such as toothpastes, shampoos, bar soaps, and body washes; health and beauty aids, including cosmetics, fragrances, and over-the-counter medications; and diapers and feminine hygiene products. Other items manufactured by consumer staples companies range from cat litter to automotive additives.

Consumers buy household nondurables at a variety of venues, including retail specialty stores, department stores, mass merchandisers, supermarkets, drugstores, and online sites. Among other factors, the makers of these products compete based on brand recognition, product quality and performance, and the level of service they provide to the wholesalers and retailers who are their customers. Their advertising and promotional expenses can be significant.

NEW PRODUCTS, THE KEY TO SUCCESS

Given the maturity of the household nondurables industry, new product development is a key driver of a company’s future sales growth. New products evolve largely through the efforts of a company’s research and development (R&D) department, in conjunction with its marketing division. Once new products are conceived and manufactured, they are test-marketed to determine their commercial viability.

A company’s marketing and product development groups often work with R&D laboratories to redesign and reformulate existing products and to develop new products. They may perform in-depth consumer research to discover what customers want. To identify and anticipate consumers’ changing needs, they often rely on household nondurables industry attitude and usage studies prepared by independent marketing firms on their behalf, and direct sales information from their largest customers.

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Makers of household and personal care products try to develop new products as quickly as possible to be the first to enter the market. Once a new product has been on the market and consumers have begun to use it, competitors need to exert considerable marketing muscle to lure those customers away.

Depending on the nature of the product, the time frame for a major manufacturer to conceive of a new product, develop and test-market it, and get it onto store shelves can be one to two years or longer. Introducing a “new and improved” version or a product line extension usually takes less time than inventing an entirely new product.

Once a company has created a prototype of a new product, it tests a limited distribution of that product in a market it believes represents its largest target market demographically. Test markets are used to gauge the ultimate success of a product before a lot of money is spent on a nationwide rollout. A product that is unsuccessful in its test market or markets will likely be dropped.

High rewards—but not without risk To remain competitive, companies need to develop a continuous stream of new, value-added products. In any given year, thousands of new products in all categories—from toothpaste to bleach—inundate the marketplace. However, only about 15% of new products in any given year reach their business objectives; the rest are withdrawn from the market.

Introducing new products is a significant means by which consumer staples companies increase their sales. Another benefit, from the manufacturer’s point of view, is that successful new products typically carry higher profit margins than established items. Their special qualities, which manufacturers tout, are designed to appeal to a target market, and consumers are willing to spend more to obtain the real or perceived value added. New product development, however, also carries risks. Efforts to create innovative or improved items increase development and marketing costs, and the new products might not succeed.

Because there is no guarantee that a new product will be well received, expense levels must be watched closely. For example, after 15 years of development, a decade of seeking approval from the US Food and Drug Administration (FDA), and considerable investment, Procter & Gamble Co.’s (P&G’s) Olean, a fat substitute generically known as olestra, has seen disappointing sales since its introduction in consumer products in 1996. Due to consumer complaints of abdominal discomfort and other side effects, along with opposition from consumer groups, the FDA required food manufacturers using olestra to place warning labels on packages. However, after reviewing further studies, the FDA remanded this order in August 2003.

The costs of new product development vary greatly, depending in part on how revolutionary the product is or how ambitious the launch program may be. Unique formulas, revised ingredients, packaging innovations, changes at the consumer level, or a combination of these factors can drive new products. There are four main categories of new product development:

 All-new products. These products consist of radical new formulas based on a newly developed concept. In March 2010, for example, Kleenex introduced one-time-use hand towels designed to keep bathrooms and kitchens sanitary and safe. This is a new application that could potentially launch a new product category, as occurred in 1999 with the launch of Clorox’s disinfectant wipes, followed closely by the 2000 introduction of Swiffer dry electrostatic cloths by P&G. Today, the market for nonwoven wipes is $1 billion. Similarly, P&G’s Febreze, a spray designed to eliminate odors in clothes, rugs, and upholstery, introduced in May 1998, created a new “fabric refreshener” category. The Febreze line was subsequently extended and now includes, among other products, candles, NOTICEables (a scented oil warmer which can be plugged into an electric outlet for up to 30 days of fragrance), and Febreze Home Collection Flameless Luminary (a battery-operated scent device).

 New and improved products. For these products, formulas or packaging have been tweaked to provide an improvement over the original. Existing products may be given formula enhancements (Clorox Co.’s scented bleaches), new packaging (Kimberly-Clark’s Kleenex tissues in oval-shaped boxes with new patterns of limited duration), or new dispensers (Estée Lauder’s TurboLash, a mascara with a battery-operated vibrating brush, and Avon’s In a Wink press-on/peel-off instant eye shadow sheets). Finally, in the category

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of “why didn’t they think of this sooner,” there is WD-40 Co.’s 2007 introduction of its Smart Straw design, whereby the straw is now permanently attached to the nozzle instead of being a separate, easy-to-lose piece.

 Product line extensions. New products may also be associated with strongly recognized existing brands. For example, in 2006, bleach-maker Clorox introduced Clorox Anywhere Hard Surface sanitizing spray, which offers the sanitizing effect of its Clorox bleach, yet can be used near food and children. Other examples include different varieties of Tide laundry detergent from P&G, and the various kinds of Colgate Total toothpaste. Some brands, which can support many product line extensions, become “megabrands.” For instance, P&G’s Oil of Olay is now called Olay and has more than 100 stock-keeping units (SKUs, code numbers, usually machine-readable barcodes, given to single items of inventory, enabling a merchant to track its inventory). To help the consumer navigate among the many choices, P&G developed the website OlayForYou.com.

 Changes at the consumer level. New products may be driven by demographic changes. For example, Avon Products Inc.’s Anew line of skin care products, introduced in the early 1990s, was the first to contain Retin-A (tretinoin) to combat the effects of aging. These products have been extremely successful because they appeal to female baby boomers reaching middle age, a large and relatively wealthy demographic. Procter & Gamble’s Olay Definity line promises to minimize wrinkles, brown spots, and dull skin, while moisturizing and offering protection from further damage.

CULTIVATING DEMAND

The success of a consumer product often depends on the advertising and marketing budget allotted to it. Getting consumers to accept a completely new brand name is particularly difficult; it takes a tremendous amount of advertising to gain a potential customer’s awareness. The company’s marketing budget may be applied to broadcast outlets (e.g., TV and radio), print (magazines and newspapers), the Internet (product- specific websites and online advertising), outdoor advertising, sample promotions, or even sponsorships of events such as concerts, games, and sporting events.

In general, we do not view marketing as a discretionary expense category for household nondurables companies, though on a short-term basis, a company can temper its spending to help earnings. Some of the most successful companies, such as Colgate-Palmolive, have a long-term history and a strategy of improving upon their cost of goods sold (COGS) in order to generate greater resources to put into marketing.

The goal of marketing is to persuade consumers to purchase a particular product. Through marketing and advertising, companies try to convey what certain brands “stand for” and to show consumers why and how these particular brands will meet their needs. Campaigns strive to get consumers’ attention and persuade them to use a product repeatedly.

When a brand’s marketing campaign succeeds in convincing customers of a product’s consistent quality and appeal, it is likely to enjoy customer loyalty. Such loyalty can give the manufacturer flexibility in pricing the product and the opportunity to leverage the brand’s name across several different product categories. For example, not only is Clorox able to sell its well-recognized bleach for a 25%–30% average price premium over store brands, but it also has successfully applied the name to several other cleaning products. These include Clorox Soft Scrub, Clorox Toilet Bowl Cleaner, Clorox Disinfecting Kitchen Cleaner, Clorox 2 Stain Fighter and Color Booster (for laundry), Clorox Anywhere Hard Surface Daily Sanitizing Spray, and Clorox Anywhere Anti-Allergen Fabric Spray.

Loyalty can also extend a company’s market share by drawing consumers into cross-category purchasing. P&G for example, has seen success with its “Just One More” campaign, which focuses on getting the 8% of North American households that already purchase several P&G products to use one additional product from the company. The head of P&G’s North American market told The Wall Street Journal in October 2010: “If I got that same 8% of households to carry 11 to 12 P&G products, instead of 10 to 11, that’s another $1 billion to $3 billion.”

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Raising the profile of brands and products through advertising is an important way to drive consumer demand. Manufacturers’ goals are to boost volume, command higher prices for their products, and gain better access to shelf space. P&G is a major global marketer, spending $4.99 billion on advertising in 2013, up from $4.83 billion in 2012. According to Advertising Age, P&G was ranked first in total US advertising spending in 2013. (Note: Advertising Age numbers may include such items as direct marketing and promotion spending.) In the 56 years that Advertising Age has ranked the 100 leading national advertisers, P&G has been ranked first 38 times.

Companies continuously monitor their marketing and advertising budgets to assess the impact of advertising on their products’ sales and market share. A good marketing and advertising program can help build all-important brand loyalty. Value-priced products typically do not receive much in the way of advertising and marketing, because their margins are narrower than full-priced brands.

Fourteen major media companies, advertisers, and advertising agencies banded together in 2009 to find new ways of measuring television-viewing habits. Called the Coalition for Innovative Media Measurement (CIMM), the consortium aims to measure audiences across TV, video-on-demand, the Internet, and mobile devices. P&G and Unilever are members of the consortium.

What drives demand? Demand for household and personal care products is affected by many factors, including price, demographics, household income, and innovation. These factors are likely to be taken into consideration by manufacturers in the R&D phase, as well as during later marketing years.

 Price. Many household and personal care products are considered necessities, so the quantity that a nation consumes tends to remain steady during periods of both recession and prosperity. However, the quality of the products purchased—as gauged by their relative prices—is directly related to real disposable personal income. A decline in disposable income puts downward pressure on consumer products prices. At such times, consumers often begin to favor lower-priced and private label goods over premium-priced brand name products. They are also more likely to increase their coupon usage and to shop through cheaper channels, such as mass merchandise stores and warehouse clubs.

The major manufacturers offer products that target a range of price points, from low to high. Although the bargain brands’ profit margins are generally lower than those of premium brands, they help the manufacturer keep capacity utilization at higher levels and thus maintain efficiency.

 Demographics. Overall demand for consumer products is closely linked to population growth; more people means more bodies to bathe and more homes to clean. However, as the US population ages, the rate of new household formations—a major driver of consumer goods demand—decreases correspondingly.

Marketers study the age range, size, and spending patterns of their various target markets. For example, based on US census data, 45- to 64-year-olds made up approximately 22% of the population in 2000. However, the Census Bureau expects this percentage to grow to 26% by 2015. People in this age group are likely to spend more money on healthcare, and leisure products and services, and less on cosmetics and clothing. Manufacturers need to market their skin care products and cosmetics to an older consumer.

With the US population expanding at an annual rate of just under 1%, the domestic market for household and personal care products is slow growing and quite mature. The prospect of limited population growth means that consumer goods companies must target existing markets very carefully in order to continue selling their products.

Manufacturers are finding more opportunities outside the US, in countries where populations are growing rapidly and market penetration is lower. According to the US Department of Commerce, the world’s developing countries will continue to grow much more rapidly than developed countries. In 1950, about 67% of the world’s population lived in developing countries; in 1990, 77% did. By 2025, the figure is projected to approach 84%. Accordingly, US consumer products companies have made rapid expansions abroad in recent years.

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 Household income. Demand for household and personal care products is also linked directly to household income trends. As a household’s income level rises, its members tend to trade up from bargain products to premium ones. In addition, they tend to add certain products to their shopping baskets that they might not ordinarily have purchased, such as a special cleaner for the bathroom rather than just an all- purpose one. However, after a certain income level is reached, income is not a major determinant of demand for consumer staples. No matter how wealthy people may be, they can use only so much toothpaste.

TRENDS IN HOUSEHOLD INCOM E* (Percent of households in each income bracket) TOTAL MONEY INCOME* 1970 1980 1990 2000 2005 2010 2011 2012 $200,000 and over 1.0 1.3 2.6 4.6 4.7 4.4 4.4 4.5 $150,000-$199,999 TABLE1.5 2.1 3.5 5.3 5.0 4.9 5.1 5.0 $100,000-$149,999 HOUSEINC7.1 :9.3 11.5 13.9 13.1 12.8 12.2 12.5 $75,000-$99,999 TRENDS11.8 IN12.7 13.0 12.7 12.6 11.6 11.4 11.7 $50,000-$74,999 HOUSEHOLD23.8 21.7 20.1 18.4 17.9 17.6 17.7 17.5 $35,000-$49,999 INCOME17.5 15.3 14.8 13.7 14.0 13.4 13.7 13.6 $25,000-$34,999 11.4 11.7 10.6 10.2 9.7 10.8 10.9 10.7 $15,000-$24,999 10.9 11.8 11.1 10.3 11.1 11.5 11.3 11.7 Less than $15,000 15.0 14.1 12.9 10.9 11.8 12.9 13.3 13.0 Total households (thous.) 64,778 82,368 94,312 108,209 114,384 119,927 121,084 122,459 Median income ($) 46,089 46,985 50,994 55,987 54,486 51,892 51,100 51,017 Mean income ($) 52,775 55,881 63,698 76,180 74,502 70,970 71,133 71,274 *In inflation-adjusted 2012 dollars. Note: Percentages may not add to 100 due to rounding. Source: US Bureau of the Census.

 Innovation. Companies create excitement for their products by adding or emphasizing benefits, such as convenience, or ease of use. To be able to offer a breakthrough new product is of the utmost importance.

An example of a new product is the Clorox BathWand, which mounts a pivoting abrasive sponge that is preloaded with Concentrated Clorox cleaner at the end of an extendible wand. The product is an alternative to filling a bucket with cleaner and water and bending over to clean a bathtub and shower. P&G’s Swiffer WetJet contains both a nozzle and disposable textured pads and has a flexible swivel head, making it easier to use than a map and bucket. The Swiffer WetJet solutions currently include four categories: multipurpose cleaner, multipurpose cleaner with scent, antibacterial cleaner, and wood floor cleaner.

PRODUCT MIX AND BRAND MANAGEMENT

For a household nondurables manufacturer, product mix—the type and quantity of merchandise it sells—is a critical factor in the company’s success, even its survival. Because products sometimes appear to be indistinguishable from one another, a company’s main objective is to develop brands that are well recognized by consumers. The ultimate goal is to attain a leading market share in a category that has an expanding customer base.

 The power of the brand. For both the household and personal care products manufacturers, having a brand with a leading market share is a key competitive advantage. A strong brand fosters consumer loyalty, which, in turn, creates the opportunity for additional market share growth and above-average pricing flexibility. Consider P&G’s Tide laundry detergent as an example. Despite a selling price above that of many other brands (including several of P&G’s) and the entry of Wal-Mart Stores Inc.’s private label product, Tide continues to maintain its No. 1 position in US laundry detergent sales. P&G recently introduced Tide Total Care, which helps maintain the original qualities of the garment, such as color, fabric finish, and shape, and Tide Pods, single-dose packets of detergent, stain-remover and brightener in one.

 Market share creates an advantage. Having a product with a leading market share is important for several reasons. First, the higher a company’s market share, the more power it will have with retailers. This helps to ensure that its products are given prime shelf space. Second, if a product is in high demand, the company will be able to produce it in large volumes, resulting in manufacturing and distribution efficiencies.

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Third, substantial market share translates into more sales dollars, which the company can use for additional advertising and promotional spending to support the brand further.

A company can also leverage a strong brand name by developing product line extensions. For example, the original Colgate toothpaste from Colgate-Palmolive has spawned additional toothpaste lines, including gels, tartar control, baking soda, and peroxide. One of the most important additions to the Colgate toothpaste family is Colgate Total, which contains an antibacterial ingredient that fights gingivitis; it is the first toothpaste to receive approval from the FDA. Furthermore, the Colgate name has been successfully carried over into tooth-whitening products and toothbrushes.

 Product mix. The nature and quality of a company’s product mix affects the bottom line. For instance, personal products tend to carry higher profit margins than household goods. (Consumers seem to be less willing to experiment with lower-quality toothpaste or cosmetics than with cut-rate floor cleaner or bleach.) However, a low-price product may still be quite profitable if it sells in large volumes. Therefore, it is important for a company to offer a portfolio of products with an optimal mix of low- and high-margin items.

 Breadth of brands. Within each product category that a consumer products company offers, a number of brand names are generally available at different price points to appeal to customers of every income level. For example, P&G offers several different laundry detergents, including Tide, Gain, and Cheer. A range of products also gives a company an advantage in manufacturing and distribution, and can help increase total market share in a particular category.

MANUFACTURING

Makers of household and personal care products use a variety of raw materials in both their products and their packaging. The cost to manufacture most household and personal care products depends largely on an array of chemical prices, while packaging expenses tend to mirror price shifts in petrochemicals and paper. Most of the large global manufacturers obtain their raw materials through global suppliers. In most cases, the manufacturers’ buying power ensures reasonable terms.

Although household and personal products companies usually create their products’ packaging in-house and patent the designs, some firms buy finished containers or packaging from other producers. Factors influencing the choice of packaging materials include product compatibility and stability, cost, package safety, shelf appeal, ease of use, and solid waste impact.

On average, raw materials account for 70% of the COGS for consumer products companies. These costs are almost evenly divided between ingredient and packaging costs. The remaining 30% of the COGS includes labor and factory overhead expenses; however, packaging, ingredient, and other manufacturing costs account for just 50% of the retail price that consumers pay. The remainder is allocated to advertising and marketing costs, distribution expenses, and operating profits for the manufacturer and retailer.

Many of the larger consumer products companies have separate manufacturing facilities for each of their product lines. A given facility may manufacture just one kind of product, like soap, or it may produce several items that use similar raw materials. Most products are made in computer-controlled continuous batches. Each production process follows proprietary formulas created by a company’s R&D team. The entire process is highly automated—from initial ordering through manufacturing, product delivery, and billing.

As the industry has become more global, many companies have set up manufacturing operations throughout the world to help them align their product costs with their sales and/or the use of third-party manufacturers. This helps to protect profits from unfavorable currency movements and bolsters a company’s competitive position against others trying to enter the market. Companies without foreign manufacturing facilities often use complex hedging strategies to protect profits from adverse currency movements.

Distribution Once a product has been manufactured, it is packaged in a container on an assembly line. The containers are then automatically labeled and boxed, moved to a loading dock area, stacked onto pallets, shrink-

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wrapped, and labeled again. Next, the boxes are loaded onto tractor-trailer trucks, which may be owned by the manufacturer, the customer, or an independent trucking company. They are driven to one of several places: a company distribution center, a customer distribution center, or a retail store.

In an effort to reduce inventory levels, manufacturers and retailers have implemented computer systems that automate the flow of merchandise from the manufacturer to the retail store. Through a process called continuous replenishment, manufacturers are able to track their retail clients’ sales via point-of-sale barcode scanning systems. Once the retailer’s inventory of a certain type of product drops to an agreed-upon level, the manufacturer’s computer system is alerted to send the customer a replacement shipment. This helps to minimize inventories for both manufacturers and retailers, while avoiding costly stock shortages.

Expanding distribution channels A successful household or personal care products company must create new distribution channels that can reach consumers in today’s hectic world. Take the case of Avon Products Inc. Although it is still the leading door-to-door direct seller of cosmetics and personal care products, this company has had to confront a crucial distribution problem: with more women working, a large percentage of its target market is no longer home during the day. To address this issue, the company has expanded its distribution network to include mail, phone, fax, and a website (www.avon.com).

GOVERNMENT REGULATION AFFECTS ALL AREAS

Substantially all of the operations of household nondurables companies are subject to a number of federal laws and agency regulations. In the US, the Food and Drug Administration (FDA) regulates the manufacturing, labeling, and sale of over-the-counter drug and cosmetic products. The Environmental Protection Agency (EPA) regulates the substances used in the manufacturing of disinfectant products. The Consumer Product Safety Commission (CPSC) regulates the labeling of household products. The Federal Trade Commission (FTC) regulates the packaging and labeling of all consumer products, and monitors the advertising practices of consumer products companies with respect to claims made about product functionality and efficacy. Household and personal care products are also subject to regulation by various state laws and various state regulatory agencies, as well as laws and regulations imposed by foreign jurisdictions.

Patents and trademarks Before a new product is released, most household and personal care products companies obtain a patent or a trademark on their new formulas, packaging, or technology, in order to prevent duplication by competitors. Companies consider these patents and trademarks to be very valuable, and they generally monitor the competition and pursue legal action if they believe that competitors have used their property without permission.

HOW THE BIG GET BIGGER

On a local level, it is relatively easy to launch a consumer products company because the technological skills and financial resources required are not substantial. Although costs related to marketing and distribution are potentially significant, they can be kept to a minimum if there are enough establishments within reasonable proximity where the products can be sold.

However, the barriers to success on a large scale are very high. The amount of capital needed to build manufacturing facilities can be prohibitive. Moreover, because brand loyalty is the “holy grail” for US consumer products companies, these firms are among the nation’s leading advertisers. Considering the high costs of manufacturing, marketing, and distribution, it is little wonder that large corporations dominate the household nondurables industry.

Many of the industry’s large global players began by making one simple product, and, over the years, evolving into giant manufacturing powerhouses with highly developed distribution channels. Today, large companies that want to grow typically do so via international growth, often through acquisitions or joint ventures.

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International outreach In developing countries, social changes, such as urbanization and improvements in living conditions, are crucial to the industry because they can lead to increased per-capita consumption of basic household products. Latin America and Asia are believed to offer the best prospects for long-term growth, although Eastern Europe is also very important for some of the companies.

Some basic products have universal appeal, and expanding their markets worldwide is relatively easy. Among companies and brands that already have proven to be highly successful abroad are Avon, Colgate- Palmolive, Estée Lauder Cos. Inc., P&G, and Gillette Co. When trying to enter foreign markets, companies use a number of strategies. These include building a worldwide brand and infrastructure from scratch, acquiring local infrastructure and using it to expand their US franchises, acquiring sizable existing country or regional franchises, and establishing joint ventures with local companies.

In our view, it is important for a company to enter developing markets while its brands are still in the early stages of growth. Once those brands are established, they are more likely to maintain a strong position as these markets mature. However, a company that neglects its market share in industrialized nations while focusing its attention on new growth markets will likely falter because of the long-time horizon for meaningful profits in these undeveloped countries.

Growth through acquisitions Traditionally, the fastest and most reliable way for a company to increase sales in this mature industry has been through acquisitions. Although this trend shows no signs of abating, the strategies have changed. Acquisitions in the 1970s and 1980s often meant diversification—buying companies in unrelated lines of business. During the 1990s and 2000s (to date), in contrast, acquired firms were more often “bolt-ons”— companies that complemented the acquirer’s existing operations.

In emerging growth markets, leading international household and personal products companies commonly expand their presence by acquiring strong regional or local brands that have deep penetration in their respective markets. Once the local company is acquired, the larger international company can transfer its expertise in various areas, including manufacturing efficiencies, improved formulas, and wider distribution. At the same time, acquiring a local company gives the larger international company a conduit through which it can introduce new products. Companies are also making acquisitions to gain established brand names in niche markets that are growing domestically.

Joint ventures Many major household and personal care products manufacturers enter foreign markets through partnerships with local companies. Joint ventures are popular because they allow a company to test the waters of an unknown operating environment without having to create an infrastructure from scratch— usually a costly and lengthy endeavor. In addition, joint venture relationships allow a US company to learn from its partner about the unique customs, tastes, and regulatory issues of a particular market.

Once this market knowledge is established, many US companies acquire their joint venture partners and build the business through additional joint ventures or acquisitions. However, this strategy carries certain risks. One danger, particularly in some developing countries, is that the local partner might duplicate the products and try to circumvent the joint venture agreement by selling goods outside the partnership.

KEY INDUSTRY RATIOS AND STATISTICS

 Disposable personal income. Reported monthly by the US Department of Commerce, which measures Americans’ income, less taxes. Changes in disposable personal income are important for this industry because they influence the amount of money consumers can spend on household and personal products.

32 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

Trends in annual sales of household and EXPENDITURESAS A % OF DISPOSABLE INCOME personal products generally mirror trends (Percent of disposable income) (Trillions of dollars) in disposable income. The quantity of such 1.05 14 products consumed tends to remain steady throughout the economic cycle. During 0.90 12 recessions, however, consumers tend to 0.75 CHART H01: 10 favor less-expensive brands and private 0.60 EXPENDITURES AS A 8 label goods. Conversely, good economic % OF DISPOSABLE times usually loosen consumer purse strings 0.45 INCOME 6 and boost sales of higher-priced branded or 0.30 4 premium products.

0.15 2 Americans’ disposable personal income

0.00 0 (DPI) grew 3.8% and 3.9% in 2011 and 1998 00 02 04 06 08 10 12 *2014 2012, respectively, reflecting improvements Toilet articles & preparations (left scale) over 2009’s post-recession 2.7% decrease. Cleaning preparations (left scale) According to quarterly data from S&P, Disposable income (right scale) there was an estimated disposable income

*Data through June. growth of 1.9% in 2013. Disposable Source: US Bureau of Economic Analysis. income growth for the first half of 2014 was 3.8% compared with the same period in 2013. Standard & Poor’s forecasts DPI to increase 4.0% in 2014. This should support modest gains in sales of branded packaged consumer household and personal products.

 Personal consumption expenditures (PCE). This statistic—part of the gross domestic product (GDP) data reported quarterly by the Department of Commerce—basically consists of new goods and services purchased by individuals from businesses. This indicator should be examined in conjunction with DPI. For example, PCE may outpace growth in DPI in the short run, but not in the long run, unless consumers increase their borrowing. In 2012 and 2013, real PCE rose 1.9% and 3.6%, respectively. The PCI growth in the first half of 2014 was also 3.6%.

As of January 2014, Standard & Poor’s Economics, which operates separately from S&P Capital IQ, was projecting that PCE (on an inflation-adjusted basis) would rise 2.7% in 2014, following a 2.0% increase in 2013. Within that forecast, S&P was CONSUMER PRICE INDEXES FOR SELECTED HOUSEHOLD projecting that inflation-adjusted consumer AND PERSONAL GOODS CATEGORIES spending on nondurable goods would rise (Year-to-year percent change) 2.97% in 2014 following a 2.18% increase 14 in 2013. 12 10  Consumer price index (CPI). Compiled 8 monthly by the Bureau of Labor Statistics 6 Chart H03: CPI FOR 4 (BLS), the CPI tracks retail price inflation 2 SELECTED (or deflation) for products sold to end-use 0 HOUSEHOLD AND consumers. It measures changes in the (2) PERSONAL GOODS prices of commodities, fuel oil, utilities, (4) CATEGORIES telephone services, food, and energy. The 2008 2009 2010 2011 2012 2013 *2014 “core” CPI excludes the volatile food and Hair, dental, & shaving Cosmetics, perfume, bath & nail energy categories. Household cleaning Household paper Most companies generally try to pass on *Data through July. Source: US Bureau of Labor Statistics. their cost increases to consumers. However, if a company tries to raise prices too much, the consumer may decide to substitute another product or forgo the purchase altogether. The CPI rose 2.1% in 2012 and 1.5% in 2013. As of August 2014, S&P Economics was projecting that the CPI would increase by 1.9% in 2014, below the 1.5% increase in 2013.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 33

 Foreign currency exchange rates. The US household and personal care products industry derives a growing portion of its sales from markets outside the United States. Thus, the exchange rates between the US dollar and foreign currencies are increasingly important in determining a company’s profitability.

When a company has significant operations in foreign markets, profits are hurt when the dollar rises vis-à- vis foreign currencies. Simply put, such a rise means that fewer dollars flow back to the US after exchange translations. The reverse is also true: When the dollar is weak, US companies with foreign operations report enhanced earnings.

As of January 2014, S&P Economics expected about a 2.0% strengthening of the US dollar against a basket of foreign currencies in 2014, following an increase in 2013 of 3.2%.

HOW TO ANALYZE A HOUSEHOLD NONDURABLES COMPANY

Analysis of a household or personal care products company must be based on a range of factors, both quantitative and qualitative. Quantitative evaluation comes from studying the company’s income statement, balance sheet, and cash flow data, with an eye toward growth trends, comparative statistics, and performance ratios. In contrast, many qualitative factors, such as the strength of a company’s management team, have to be assessed subjectively.

ASSESSING THE BUSINESS

In the consumer products industries, a company’s most important features are its brand names, product mix, market share, and competitive position. The firm’s geographical diversification and plans for international expansion are also important. While some of these factors, such as market share statistics, can be quantified, an overall assessment of these areas is largely subjective.

Market position and brand strength Market leadership—having a brand that outsells all other similar products by a significant margin—is the big dream for consumer products companies. Dominance in a product category offers a company many benefits, including greater negotiating power with suppliers and retailers, and the potential to realize substantial economies of scale. Competitive advantages are particularly evident in areas of raw materials procurement, manufacturing efficiency, and marketing.

Market position is related to brand strength; therefore, the two characteristics should be considered together. Indeed, brand strength is best measured by how well a product sells relative to competing products. Does the company have a number of brands that lead its market segments?

Product mix and competitive environment Many of the large consumer products manufacturers have extremely diversified product lines. Therefore, they typically face different competitors in each category. For example, rivals of Procter & Gamble Co. (P&G) include, among others, Colgate-Palmolive Co. (oral care products, soaps, dish detergents, and pet food), Kimberly-Clark Corp. (diapers and paper products), L’Oréal SA (cosmetics and hair care products), and Nestlé SA (pet food).

An analyst should ask various questions concerning the competitive environment. How many competitors does the company have in each product category, and what are their respective market shares? Are rival products gaining or losing market share? Does the category have any private label competition? Is the category itself growing, declining, or stagnating?

Geographic reach For household or personal care products companies, the ability to compete and grow in established markets (which tend to be in industrialized countries) continues to be crucial to its success. However, because the industry is becoming increasingly global, a company that is not expanding into emerging growth markets— regions where usage rates are low and economies are growing—may be neglecting long-term growth

34 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

prospects. In particular, the emerging growth markets of China, India, Latin America, Turkey, and Eastern Europe offer strong potential for future gains. It is important to note how much exposure a particular company has in these markets and its plans for future global expansion.

CRUNCHING THE NUMBERS

The first step in quantitative analysis should be to dissect the components of the income statement. To reduce seasonal factors, results should be compared with the year-earlier period. Comparing sales and earnings trends over a longer period can also be revealing. In addition, a company’s results should be compared with those of its competitors.

Afterward, the cash flow and balance sheet statements should be analyzed for financial strength, changes in financial position, and other key indicators, as described below. Finally, performance ratios help to put these figures into perspective.

Components of the income statement The most basic review of the income statement includes an analysis of sales, gross margins, operating margins, interest expense, and net income—the bottom line. Earnings per share (EPS) and the price-to- earnings ratio help analysts put a value on the company’s stock.

 Sales. Net sales growth is a sign of health for a business. However, one needs to look at how a company’s sales growth compares with that of its market, in general, and of its specific competitors. It is also important to determine what is behind any sales growth. Is it pricing? Unit volume gains? Acquisitions? Divestitures? Is the company gaining market share, or is it just riding market growth spurts?

With a rising percentage of sales made outside the US, overall sales figures are likely to be affected (for better or worse) by fluctuations in foreign currency exchange rates. Other factors that can affect sales figures include new product introductions, a shift in contributions from mature industrialized nations versus emerging growth countries, and/or weak economies in a particular geographic market.

Following an accounting change in 2002, some promotional costs are deducted from sales. Thus, sales levels will be adjusted for coupons, product giveaways, retailer incentives, and other costs related to promotional activities. (Note: absolute values of operating income and net earnings did not change under these revised accounting rules.)

 Gross profit margins. Defined as sales minus COGS, and expressed as a percentage of sales, gross margins generally reflect a company’s product mix and its operational efficiency. Often, the higher the volume a company produces and the more stable its manufacturing processes, the more efficient its operations. It is important to understand the reasons for any year-to-year changes in a company’s gross margins and to compare the margins with those of other companies in the same business. Cutting prices to boost demand may temporarily increase volume and therefore sales comparisons, but gross margins may suffer.

Changes in raw materials prices, a major component of COGS, can also have a major impact on gross margins. If raw materials prices rise and a company is unable to pass on the higher costs to customers, it will have to absorb the additional costs. To lessen the impact on profit margins, manufacturers typically use their global purchasing power to seek out the least expensive raw materials prices, often buying the materials on a futures basis. Some companies maintain reserves on their balance sheets for negative swings in raw materials prices, so that a sudden increase will not adversely affect the company’s results.

 Operating margin. The performance of the operating margin takes into account the operating expenses required to run the business. These costs include rent, advertising and promotion, research and development (R&D), and employee payrolls. The operating margin equals operating income divided by sales. Because operating expenses are generally more controllable than raw materials costs, year-to-year changes in this ratio can be used to measure how efficiently a company is running its business. Ideally, over time, a company should show declining operating expenses as a percentage of sales.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 35

 Interest expense. The manufacturing of household and personal care products is not particularly capital intensive, so interest expense typically is not a big line item for these companies. Most interest charges are related to borrowing costs for acquisitions or share repurchases.

If interest charges show a substantial increase, the analyst should ask why. For example, a major acquisition or investment in new manufacturing facilities could be a bullish sign that the company predicts increased demand for its products, or that it is expanding overseas. At the same time, increased debt leverage and the associated interest charges may crimp near-term earnings and reduce the amount of funds available for investment in the business.

 Net income. This is the bottom line. Net income measures the profits or losses of a company. An analyst should be on the lookout for special items that can distort the net income figure. Special (or “extraordinary” or “nonrecurring”) credits could include a profit gain from an asset sale, favorable legal settlements, or a one-time benefit from a change in accounting practices.

Special charges can result from business restructuring initiatives, losses derived from asset sales, an unfavorable legal decision, or a change in accounting practices. In recent years, many of the major US household products companies incurred such charges, mostly to restructure existing operations. These charges against earnings were often taken to pay the costs of consolidating facilities, reduce excess manufacturing capacity, dispose of underperforming or nonstrategic businesses, and lay off employees.

 Earnings per share (EPS). Defined as net income divided by the number of shares outstanding, EPS represents the amount of profits available to each stockholder. After adjusting for special items, it is useful to look at EPS trends over the course of a few years to determine a company’s underlying health. However, keep in mind that companies have some flexibility in bolstering the EPS figure. For example, a company can increase the amount of stock it repurchases, or it can temporarily trim its marketing spending budget.

Cash flow figures Cash flow numbers show where a company is putting its earnings to work. Most of the larger US household and personal care products companies generate substantial amounts of free cash that can be put to work beyond the upkeep of existing equipment. Free cash flow is often defined as net income plus depreciation and amortization minus capital expenditures and cash dividends. Free cash can be used to reduce debt, repurchase shares, make acquisitions, enter new markets, or reinvest in existing operations, automation, or technology. It is important for a company to find the optimal balance between reinvesting free cash into its business and using the cash to reward shareholders.

Looking at the balance sheet It is important to examine a number of balance sheet ratios to assess a company’s financial position and to catch early signs of possible cash flow problems. A significant drop in a company’s current ratio (current assets divided by current liabilities) can signal a potential drain on the capital needed to run the business. In addition, an unusual inventory increase could lead to an asset write-down and could slow production. The rate of inventory turnover (inventory divided by the sales ratio) can reveal changes in production or inventory bottlenecks.

 Debt leverage. Although there is no set “optimal” amount of long-term debt that a company should carry, most companies in this industry seem to target debt-to-equity ratios below 40%. A company’s debt leverage can be measured with either of two standard ratios: debt to shareholders’ equity, or long-term debt as a percentage of total invested capital (total invested capital is the sum of stockholders’ equity, long-term debt, capital lease obligations, and deferred income taxes). Investors must weigh the benefits and disadvantages of various debt levels. An increased debt load can enhance earnings growth and shareholder returns. On the other hand, a clean balance sheet allows for a greater degree of safety, a potentially higher credit rating, and ready availability of funds for any potential opportunity.

Performance ratios To determine how well a company uses its resources, analysts look at such ratios as return on assets (ROA), which is profits divided by average assets; and return on equity (ROE), or profits divided by average equity.

36 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

High ROA and ROE ratios are generally viewed as positive signs that a company is maximizing performance. Some companies in this industry achieve ROEs in excess of 15% and ROAs of around 11%.

VALUATION MEASURES

 Price-to-earnings ratio. When valuing a company’s stock, a good place to start is the basic investment ratio of stock price-to-earnings per share, called the price-to-earnings (P/E) ratio. This ratio (or earnings multiple) serves as a benchmark for valuing the company’s stock against those of its peers, companies outside the household products industry, stock indices (such as the S&P 500), and the company’s historical average earnings multiple.

Typically, the P/E ratio of a particular stock will be related to the company’s projected growth rate, and investors generally award a higher ratio to a company that has prospects for rapid earnings growth. Historically, the consumer staples group has traded at a substantial premium to the market multiple because of these companies’ relatively steady, predictable earnings growth and dividend payments. More recently, however, increased international exposure has added to the volatility of earnings and share prices.

 Discounted cash flows. S&P Capital IQ may also use discounted cash flows to help determine the intrinsic values of companies in the household nondurables area. The intrinsic value of a company’s common stock generally equals the present value of its free cash flow to equity holders. Using discounted cash flow (DCF) methodologies may help avoid the pitfalls associated with relative valuation; for example, an overvalued stock may appear attractive because it is being compared with another stock that is even more overvalued. 

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 37

GLOSSARY

All-new products—A category of new product development that consists of adopting new formulas based on a newly developed concept. For example, following the launch of Clorox Co.’s disinfectant wipes in 1999, Procter & Gamble Co. introduced Swiffer dry electrostatic cloths in 2000.

Breadth of brands—The number of brands carried by a company within a product classification. The brands usually have different price points. For example, P&G offers several different laundry detergents, including Tide, Gain, and Cheer.

Category sales—The revenue of a category, e.g. laundry detergent and batteries, which is typically measured through volume and value sales.

Consumer packaged goods (CPG)—Goods that are replaced more frequently than durable goods. Examples of CPG products are batteries, cosmetics, disposable diapers, laundry detergent, toothpaste, and toilet tissue.

Direct selling model—A type of retailing or selling method in which a company directly sells to consumers, which bypasses the role of retailers. Avon Products Inc. and Tupperware Corp. are examples of household nondurable companies that are benefiting from this selling model.

New and improved products—A category of new product development that focuses on tweaking formulas or packaging to provide an improvement over the original product. For example, Kimberly-Clark Corp. offered Kleenex tissues in oval-shaped boxes with new patterns for a limited time.

Organic sales—Revenue generated by a company from its existing operations, and exclude revenue amassed from mergers and acquisitions, and borrowing.

Private-label goods—A product line manufactured under contract for, and distributed exclusively by, a wholesaler/retailer.

Product line extension—Occurs when a company adds new products in an existing product line. For example, there are different varieties of Tide laundry detergent from P&G, and the various kinds of Colgate Total toothpaste.

Restructuring—The process of modifying a company’s organizational structure, which is usually undertaken to reduce cost. Kimberly-Clark's pulp-and-tissue restructuring plan and P&G's five-year cost-reduction program are examples of restructuring efforts conducted by household nondurables companies. 

38 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

INDUSTRY REFERENCES

PERIODICALS TRADE ASSOCIATIONS

Advertising Age The American Cleaning Institute (formerly the Soap http://www.adage.com and Detergent Association) Weekly; covers trends in the advertising world. http://www.cleaninginstitute.org Trade group that represents manufacturers of household, Chain Drug Review industrial, and institutional cleaning products. http://www.chaindrugreview.com Biweekly; covers events and trends pertinent to growth and The American Pet Products Association (APPA) development of the chain drugstore industry. http://www.americanpetproducts.org Not-for-profit trade association made up of more than 900 Cosmetics Design.com USA pet product manufacturers, their representatives, http://www.cosmeticsdesign.com importers, and livestock providers. Daily online newsletter on the US cosmetics industry. The Direct Selling Association Drug Store News http://www.dsa.org http://www.drugstorenews.com National trade association of leading firms that Biweekly; covers the drugstore industry. manufacture and distribute goods and services sold directly to consumers. Happi http://www.happi.com The Fragrance Foundation Monthly; covers soaps, detergents, cosmetics and http://www.fragrance.org toiletries, waxes and polishes, insecticides, aerosols, and Nonprofit educational arm of the international fragrance related chemical specialties. industry.

MMR Organic and Sustainable Industry Standards (OASIS) http://www.massmarketretailers.com http://www.oasisseal.org Biweekly; features stories on mass merchandisers, drug Mutual benefit trade group representing the concerns and chains, and supermarkets. goals of companies that make sustainable and organic products for the health and beauty industry. Nonwovens Industry http://www.nonwovens-industry.com The Personal Care Products Council Monthly; news, markets, and analysis for the nonwovens http://www.personalcarecouncil.org industry. Leading US trade association for the personal care products industry; formerly the Cosmetic, Toiletry, and Fragrance Retailing Today Association (CTFA). http://www.retailingtoday.com Publishes eight weekly e-newsletters that cover five major GOVERNMENT AGENCIES retail categories: apparel, home & housewares, entertainment, food & consumables, and hardlines. Bureau of Economic Analysis (BEA) http://www.bea.gov Supermarket News An agency of the Department of Commerce with a mission http://www.supermarketnews.com to provide accurate and relevant gross domestic product Weekly; covers trends in the supermarket industry. (GDP) and economic accounts data in a timely and cost- effective manner. The cornerstone of BEA’s statistics is the WWD national income and product accounts (NIPA). http://www.wwd.com Daily newspaper; covers women’s and children’s apparel, accessories, cosmetics, and beauty care products; formerly called Women’s Wear Daily.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 39

Bureau of Labor Statistics (BLS) OTHER SOURCES OF INFORMATION http://www.bls.gov The federal government’s principal fact-finding agency for IRI labor economics and statistics; a division of the US http://www.iriworldwide.com Department of Labor. It collects, processes, analyzes, and Market research firm that collects data from checkout-line disseminates data to the US public, various federal, state, barcode scanners at nearly 33,000 supermarkets, and local agencies, businesses, and labor groups. Its major drugstores, mass merchandisers, and convenience stores; programs include the consumer price index and the formerly known as Information Resources Inc. (IRI). producer price index. Population Reference Bureau (PRB) Consumer Product Safety Commission (CPSC) http://www.prb.org http://www.cpsc.gov Provides timely and objective information on US and Independent federal agency responsible for protecting the international population trends and their implications; public against unreasonable risks and injuries associated produces print and electronic materials on key population with consumer products; sets safety standards and initiates and health topics. the recall of unsafe products. COMPANY WEBSITES Federal Trade Commission (FTC) http://www.ftc.gov Avon Products Inc.: http://www.avon.com Enforces federal laws and rules prohibiting unfair or Bare Escentuals Inc.: http://www.bareescentuals.com deceptive practices, methods of competition, and Chattem Inc.: http://www.chattem.com advertising. Church & Dwight Co.: http://www.churchdwight.com The Clorox Co.: http://www.thecloroxcompany.com US Department of Commerce Colgate-Palmolive Co.: http://www.colgate.com http://www.commerce.gov Elizabeth Arden, Inc.: http://www.elizabetharden.com This cabinet-level department’s mission is to ensure and Energizer Holdings Inc.: http://www.energizer.com enhance economic opportunity for Americans by working The Estée Lauder Cos. Inc.: http://www.elcompanies.com with businesses and communities to promote economic Inter Parfums Inc.: http://www.interparfumsinc.com growth. Kimberly-Clark Corp.: http://www.kimberly-clark.com Newell Rubbermaid Inc.: US Energy Information Administration (EIA) http://www.newellrubbermaid.com http://www.eia.gov Procter & Gamble Co.: http://www.pg.com Statistical and analytical agency within the US Department Reckitt Benckiser plc: http://www.rb.com of Energy; collects, analyzes, and disseminates Revlon Inc.: http://www.revlon.com independent and impartial energy information. Sally Beauty Holdings Inc.: http://www.sallybeautyholdings.com US Food and Drug Administration (FDA) S.C. Johnson & Son, Inc.: http://www.scjohnson.com http://www.fda.gov Spectrum Brands, Inc.: http://www.spectrumbrands.com This division of the US Department of Health and Human Tupperware Corp.: http://www.tupperwarebrands.com Services is responsible for supervising the food and Unilever United States, Inc.: http://www.unileverusa.com pharmaceutical industries. WD-40 Co.: http://www.wd40.com

40 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100) Ticker Company Yr . En d 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP 1,653.6 1,700.0 1,628.7 1,523.6 1,614.3 1,705.4 C 1,145.0 3.7 (0.6) (2.7) 144 148 142 133 141 CHD † CHURCH & DWIGHT INC DEC 3,194.3 2,921.9 A 2,749.3 2,589.2 2,520.9 2,422.4 1,056.9 11.7 5.7 9.3 302 276 260 245 239 CLX [] CLOROX CO/DE JUN 5,623.0 5,468.0 5,231.0 D 5,534.0 5,450.0 5,273.0 A 4,144.0 D,F 3.1 1.3 2.8 136 132 126 134 132 CL [] COLGA TE- PA LMOLIV E CO DEC 17,420.0 17,085.0 16,734.0 15,564.0 15,327.0 15,329.9 9,903.4 5.8 2.6 2.0 176 173 169 157 155 ENR † ENERGIZER HOLDINGS INC SEP 4,466.0 4,567.2 4,645.7 4,248.3 3,999.8 A 4,331.0 A 2,232.5 A 7.2 0.6 (2.2) 200 205 208 190 179

KMB [] KIMBERLY -CLA RK CORP DEC 21,152.0 21,063.0 20,846.0 19,746.0 19,115.0 A 19,415.0 A 14,348.0 A,C 4.0 1.7 0.4 147 147 145 138 133 PG [] PROCTER & GA MBLE CO JUN 84,167.0 83,680.0 D 82,559.0 78,938.0 A,C 79,029.0 D 83,503.0 43,373.0 6.9 0.2 0.6 194 193 190 182 182 WDFC § WD-40 CO A UG 368.5 342.8 336.4 321.5 292.0 317.1 238.1 4.5 3.1 7.5 155 144 141 135 123

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 7,355.9 A 6,696.1 6,679.9 6,022.7 A 5,152.6 5,383.3 587.4 A 28.8 6.4 9.9 1,252 1,140 1,137 1,025 877 NWL [] NEWELL RUBBERMA ID INC DEC 5,692.5 D 5,902.7 5,864.6 D 5,759.2 5,577.6 6,470.6 7,750.0 A (3.0) (2.5) (3.6) 73 76 76 74 72 TUP † TUPPERWA RE BRA NDS CORP DEC 2,671.6 2,583.8 2,585.0 2,300.4 2,127.5 2,161.8 1,174.8 8.6 4.3 3.4 227 220 220 196 181

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC 9,955.0 D 10,717.1 11,291.6 10,862.8 A,C 10,382.8 10,690.1 6,876.0 3.8 (1.4) (7.1) 145 156 164 158 151 IPA R § INTER PA RFUMS INC DEC 563.6 654.1 615.2 460.4 409.5 446.1 185.6 11.7 4.8 (13.8) 304 352 331 248 221 EL [] LA UDER (ESTEE) COS INC -CL A JUN 10,183.2 9,715.7 8,814.6 7,811.5 7,331.9 7,910.8 5,117.6 7.1 5.2 4.8 199 190 172 153 143 MED § MEDIFA ST INC DEC 356.9 356.7 298.2 257.6 165.6 105.4 25.4 30.3 27.6 0.1 1,406 1,406 1,175 1,015 653

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 1,344.5 1,238.3 A 1,175.5 1,103.8 1,070.2 1,141.1 814.4 5.1 3.3 8.6 165 152 144 136 131 HLF HERBA LIFE LTD DEC 4,825.3 4,072.3 3,454.5 2,734.2 2,324.6 2,359.2 1,159.4 15.3 15.4 18.5 416 351 298 236 200 NUS NU SKIN ENTERPRISES -CL A DEC 3,176.7 2,169.7 1,744.0 1,537.3 1,331.1 1,247.6 986.5 12.4 20.6 46.4 322 220 177 156 135 REV REV LON INC -CL A DEC 1,495.0 A,C 1,427.7 1,381.4 1,321.4 1,295.9 1,346.8 D 1,299.3 1.4 2.1 4.7 115 110 106 102 100 UN UNILEV ER NV -A DR DEC NA 38,304.5 34,119.4 A 31,287.0 31,411.4 30,772.1 36,485.9 NA NA NA NA 105 94 86 86

UL UNILEV ER PLC -A DR DEC NA 29,371.3 26,162.2 A 27,444.3 25,662.9 25,631.8 17,294.4 NA NA NA NA 170 151 159 148

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 41

Net Income

Million $ CAGR (%) Index Basis (2003 = 100) Ticker Company Yr . En d 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP (1.9) 21.2 28.3 45.8 65.9 (267.3) 34.6 NM NM NM (6) 61 82 132 190 CHD † CHURCH & DWIGHT INC DEC 394.4 349.8 309.6 270.7 243.5 195.2 81.0 17.2 15.1 12.8 487 432 382 334 301 CLX [] CLOROX CO/DE JUN 574.0 543.0 287.0 603.0 537.0 461.0 514.0 1.1 4.5 5.7 112 106 56 117 104 CL [] COLGA TE- PA LMOLIV E CO DEC 2,241.0 2,472.0 2,431.0 2,203.0 2,291.0 1,957.2 1,421.3 4.7 2.7 (9.3) 158 174 171 155 161 ENR † ENERGIZER HOLDINGS INC SEP 407.0 408.9 261.2 403.0 297.8 329.3 169.9 9.1 4.3 (0.5) 240 241 154 237 175

KMB [] KIMBERLY -CLA RK CORP DEC 2,142.0 1,750.0 1,591.0 1,843.0 1,884.0 1,698.0 1,694.2 2.4 4.8 22.4 126 103 94 109 111 PG [] PROCTER & GA MBLE CO JUN 11,312.0 9,169.0 11,797.0 10,946.0 11,293.0 12,075.0 5,186.0 8.1 (1.3) 23.4 218 177 227 211 218 WDFC § WD-40 CO A UG 39.8 35.5 36.4 36.1 26.3 27.6 28.6 3.3 7.6 12.2 139 124 127 126 92

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 203.9 243.9 204.7 106.7 128.7 (58.9) 31.8 20.4 NM (16.4) 642 768 644 336 405 NWL [] NEWELL RUBBERMA ID INC DEC 420.1 399.6 134.6 292.8 285.5 (51.8) (46.6) NM NM 5.1 NM NM NM NM NM TUP † TUPPERWA RE BRA NDS CORP DEC 274.2 193.0 218.3 225.6 175.1 161.4 47.9 19.1 11.2 42.1 572 403 456 471 366

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC (5.5) (42.5) 522.2 590.9 625.8 875.3 664.8 NM NM NM (1) (6) 79 89 94 IPA R § INTER PA RFUMS INC DEC 39.2 131.1 32.3 26.6 22.4 23.8 13.8 11.0 10.5 (70.1) 283 948 233 192 162 EL [] LA UDER (ESTEE) COS INC -CL A JUN 1,019.8 856.9 700.8 478.3 218.4 473.8 319.8 12.3 16.6 19.0 319 268 219 150 68 MED § MEDIFA ST INC DEC 24.0 15.9 18.5 19.6 12.0 5.4 2.4 25.8 34.6 51.0 995 659 769 814 496

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 40.7 57.4 41.0 19.5 (6.2) 19.9 2.0 34.9 15.4 (29.1) 2,000 2,820 2,013 959 (303) HLF HERBA LIFE LTD DEC 527.5 464.0 412.6 290.5 203.3 221.2 36.8 30.5 19.0 13.7 1,432 1,259 1,120 788 552 NUS NU SKIN ENTERPRISES -CL A DEC 364.9 221.6 153.3 136.1 89.8 65.3 67.9 18.3 41.1 64.6 538 327 226 200 132 REV REV LON INC -CL A DEC 24.6 50.7 52.8 327.0 48.5 13.1 (153.8) NM 13.4 (51.5) NM NM NM NM NM UN UNILEV ER NV -A DR DEC NA 3,343.5 3,122.1 3,446.0 2,969.6 4,083.8 2,489.2 NA NA NA ** 134 125 138 119

UL UNILEV ER PLC -A DR DEC NA 2,563.8 2,394.0 2,185.4 1,860.3 2,913.2 990.1 NA NA NA ** 259 242 221 188

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.

42 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

Return on Revenues (%) Return on Assets (%) Return on Equity (%) Ticker Company Yr . En d 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP NM 1.2 1.7 3.0 4.1 NM 1.9 2.5 4.0 5.5 NM 4.6 5.7 8.5 12.5 CHD † CHURCH & DWIGHT INC DEC 12.3 12.0 11.3 10.5 9.7 9.4 9.7 10.2 8.9 8.2 18.1 17.1 15.8 15.6 16.6 CLX [] CLOROX CO/DE JUN 10.2 9.9 5.5 10.9 9.9 13.2 12.7 6.6 13.2 11.6 10,436.4 NA NA NA NA CL [] COLGA TE- PA LMOLIV E CO DEC 12.9 14.5 14.5 14.2 14.9 16.4 18.9 20.3 19.4 21.4 99.7 108.3 96.3 75.4 90.3 ENR † ENERGIZER HOLDINGS INC SEP 9.1 9.0 5.6 9.5 7.4 6.1 6.1 4.0 6.4 5.0 18.0 19.6 12.4 20.9 21.6

KMB [] KIMBERLY -CLA RK CORP DEC 10.1 8.3 7.6 9.3 9.9 11.0 8.9 8.1 9.4 10.1 43.5 34.2 28.5 32.6 40.6 PG [] PROCTER & GA MBLE CO JUN 13.4 11.0 14.3 13.9 14.3 8.2 6.6 8.7 8.2 8.0 16.8 13.6 17.9 17.3 16.7 WDFC § WD-40 CO A UG 10.8 10.4 10.8 11.2 9.0 12.8 12.2 12.8 13.1 9.9 21.8 18.4 18.3 19.5 15.6

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 2.8 3.6 3.1 1.8 2.5 2.3 3.3 2.9 1.6 2.2 9.5 13.3 11.0 5.9 8.2 NWL [] NEWELL RUBBERMA ID INC DEC 7.4 6.8 2.3 5.1 5.1 6.8 6.5 2.1 4.6 4.3 20.7 20.8 7.2 15.9 16.8 TUP † TUPPERWA RE BRA NDS CORP DEC 10.3 7.5 8.4 9.8 8.2 15.0 10.5 11.3 11.8 9.7 74.9 39.4 33.8 31.6 31.5

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC NM NM 4.6 5.4 6.0 NM NM 6.7 8.0 9.7 NM NM 32.4 40.3 64.3 IPA R § INTER PA RFUMS INC DEC 7.0 20.0 5.3 5.8 5.5 5.5 20.6 6.8 6.2 5.3 9.9 41.4 13.2 11.5 10.3 EL [] LA UDER (ESTEE) COS INC -CL A JUN 10.0 8.8 8.0 6.1 3.0 14.8 13.3 12.1 9.1 4.3 33.9 32.0 30.6 26.7 13.3 MED § MEDIFA ST INC DEC 6.7 4.5 6.2 7.6 7.2 18.2 13.5 18.6 25.0 21.0 25.3 19.3 25.5 32.3 27.3

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 3.0 4.6 3.5 1.8 NM 3.8 6.0 4.8 2.3 NM 8.2 12.8 10.6 5.7 NM HLF HERBA LIFE LTD DEC 10.9 11.4 11.9 10.6 8.7 25.1 29.3 30.8 24.4 17.9 111.4 97.1 78.8 68.6 67.7 NUS NU SKIN ENTERPRISES -CL A DEC 11.5 10.2 8.8 8.9 6.7 24.5 20.7 16.3 16.6 12.3 50.4 38.1 29.3 32.1 26.0 REV REV LON INC -CL A DEC 1.6 3.6 3.8 24.7 3.7 1.5 4.2 4.7 34.8 6.0 NA NA NA NA NA UN UNILEV ER NV -A DR DEC NA 8.7 9.2 11.0 9.5 NA 9.6 9.3 10.6 9.2 NA 30.7 19.4 17.0 17.3

UL UNILEV ER PLC -A DR DEC NA 8.7 9.2 8.0 7.2 NA 9.6 9.7 10.2 9.5 NA 30.7 86.1 NA NA Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 43

Debt as a % of Current Ratio Debt / Capital Ratio (%) Net Working Capital Ticker Company Yr . En d 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP 3.7 3.2 3.1 3.2 3.2 50.2 49.2 48.8 43.0 42.5 96.4 100.9 106.0 92.3 94.8 CHD † CHURCH & DWIGHT INC DEC 1.7 1.3 2.0 1.5 1.6 21.4 21.6 10.3 10.5 24.9 162.6 335.9 71.9 123.4 165.4 CLX [] CLOROX CO/DE JUN 1.3 0.7 0.9 0.7 0.6 89.1 101.0 97.5 95.2 107.6 758.7 NM NM NM NM CL [] COLGA TE- PA LMOLIV E CO DEC 1.1 1.2 1.2 1.0 1.1 63.3 66.5 62.8 50.3 46.9 NM 600.7 645.8 NM NM ENR † ENERGIZER HOLDINGS INC SEP 2.2 1.9 2.1 1.9 1.8 40.0 45.9 46.3 44.2 50.8 141.3 176.0 178.9 172.0 236.8

KMB [] KIMBERLY -CLA RK CORP DEC 1.1 1.1 1.2 1.2 1.2 48.4 47.8 46.4 42.9 41.2 767.2 NM 612.4 517.2 509.2 PG [] PROCTER & GA MBLE CO JUN 0.8 0.9 0.8 0.8 0.7 19.5 22.3 21.9 22.9 21.9 NM NM NM NM NM WDFC § WD-40 CO A UG 1.6 1.9 2.6 2.5 2.5 0.0 0.0 0.0 4.8 10.1 0.0 0.0 0.0 11.8 29.5

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 2.0 2.2 2.4 2.0 2.0 53.1 58.6 54.4 55.2 50.9 200.0 158.2 142.4 165.7 142.7 NWL [] NEWELL RUBBERMA ID INC DEC 1.4 1.4 1.3 1.3 1.2 43.3 45.9 49.4 52.0 53.1 244.0 243.7 371.4 442.8 476.9 TUP † TUPPERWA RE BRA NDS CORP DEC 1.1 1.1 1.1 1.7 1.5 68.6 45.8 43.2 32.9 38.3 NM 575.6 441.7 122.4 180.4

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC 1.6 1.5 1.4 1.4 1.8 68.9 67.8 60.7 58.8 63.6 204.5 214.3 203.6 196.1 120.5 IPA R § INTER PA RFUMS INC DEC 4.2 2.4 2.1 2.5 2.9 0.0 0.0 0.0 2.0 7.0 0.0 0.0 0.0 2.7 9.0 EL [] LA UDER (ESTEE) COS INC -CL A JUN 2.2 1.8 1.9 2.0 2.0 28.7 28.1 29.1 38.2 45.5 56.1 61.8 62.0 77.8 95.5 MED § MEDIFA ST INC DEC 3.4 3.1 3.2 3.8 5.6 0.4 3.8 5.0 6.2 9.6 0.7 6.4 9.7 10.9 19.1

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 2.2 2.2 3.3 2.2 1.9 32.4 33.2 36.9 37.9 39.9 68.6 72.3 64.3 71.3 77.9 HLF HERBA LIFE LTD DEC 1.8 1.3 1.4 1.3 1.2 57.9 48.5 24.2 24.4 35.3 117.9 194.6 91.8 140.3 284.8 NUS NU SKIN ENTERPRISES -CL A DEC 1.4 1.9 2.2 2.0 1.8 11.5 20.0 15.6 21.6 23.8 33.3 55.5 37.4 64.5 79.3 REV REV LON INC -CL A DEC 1.4 1.2 1.5 1.5 1.3 147.0 230.0 232.3 236.0 610.9 757.4 NM 663.7 766.8 NM UN UNILEV ER NV -A DR DEC NA 0.8 0.8 0.9 1.0 NA 31.3 33.8 22.7 28.6 NA NM NM NM NM

UL UNILEV ER PLC -A DR DEC NA 0.8 0.8 0.9 0.9 NA 31.3 33.8 457.4 181.5 NA NM NM NM NM

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.

44 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %) Ticker Company Yr . En d 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP NM - NM 30 - 19 23 - 13 16 - 12 13 - 6 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 CHD † CHURCH & DWIGHT INC DEC 23 - 19 24 - 18 22 - 16 19 - 16 18 - 13 39 38 31 16 13 2.1 - 1.7 2.2 - 1.6 2.0 - 1.5 1.0 - 0.9 1.0 - 0.7 CLX [] CLOROX CO/DE JUN 22 - 17 18 - 16 36 - 29 16 - 14 16 - 12 58 58 105 47 48 3.5 - 2.6 3.6 - 3.1 3.6 - 2.9 3.4 - 2.9 4.0 - 2.9 CL [] COLGA TE- PA LMOLIV E CO DEC 28 - 22 21 - 17 19 - 15 19 - 16 19 - 12 55 47 46 46 38 2.5 - 2.0 2.8 - 2.2 3.0 - 2.4 2.8 - 2.4 3.2 - 2.0 ENR † ENERGIZER HOLDINGS INC SEP 17 - 12 13 - 10 23 - 16 13 - 9 14 - 8 26 6 0 0 0 2.1 - 1.5 0.6 - 0.5 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

KMB [] KIMBERLY -CLA RK CORP DEC 20 - 15 20 - 16 18 - 15 15 - 13 15 - 10 58 67 70 59 53 3.9 - 2.9 4.2 - 3.4 4.6 - 3.8 4.5 - 3.9 5.6 - 3.6 PG [] PROCTER & GA MBLE CO JUN 21 - 17 22 - 18 16 - 14 18 - 11 17 - 12 57 66 48 49 44 3.3 - 2.7 3.6 - 3.0 3.4 - 2.9 4.6 - 2.8 3.7 - 2.6 WDFC § WD-40 CO A UG 31 - 18 25 - 18 22 - 16 19 - 14 22 - 14 48 51 50 46 63 2.6 - 1.5 2.9 - 2.1 3.1 - 2.3 3.4 - 2.4 4.6 - 2.9

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 34 - 20 18 - 9 16 - 11 29 - 21 21 - 6 0 0 15 28 10 0.0 - 0.0 0.0 - 0.0 1.3 - 0.9 1.3 - 0.9 1.7 - 0.5 NWL [] NEWELL RUBBERMA ID INC DEC 22 - 15 16 - 12 44 - 24 18 - 13 16 - 4 41 31 63 19 25 2.8 - 1.8 2.7 - 1.9 2.7 - 1.4 1.5 - 1.1 5.7 - 1.6 TUP † TUPPERWA RE BRA NDS CORP DEC 18 - 12 19 - 15 20 - 12 15 - 10 18 - 4 47 41 33 29 33 3.9 - 2.6 2.8 - 2.1 2.7 - 1.7 2.9 - 1.9 8.3 - 1.8

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC NM - NM NM - NM 26 - 13 26 - 18 25 - 10 NM NM 77 64 58 1.6 - 1.0 5.5 - 3.2 5.7 - 2.9 3.5 - 2.4 5.8 - 2.3 IPA R § INTER PA RFUMS INC DEC 31 - 15 5 - 3 23 - 13 23 - 13 18 - 5 76 7 30 30 18 4.9 - 2.5 2.1 - 1.5 2.3 - 1.3 2.3 - 1.3 3.8 - 1.0 EL [] LA UDER (ESTEE) COS INC -CL A JUN 29 - 23 30 - 23 34 - 22 34 - 20 46 - 18 41 24 21 23 50 1.8 - 1.4 1.1 - 0.8 0.9 - 0.6 1.2 - 0.7 2.8 - 1.1 MED § MEDIFA ST INC DEC 17 - 13 29 - 12 23 - 10 28 - 11 41 - 4 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 36 - 22 25 - 16 26 - 16 34 - 20 NM - NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 HLF HERBA LIFE LTD DEC 16 - 6 18 - 6 18 - 9 15 - 8 13 - 4 23 29 21 18 24 3.9 - 1.5 5.0 - 1.6 2.3 - 1.1 2.4 - 1.3 6.6 - 1.8 NUS NU SKIN ENTERPRISES -CL A DEC 22 - 6 17 - 9 21 - 11 16 - 10 20 - 6 19 22 24 23 32 3.3 - 0.9 2.5 - 1.3 2.1 - 1.1 2.2 - 1.5 5.8 - 1.6 REV REV LON INC -CL A DEC 62 - 32 19 - 13 19 - 9 3 - 1 21 - 2 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 UN UNILEV ER NV -A DR DEC NA - NA 20 - 16 19 - 16 17 - 13 19 - 10 NA 63 68 56 63 3.8 - 3.2 4.0 - 3.2 4.3 - 3.5 4.3 - 3.4 6.4 - 3.3

UL UNILEV ER PLC -A DR DEC NA - NA 20 - 16 19 - 16 19 - 15 23 - 12 NA 63 68 67 71 3.7 - 3.2 4.0 - 3.1 4.4 - 3.6 4.3 - 3.4 5.9 - 3.1 Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.

INDUSTRY SURVEYS HOUSEHOLD NONDURABLES / SEPTEMBER 2014 45

Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $) Ticker Company Yr . En d 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 HOUSEHOLD PRODUCTS‡ CENTA § CENTRA L GA RDEN & PET CO SEP (0.04) 0.44 0.50 0.71 0.95 3.72 3.60 3.21 3.84 3.44 10.84 - 6.00 13.27 - 8.43 11.29 - 6.60 11.12 - 8.48 12.45 - 5.30 CHD † CHURCH & DWIGHT INC DEC 2.85 2.50 2.16 1.90 1.73 (0.91) (2.94) 1.88 0.99 (0.22) 66.96 - 53.80 59.27 - 44.21 46.45 - 33.83 35.50 - 29.53 31.21 - 22.70 CLX [] CLOROX CO/DE JUN 4.38 4.15 2.09 4.28 3.86 (12.17) (14.58) (13.65) (16.03) (17.73) 96.76 - 73.50 76.74 - 66.37 75.44 - 60.56 69.00 - 58.96 63.10 - 45.67 CL [] COLGA TE- PA LMOLIV E CO DEC 2.41 2.60 2.49 2.22 2.27 (1.81) (1.93) (1.69) (0.52) (0.04) 66.49 - 52.62 55.49 - 43.61 47.44 - 37.43 43.08 - 36.56 43.69 - 27.25 ENR † ENERGIZER HOLDINGS INC SEP 6.55 6.30 3.75 5.76 4.77 (13.76) (20.38) (18.67) (14.09) (19.45) 113.16 - 80.78 83.33 - 64.36 84.94 - 61.60 77.09 - 49.25 69.11 - 37.57

KMB [] KIMBERLY -CLA RK CORP DEC 5.58 4.45 4.02 4.47 4.53 3.76 3.60 4.15 5.47 4.37 111.68 - 83.92 88.25 - 70.50 74.06 - 61.00 67.24 - 58.25 67.03 - 43.05 PG [] PROCTER & GA MBLE CO JUN 4.04 3.24 4.12 3.70 3.76 (6.74) (7.70) (8.11) (8.60) (8.91) 85.82 - 68.35 70.99 - 59.07 67.72 - 57.56 65.38 - 39.37 63.48 - 43.93 WDFC § WD-40 CO A UG 2.55 2.22 2.16 2.17 1.59 3.92 3.98 4.63 4.20 2.74 79.31 - 47.00 54.42 - 39.36 47.97 - 35.37 41.77 - 29.30 34.55 - 21.81

HOUSEWARES & SPECIALTIES‡ JAH † JA RDEN CORP DEC 1.79 2.08 1.55 0.80 1.02 (19.10) (11.26) (7.05) (8.09) (5.01) 61.42 - 35.09 37.18 - 19.67 25.00 - 17.07 23.41 - 17.00 21.29 - 5.85 NWL [] NEWELL RUBBERMA ID INC DEC 1.46 1.37 0.46 1.04 1.02 (3.25) (3.58) (4.10) (5.15) (5.84) 32.54 - 21.72 22.49 - 15.93 20.38 - 10.87 18.48 - 13.11 16.10 - 4.51 TUP † TUPPERWA RE BRA NDS CORP DEC 5.28 3.49 3.63 3.60 2.80 (1.14) 2.64 1.68 5.19 2.93 97.14 - 63.57 67.82 - 50.90 71.99 - 45.18 54.15 - 36.12 50.20 - 10.91

PERSONAL PRODUCTS‡ AVP [] A V ON PRODUCTS DEC (0.01) (0.10) 1.20 1.37 1.45 1.55 1.13 1.49 1.10 2.16 24.71 - 14.57 23.58 - 13.70 31.60 - 16.09 36.20 - 25.00 36.39 - 14.40 IPA R § INTER PA RFUMS INC DEC 1.27 4.29 1.06 0.88 0.74 9.43 8.72 4.72 3.94 4.08 38.94 - 19.55 20.98 - 14.98 24.80 - 13.75 19.84 - 11.37 13.48 - 3.50 EL [] LA UDER (ESTEE) COS INC -CL A JUN 2.63 2.20 1.78 1.21 0.56 5.76 4.27 3.86 2.75 1.86 75.77 - 59.90 65.60 - 49.81 60.37 - 39.83 40.72 - 23.83 25.28 - 9.90 MED § MEDIFA ST INC DEC 1.74 1.16 1.33 1.39 0.89 7.50 6.56 5.15 4.71 3.03 29.47 - 21.75 33.29 - 14.02 29.98 - 12.97 38.23 - 15.75 36.58 - 3.81

OTHER COM PANIES WITH SIGNIFICANT HOUSEHOLD NONDURABLES OPERATIONS RDEN ELIZA BETH A RDEN INC JUN 1.37 1.97 1.47 0.70 (0.22) 6.67 4.97 7.28 5.38 4.51 49.57 - 30.37 49.75 - 30.96 37.94 - 22.93 24.00 - 13.69 15.90 - 3.93 HLF HERBA LIFE LTD DEC 5.14 4.13 3.51 2.44 1.66 1.34 (0.20) 1.23 0.62 (0.46) 81.75 - 30.84 73.00 - 24.24 63.40 - 31.25 35.65 - 18.53 22.22 - 6.06 NUS NU SKIN ENTERPRISES -CL A DEC 6.23 3.66 2.47 2.18 1.42 11.24 6.60 6.07 4.52 2.89 139.81 - 36.85 62.01 - 32.36 51.67 - 27.50 33.99 - 22.86 28.78 - 7.90 REV REV LON INC -CL A DEC 0.47 0.97 1.01 6.30 0.94 (27.17) (17.88) (17.48) (16.86) (23.20) 29.31 - 14.82 17.99 - 12.60 19.33 - 9.50 18.79 - 9.22 19.87 - 2.30 UN UNILEV ER NV -A DR DEC NA 1.95 1.82 2.00 1.73 NA (3.15) (3.61) 4.87 1.99 42.99 - 36.95 38.91 - 30.44 35.17 - 28.89 33.10 - 26.02 33.02 - 16.91

UL UNILEV ER PLC -A DR DEC NA 1.96 1.83 1.67 1.42 NA (2.94) (3.38) (9.92) (8.11) 43.88 - 37.40 39.55 - 30.84 34.55 - 28.45 32.41 - 25.74 32.34 - 16.95

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s. In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

46 HOUSEHOLD NONDURABLES / SEPTEMBER 2014 INDUSTRY SURVEYS

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S&P assumes no and any such adviser must accordingly make their own assessment taking obligation to update the Content following publication in any form or into account an individual’s particular circumstances. format. The Content should not be relied on and is not a substitute for SPIS holds an Australian Financial Services License Number 258896. the skill, judgment and experience of the user, its management, Please refer to the SPIS Financial Services Guide for more information at: employees, advisers and/or clients when making investment and other www.spcapitaliq.com/FinancialServicesGuide business decisions. S&P does not act as a fiduciary or an investment adviser except where registered as such. While S&P has obtained For residents of China: Industry Surveys are not distributed in or directed information from sources it believes to be reliable, S&P does not perform to residents in The People’s Republic of China. 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S&P has set out in the CML and CMA rule books. established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each For residents of Malaysia: All queries in relation to Industry Surveys analytical process. should be referred to Ahmad Halim at [email protected].

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