Unilever Delivers Volume Growth in 2010; Pricing Recovery Could Add Further Upside

Headquartered in the Netherlands, Unilever (NYSE:UL) is the second largest consumer goods company in the world after Procter & Gamble (NYSE:PG) and sells everything from soaps and deodorants to salad dressings, ice-cream and tea beverages. Its portfolio of billion-dollar brands includes Dove, Lux, Axe, Rexona, Surf, CloseUp, Signal, Wall’s, Lipton and Vaseline, to name a few.

Our price estimate for Unilever stands at $35.14, well ahead of market price.

See our full analysis and $35.14 price estimate for Unilever

Unilever recently announced its results for 2010, which highlighted its strategy amid sluggish economic conditions. As the global economy recovers from the recessionary macroeconomic period during 2008 and 2009, consumer demand seems to be picking up, albeit at a slow pace. The recovery has been notably sluggish in the West with North America and Western Europe recording under 4% economic growth.

In 2010, Unilever focused on volume growth at reduced prices. Amidst low employment and disposable income levels, many consumers substituted premium brand purchases for lower priced brands and private labels. Unilever increased its promotional spending and slashed prices of its products in an effort to be more competitive and gain sales volume in the process. Unilever also increased its spending on advertising, which further squeezed operating margins. While this strategy put pressure on Unilever’s product pricing and profit margins, the company was successful at maintaining (and growing) its market share.

Unilever’s home care segment, which includes detergents and cleaners, showed the highest volume growth in 2010, at over 8%. However, discounted pricing eroded almost 5%, leading to a 3% effective growth in dollar terms. Unilever’s foods segment witnessed stiff competition from both local brands and private labels and, as a result, could only generate 2.5% growth in volumes.

Emerging economies continued to be Unilever’s engine of growth for yet another year. Asia, Africa and Central and Eastern Europe grew in excess of 10% in terms of volumes. In Western Europe, price cuts seemed to have limited effect on volume growth – a 1.8% drop in prices could only generate a 1.4% growth in volumes, leading to a net decline of 0.4%.

Going forward, as macroeconomic conditions improve and consumer spending returns to pre-crisis levels, we expect a gradual recovery in prices, which could present Unilever with a notable upside opportunity.