Unilever leaves shareholders cold despite COVID crisis wins

·6-min read

Apart from the obvious, 2020 was a big year for Unilever, the consumer goods giant.

Unilever, home to brands including Knorr, Persil, Marmite, Vaseline, Cif, Magnum and Ben & Jerry's, finally completed the unification of its legal structure under a single company.

It brought to an end a 90 year-old arrangement in which the business had two parent holding companies - Unilever plc, whose shares were listed in London and New York and Unilever NV, which was based in Rotterdam and whose shares were listed in Amsterdam and New York.

Now, there is just one company, London-based Unilever plc.

The decision was taken in June last year, approved by shareholders in September and October and completed in November. It made Unilever, by far, the biggest company in the FTSE 100.

The aim was to give Unilever's management more flexibility to move quickly should it want to do mergers or acquisitions.

Accordingly, there was more interest than usual in the company's results on Thursday, at which a 'strategy refresh' was promised.

Firstly, the results. For Unilever, what it has lost on the roundabouts, it gained on the swings.

Accordingly, COVID-19 meant it enjoyed higher demand for hand and home hygiene products, for laundry products and for food consumed at home. But sales of beauty and personal care products, particularly in hair care and deodorants, were hit by people staying at home and spending less time on personal grooming. Growth in those lines only returned when, as in China and India, restrictions on movement were removed.

It has led to big swings in sales of some individual brands. Domestos, for example, saw sales rise by 25%. And Lifebuoy saw its sales rise by more than 50% - making it the latest Unilever brand to notch up annual revenues of more than €1bn.

In ice cream, in which it is the world's biggest player, the company had to quickly switch production to cater for consumers eating at home. Its 'at home' ice cream business grew by 17%, enough to offset a drop of more than 20% in the 'out of home' business.

Altogether, Unilever reported a 3.5% drop in full year pre-tax profits to €8bn, although profits were up by 3.9% once currency movements were stripped out.

Alan Jope, the chief executive, pointed out that 60% of the business had enjoyed growth ahead of its markets during the year.

The company, one of the most important customers for the advertising world, also raised its marketing spend by €160m, focusing its messaging on the new environment, which meant spending more on hygiene brands and its 'stay at home' food brands. The big 'stay inspired' campaign for Hellmann's mayonnaise is an example.

So what of the strategy refresh?

The company, whose products are used daily by 2.5 billion people around the world, has made some strategic decisions already.

Its black tea business, which includes the PG Tips and Lipton brands, will be sold or demerged. A number of other smaller beauty brands in Europe and North America may also be offloaded but Mr Jope insisted that no decision has yet been taken.

Longer term, he has identified three core strengths enjoyed by the business. Firstly, its brand leadership in a number of categories. Some 13 brands, each with sales of more than €1bn annually, now accounted for more than half of Unilever's annual revenues with the biggest, Dove and Knorr, generating more than €4bn apiece.

Mr Jope also highlighted strong positions in fast-growing markets. In the presentation to analysts and investors, he presented a chart showing 10 countries - including Turkey, China, India, Indonesia, Pakistan, Brazil, the Philippines and Vietnam - that are expected to account for more than two-thirds of global GDP growth during the next decade. The remaining two were the United States and the UK.

He said the third strength was Unilever's global leadership in sustainability. Pursuing this was a priority for Mr Jope's predecessor, Paul Polman, even when it earned him derision from some investors. It was even blamed for the unwanted takeover approach, in 2017, that the company received from Kraft Heinz.

But Mr Jope doubled down, telling investors: "There is clear growing and compelling evidence that sustainable business drives superior growth. Measurable brand purpose grows measurable brand power and that in turn drives market share and growth.

"We see this in our own brands".

He said Unilever brands seen by consumers as more purposeful were growing more rapidly than its other brands - and that this had been the case now for 12 years.

He said sustainable production had also saved the company money and was in addition a driving force in attracting talent and especially in the field of graduate recruitment.

Put together, Mr Jope said this meant targeting higher growth, with categories such as hygiene, skin care, prestige beauty, 'functional nutrition' and plant based foods likely to be made a priority. He said some progress had already been made in this regard with the company's prestige beauty business - whose brands include Murad, Ren, Dermologica, Tatcha and Hourglass - was growing faster than the market as a whole while functional nutrition, including brands such as Olly, Horlicks and Liquid IV, would be a €1bn business this year.

He said brands highlighting they were a force for good would also be a priority: "Young people in particular feel strongly that it is time for businesses and brands to show more responsibility. Actually, Gen Z and Millennials are already the majority of the adult population globally - and they simply care more about the positive impact of the brand choices we are making."

That will mean ensuring all of the company's plastic packaging will be recyclable by 2025, continuing initiatives such as Dove's 'self-esteem' campaign or Ben & Jerry's campaign for refugee rights.

The US, India and China, which together account for 35% of Unilever's current sales, will be made a priority when it comes to targeting future growth.

Unilever shares fell by more than 4% on the announcement.

That partly reflects the fact that results for the final three months of 2020 came in slightly below expectations but also the fact that the long-term sales growth target outlined by the company, of between 3-5%, was slightly lower than the targets recently set out by competitors such as Procter & Gamble.

Some investors had also, perhaps, expected a 'big bang' announcement. There has been speculation Unilever may ultimately hive off its slower-growing food and refreshment business to focus on beauty and personal care and hygiene.

That may come in time. But, for now, Mr Jope clearly sees benefits in diversification.