Unilever (NYSE:UL) generates more than half of its global sales from its foods business, yet the foods portfolio still accounts for just one-fifth of its sales in the Indian market. So far, personal care and home care brands have driven Unilever’s growth and penetration in India, but it is now attempting to fix this anomaly by integrating its food services business, Unilever Food Solutions (UFS), with the Out of Home (OOH) arm. The move is meant to give a greater push to its food brands like Knorr and Kissan, which face stiff competition from Indian players like ITC, Amul, Mother Dairy and global players like Nestle (NYSE:NESN). In the personal care categories, the consumer giant competes with Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and ITC.
Unilever’s Indian Paradox
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Foods and beverages accounted for more than 52% of Unilever’s global revenues in 2011. In contrast, it generated only 18% of its sales from foods and beverages in the Indian market, compared to 50% sales from home care and 30% sales from beauty and personal care.
The foods category is currently also much less profitable in India. Even though beverage brands like Bru, Lipton and Brooke Bond have performed relatively better, packaged food brands like Knorr, Kissan and Kwality Walls have significantly under-performed their competition in the country and have serious profitability concerns, in contrast to the global competence of Unilever’s powerful food brands.
Integrating Unilever Food Solutions (UFS) With The Out of Home (OOH) Arm
Unilever is now integrating its food services business, Unilever Food Solutions (UFS), with the Out of Home (OOH) arm, in a bid to drive sales of its food brands. It is expected to address the inadequate scale of its food business in India, which has been a drag on its profitability. An aligned portfolio and product innovation for the integrated foods businesses are expected to increase the speed to market and scale across the retail and institutional/vending channels. It will help Out of Home to extend reach beyond institutional vending channels into retail space by leveraging Unilever’s portfolio of food and beverage products.
However, many of Unilever’s popular brands like Hellmann and Blue Band can only have limited traction in the Indian mass market, and Unilever needs to enter into new food categories more suited to Indian consumer’s tastes instead on relying on Knorr, Lipton and Brooke Bond and further strengthen its home grown brands like Annapurna.
This may be the right time to focus on strengthening its foods business, given that the personal care business is already very strong in India and its biggest competitor P&G recently decided to decelerate its emerging markets expansion in the personal and home care categories to divert focus on its market share in the developed markets.
We have a $33 Trefis price estimate for Unilever stock, at a 5% premium to the current market price.