The recent exit of Revlon Consumer Products and L'Oreal S.A's Garnier brand from China is an affirmation of the sectors focus on profitable growth, according to Fitch Ratings.
From Procter & Gamble (P&G), with over US$80 billion in revenues, to Revlon Consumer Products, Inc., with pro forma revenues of $2 billion, the pursuit of revenue growth at all costs has become less fashionable in a slow-growth and volatile global markets environment.
In the short term, focusing investments that have higher margin and cash flow potential is positive. Due to insufficient scale or pricing power, operating in China is not always profitable for global fast-moving consumer goods companies. However, there could be longer term negative implications with a complete exit from a large market such as China, which has significant potential.
Geographic exits are not unique to China. Kimberly-Clark Corp. is exiting $500 million in tissue businesses in Western Europe, which is considered a highly competitive and slow growth market. However, there is concern when companies exit markets such as China where sheer demographics support long-term growth.
Further, many companies find it more difficult to re-enter a market after incumbents have had time to invest and capture large market shares. Re-entering large markets at a later stage may require heavier investments, including merger and acquisitions (M&As).
Fitch regards these exits on a case-by-case basis. L'Oreal, with significant rating headroom, is merely putting its muscle behind other brands in China and will still retain access to China's potential.
Complete exits such as Revlon are understandable from a short-term perspective, as the company does not appear to have the scale and financial flexibility to compete and invest in China's vast and fragmented retail market, and its margins and profitability will benefit in the near term. However, Revlon's presence in other emerging markets is relatively small, and given the Colomer acquisition, its exposure to the U.S. and Western European markets increases. The benefit in the near term might hamper its longer term growth.
Avon Products, Inc. also has issues in China, and given the sector focus on profitable growth, exiting could make financial sense in the short term. Avon has some flexibility to invest further, though less than several years ago.
The long-term potential of the world's largest population and the difficulty of re-entering and building a sales force are likely behind the company's decision to continue trying to stabilise operations in China.
Nonetheless, Fitch notes that management is pragmatic in balancing financial flexibility versus revenue growth and exited both South Korea and Vietnam in 2012.