The Unilever Plc that Hein Schumacher is taking over as chief executive officer next week should be firing on all cylinders. But it’s not. Not by a long stretch.
Instead, on July 1, he will inherit a company that has failed to deliver sustainable sales growth despite powerful brands and enviable positions in emerging markets. Schumacher must reverse that underperformance. If he can’t achieve it within the company’s current structure, he must look at a more radical solution: a breakup.
Unilever generates almost 60 percent of its sales from emerging markets, which should deliver faster revenue expansion than more mature regions. It also has a suite of household name brands, such as Dove skin care and Magnum ice cream, and exposure to in-demand categories, such as premium cosmetics. Yet, until recently, its sales growth has trailed rivals Nestle SA and Procter & Gamble Co.
In some ways, Schumacher, who comes from dairy cooperative Royal FrieslandCampina and so is largely unknown to investors, is joining Unilever at an opportune moment.
His predecessor Alan Jope overhauled the organisation, shifting from a structure arranged around both divisions and geographies to five business units: beauty & wellbeing, personal care, home care, nutrition and ice cream. Managers should be incentivized to maximise each division’s performance, so making better strategic choices and faster decisions.
Schumacher hasn’t committed to this structure. But he should. And it’s no coincidence that it is very much like the one that activist investor Nelson Peltz, who joined Unilever’s board last year after building a stake in the company, proposed at P&G six years ago.
Unilever has also begun to tackle its portfolio. Jope’s predecessor, Paul Polman, sold the margarine business, and last year Jope completed the sale of the tea arm to CVC Capital Partners for €4.5 billion ($4.9 billion).
Schumacher should go further.
There are some obvious candidates to be offloaded. Two years ago, Jope put a string of smaller beauty and personal care brands, including Q-Tips and Timotei shampoo, into a separate unit called Elida Beauty. It explored a sale, but a deal never materialised. This business should be put back on the block.
US ice cream brands, such as Klondike, Breyers and Good Humor, should also be exited. Unless Unilever can bulk up its oral-care business — this was one of the reasons for its £50 billion ($63 billion) tilt at GSK Plc’s consumer arm 18 months ago — then brands such as Signal toothpaste also look peripheral. Meanwhile, some of Unilever’s cleaning and laundry products, such as Domestos, might fit better with a rival, such as Reckitt Benckiser Group Plc.
Any proceeds – for example, the company said Elida generated annual sales of €600 million ($652 million) in 2020 – should be used to invest in its blockbuster names. The 14 “billionaire brands,” as they are known, each generate annual sales of €1 billion or more, and collectively account for just over half of turnover. As well as Dove, which is well above €1 billion, other billionaire brands include Magnum ice cream, Rexona deodorant, Lux skin cleansing, Axe male fragrance, Wall’s Ice Cream, Hellmann’s mayonnaise and Ben & Jerry’s.
In time, Schumacher could supplement these winners with bolt-on deals, but he should avoid the scattergun acquisitions that have swelled the portfolio over the past few years. He will have to earn the right to do any larger M&A.
If he can streamline — and turbocharge — what remains, he has a good chance of lifting sales. As price increases abate, the amount sold should naturally recover.
Barclays Plc analyst Warren Ackerman says that if 60 percent of Unilever’s portfolio can gain market share, compared with 48 percent in the first quarter, this could help it achieve an organic growth rate around the mid-single-digit level — at the top of the company’s long-term target.
Schumacher should have some good fortune when it comes profitability too. The big hikes in commodity costs that have crimped the margin over the past year or so are probably behind him. But he should avoid setting a margin goal. Jope’s decision in late 2018 to stick with the 20 percent set by Polman limited his room to manoeuvre and contributed to many of the nasty surprises over the past five years.
Schumacher has another thorny issue to navigate: Unilever’s focus on purposeful brands, which drew criticism from UK money manager Terry Smith. Some of this is simply canny marketing. Young people prefer companies whose values chime with their own. But amid a mundane performance, it can become a flashpoint for other investor gripes.
Smith took aim at Hellmann’s mayonnaise. But ironically, its campaign around reducing food waste, including its Super Bowl ad, drove dressing sales in the first quarter of the year. Schumacher should be more explicit about what attributes consumers are prepared to pay for.
Yet if these actions fail to deliver a sustainable improvement in performance, then the new CEO, supported by Peltz, must consider a more radical solution.
In simple terms, this would mean a split between Unilever’s food and non-food operations. But with the five business units, the company could be sliced and diced in different ways, and much of the groundwork for separation has already been done.
Analysts at Jefferies have estimated that a breakup could deliver more value for shareholders than the market is currently ascribing.
Since the failed GSK consumer bid — which would have precipitated food and refreshments being hived off — a split has been off the table. The new CEO will likely have the backing of shareholders for the current structure for now. And no leader wants to take an ax to their empire.
But if Schumacher fails to reverse the decades of underperformance, he and Peltz may have to consider a U-turn.
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