Breakingviews: Consumer giants have bigger problems than turkey

Global consumer giants such as Unilever and Nestlé are proving they can resist infection if Turkey catches a cold. Their business models will, however, be increasingly vulnerable if the bug spreads more widely across emerging markets.

Market turmoil in Turkey, whose currency has lost more than a third of its value against the dollar so far this year, will have limited impact on Unilever, which made just 3 percent of its total revenue in the country last year. Nestlé is even less exposed, and most of what is manufactured in its two Turkish factories is sold locally. That helps to keep these goods competitive relative to imported brands which have grown more expensive as the lira has slumped in value. However, both companies have grown in recent years by increasing their presence in emerging markets. Unilever made 58 percent of group sales in such economies in the last financial year while the comparable share for Nestlé was 43 percent.

The first channel of contagion is that declines in emerging market currencies result in lower revenue figures once Unilever and Nestlé translate sales back into the euro and Swiss franc respectively. For example, the currency of Brazil, Nestlé’s fourth-largest market, has depreciated 19 percent against the franc since the beginning of the year. The companies can hedge some of their foreign exchange exposure but they will struggle to pass on price increases given consumer demand in these economies is weaker than it was in 2013, when fears that U.S. monetary policy would be tightened sparked a selloff in their asset markets.

The International Monetary Fund expects emerging economies to grow 4.9 percent in 2018, down from the 5.1 percent rate of expansion seen in 2013. But even that might be hard to achieve if central banks in these countries have to keep raising rates to support their currencies and retain the confidence of investors. Argentina, India, and Indonesia are among the countries that have raised interest rates in the past month. Such policy tightening could end up slowing consumer spending. That would be bad news for Nestlé and Unilever, which reported the slowest growth in their emerging market sales since the start of the decade for the first half of the year.

Western shoppers show few signs of picking up the slack. Annual sales growth in developing markets has averaged 8 percent since 2011 at both companies. The comparable growth rate for Nestlé’s mature markets is 1.8 percent. There’s a similar divergence at Unilever, which derived over 90 percent of its organic revenue growth over the past 12 years from emerging economies, according to Credit Suisse analysts. The reliance on these markets could prove a hindrance rather than a help if the Turkish infection spreads more widely.

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