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Investment Overview for Unilever Group (NYSE:UL)
Unilever's Share of Global Skin & Hair Care Market: More than 80% of Unilever's sales in the emerging markets come from its personal care and home care businesses. We estimate that Unilever's Skin Care & Hair Care Market Share gradually increased from 11% in 2008 to 13% in 2013, before declining to 11% in 2014. We expect Unilever's Skin Care & Hair Care Market Share to reach 14% by the end of our forecast period. There will be a more than 10% upside in our valuation for the company if the market share crosses 15% by 2021.
Unilever's Market Share of Grocery: Unilever's share of the grocery market(that includes savory, dressing and spread products) declined from 69% in 2008 to 41% in 2014 due to poor performance in the highly competitive European market. The decline in market share was also heavily impacted by the gradual sale of food brands owned by Unilever between 2008 and 2014. We expect Unilever's market share to decline slightly in the medium term while it continues divesting its foods business. Thereafter, we expect its market share to stabilize as Unilever's stronghold in the emerging markets partially offsets the increasing competition. There could be a more than 10% downside to our price estimate if Unilever's grocery market share declined to 15% by 2021 due to continued divestment of its food brands.
Unilever N.V. (NYSE: UN) is a public limited company registered in the Netherlands. The company's shares are and depositary receipts for shares are listed on the Euronext Amsterdam and New York Stock Exchange.
Unilever PLC (NYSE: UL) is a public limited company registered in the UK and Wales which has shares listed on the London Stock Exchange, and American Depositary Receipts, on the New York Stock Exchange. The two parent companies, NV and PLC, together with their group companies, operate as a single economic entity, the Unilever Group.
Unilever is a market leader in mass skin care products and deodorants, and the second largest player in daily hair care products. Principal brands in personal care include Dove, Lux, and Rexona (including Sure and Degree), Sunsilk (including Seda / Sedal), Axe and Pond’s. Other important brands include Suave, Clear, Lifebuoy and Vaseline, together with Signal and Close Up in oral care. Personal care accounts for 37% of Unilever's revenues and 39% of its operating profit.
Unilever is also a global major in savory products, dressings and spreads. The company manufactures soups, bouillons, sauces, snacks, mayonnaise, salad dressings, olive oil, margarine, spreads and cooking products such as liquid margarine, and some frozen foods. It markets them under key brands such as Knorr, Hellmann’s, Becel/Flora (Healthy Heart), Rama/Blue Band (Family Goodness), Calvé, WishBone, Amora, Ragú and Bertolli. Savory products, dressings and spreads account for 26% of Unilever's revenues and 41% of its operating profit.
Unilever is a leading manufacturer of ice cream sold under the international Heart brand, including Cornetto, Magnum, Carte d’Or, Solero, Wall’s, Kibon, Algida and Ola. Other popular brands include Ben & Jerry’s, Breyers, Klondike and Popsicle. Unilever is a leading manufacturer of tea beverages. Principal tea brands are Lipton, Brooke Bond and PG Tips. The ice cream and beverages business segment, as reported by the company, also includes weight management products, the principle one being Slim-Fast. It also includes nutritionally enhanced products that are sold in developing markets. Ice cream & beverages account for 11% of Unilever's revenues and 19% of its operating profit.
Unilever's home care business includes laundry products, such as tablets, traditional powders and liquids for washing clothes. Tailored products including soap bars are available for lower income consumers. Unilever's brands include Omo (‘Dirt is Good’ platform), Surf, Comfort, Radiant, Skip and Snuggle. Unilever's household care products include surface cleaners and bleach, which are sold under the Cif, Domestos and Sun / Sunlight brands. Home care accounts for 19% of Unilever's revenues and 9% of its operating profits.
Unilever's strategy for growth has been to strengthen its existing popular brands through innovation and by improving its products rapidly to suit the latest consumer preferences. Unilever has also accelerated changes in its production & distribution systems to make its supply chain more cost-competitive and to deliver its products faster across multiple markets. "One Unilever" program is one such example. Unilever's business is highly diversified and it makes conscious efforts to have a workforce that is equally diverse so that it can cater to its consumers in international markets more efficiently.
Trefis believes that Unilever’s Personal Care business, specifically the Skin and Hair Care segment, is the most value accretive division of the company. This is because of the following reasons:
- Led by globally renowned brands like Dove, Lux and Sunsilk, the Skin and Hair Care division accounted for 26% of Unilever’s total revenues in 2014.The division reported EBITDA margin of 21% in 2014, which is over 10 percentage points higher than the EBITDA margin of Unilever’s Ice Creams and Beverages divisions.
- The company is currently pursuing an aggressive acquisition strategy in the personal care business, specifically in the premium category. The strategy is aimed at consolidating Unilever’s market share in the global personal care products industry and shoring up its defense against Procter & Gamble’s increased focus in this sector. As a result, we believe that the revenue share of Unilever’s Skin and Hair Care division is likely to increase in the medium term. Consequently, Unilever is likely to derive an increasingly higher proportion of its value from the Skin and Hair Care segment in the future.
- It is worth noting that the Skin and Hair Care division’s revenue share in 2014 was the same as that of Unilever’s Food division. However, Unilever has been shifting its focus away from the Food business in recent years and is giving more emphasis to the personal care business. This is clear from the fact that it has been divesting its foods brands since 2008. In 2014 alone, the company sold the popular Ragu and Bertolli pasta brands and announced that it will split its spreads business into a separate, standalone company. This strategy is in stark contrast to Unilever’s acquisitive expansion strategy in the personal care business. Therefore, although the foods business may currently forms a substantial part of Unilever’s operations, we believe that its importance for Unilever is likely to decline over the medium term.
Heavy focus on premium personal care segment
Unilever is pursuing an acquisition-driven strategy for its personal care business, with a specific focus on the premium segment. In calendar 2015, it has acquired several relatively small premium skin care brands like REN Skincare and Murad, among others. In the fiscal 2015 second quarter earnings call, Unilever stated that it plans to bring up the revenue share of its personal care business to 50%. This demonstrates the extent of the company's focus on the personal care sector.
Aggressive expansion across emerging markets
While P&G has set a target to add 1 billion new customers this decade, Unilever has set an ambitious target of doubling its sales by 2020. Both consumer giants have been pursing aggressive expansion across emerging markets of Asia, Africa and Latin America by entering new country-product categories with huge investments in distribution and marketing.
Emerging markets are the next frontier of growth for the personal care products industry. Growth in the developed markets is expected to remain in the 1% to 2% range over the medium term due to sluggish consumption and market saturation. On the other hand, expanding GDP of a number of emerging market countries is expected to help the personal care products industry to grow by mid-single digits over the medium term.
Though Unilever trails P&G in terms of global sales, it has a larger presence in emerging markets. While P&G generates less than 40% of its total revenues from emerging markets, Unilever earns over 55% of its sales from these markets. By 2020, Unilever expects developing markets to account for 70% of its total sales, with about two-thirds of that coming from growth in the overall size of those markets and the other third from an increase in Unilever’s share of those expanding markets. It is also likely to benefit from P&G's recent decision to put its expansion in emerging markets on hold to divert focus on reclaiming market share in its core country-product categories.
Unilever has stronger distribution networks in emerging markets compared to P&G (whose emerging markets expansion has turned out to be hugely expensive) and also gets strength from a strong "shakti women" network for sales in rural and remote markets of Asia and Africa. Unilever also succeeded in keeping its prices more competitive than its rivals and introduced smaller pack sizes, which has helped it grow volume market share in these markets.
Overhaul of the supply chain and business operations ensure improved efficiency and operating margins
Unilever is gradually integrating its supply chain and business operations to reach a large number of consumers across multiple markets in a more cost-effective way. Although restructuring charges related to streamlining of existing production and distribution infrastructure may negatively impact Unilever's operating margins in the short term, cost savings from increased efficiency is expected to drive margins higher in the long term.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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