PZ Cussons in a lather

Like the global giants that dominate its industry, PZ is well spread internationally, fitting for a group that began life in Africa. It has expanded into eastern Europe and Asia, yet counts the UK, Indonesia and Nigeria, where founders George Paterson and George Zochonis set up shop in 1899, as its key markets. Nigeria is also home to two important joint ventures that are helping PZ diversify from personal care – a nutrition venture with Irish dairy group Glanbia is growing quickly, while a palm-oil refinery being built with Swiss food group Wilmar should be completed by the end of 2012.

Despite hefty investment, the company is debt free, thanks to strong cash flow and a tendency not to overstretch itself. Although the founders’ families no longer have representation on the board, they still hold more than half of the shares, and PZ's present bosses continue to demonstrate the conservative ethos that has helped the company survive and prosper for over 100 years.

Even so, good practice cannot shield PZ from a barrage of pressures beyond its control. Commodity cost increases have outpaced recent efficiency gains. That has put a squeeze on profit margins and is exacerbated by the UK's intense promotional environment. In the first half of the current financial year, PZ was forced to absorb £20m in additional raw material costs, not far short of the £25m hit for the whole of 2010-11.

That has already meant one profit warning this year, with the effect of difficult UK markets compounded by unforeseen events, such as floods in Thailand and political unrest in the Middle East. PZ says that input costs have now stabilised, but UK profits could stay squeezed if stagnating grocery sales spark an all-out price war among supermarkets, as some City analysts predict. Cut-throat pricing has also spread to Australia, where the company is conducting a review after the division slumped to a loss in the first half.

But developments in Nigeria are especially worrying. Less than a year ago, PZ was optimistic about Nigeria. The conclusion of presidential elections in July had been expected to restore a degree of stability to the market and free up consumer credit, important for its African electrical goods retailing arm.

Unfortunately, the country's new leader, Goodluck Jonathan, hasn't lived up to his name. Although Nigerian consumers have been spending more, a wave of strikes following the decision to remove fuel subsidies has disrupted trading and resulted in a large working capital outflow in the first half. Any repeat could curb PZ's ability to make bolt-on acquisitions to plug gaps in its portfolio – such as the recent purchase of Australian hair products maker Fudge. While the fuel subsidies have been partially restored, fiscal reform later this year could create more disruption. Adding to the uncertainty is the growing schism between the Islamic population of the north and the Christian south. A state of emergency has been declared in the country’s northern regions, and, after a wave of terrorist activity, fears are mounting that hostilities could escalate.