Unilever (NYSE:UL) is one of the world’s leading packaged food producer. Its products ranging across spreads, sauces, soups and salad dressings have traditionally dominated grocery shelves of developed countries. According to our estimates the company commands close to 50% market share in these product categories. The food business contributes to around 30% of the company’s revenues and also offers its highest margins (19%, compared to a company-average of around 15%). It’s not difficult to see why we think this segment constitutes the largest part of the company’s share price. We estimate that the Unilever stocks derive around 36% of their value from packaged food sales.
Yet, all is not well with this segment. Although Unilever has overall performed well in the recent quarter (recording a 10.3% increase in quarterly revenues), the food business was a notable underperformer, marking a 0.4% decline in quarter sales. The company also lost market share for items such as food spreads, a traditional stronghold for the company. Also, the company’s shares in the overall food spreads and seasoning market has declined at a rather alarming pace in recent times, down from around 60% in 2008 to just below the 50% mark in 2012.
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The reasons for this decline can be traced to two distinct factors:
1. Unilever is moving its focus to core brands in developed regions
Unilever has been following a policy of strongest-brands-first in developed regions such as the U.S. Stagnating markets and increasing price competition have forced the company to go on the defensive in these regions. In the past few years, Unilever has sold its numerous brands and businesses in the sector. In July this year, Unilever sold off its North American frozen meals portfolio to key competitor ConAgra Foods for a sum of $265 million. 
The company is also planning to sell off certain brands that it considers is hampering its focus on other profitable products. The company is possibly looking to offload its ‘Skippy’ brand of peanut butter in the U.S.,  and ConAgra and B&G have already expressed interest in these units. Unilever hopes that these divestment will help the company in two ways: improving its focus on marketing and the production of core brands such as Hellmann’s and Knorr while simultaneously freeing up resources to fund its expansion into emerging economies. Such policies may be good for the company’s long-term outlook but are certainly hitting the company’s top-line in the short run.
2. Inability to gain traction in emerging markets due to low adoption and stiff competition.
Unilever has a strong historical presence in emerging economies such as India, China and Indonesia. Its portfolio in these countries has been a mix of personal care products (soaps, cosmetics, creams etc) and fabric care products. But the increasing prevalence of urban lifestyles and increasing disposable incomes have led to a rapid growth in packaged foods consumption in countries like China and India.
However, this market has been tapped more effectively by local players who understand cultural tastes and preferences and also provide their products at lower price points. This has largely hampered Unilever’s attempts at gaining a significant share of this market. To add to the competition, the last few years have seen a mass influx of other big rival names. Kraft Foods (NYSE:KRFT) and Nestle (PINK:NSRGY) have announced their intention to significantly increase their presence in emerging economies and are arming themselves with innovative products, packaging and advertising. 
Will Unilever’s developed market gamble pay off? Will the company be able to carve out a significant chunk of the emerging markets?
The answer right now is a tentative ‘yes’. There are many factors working in Unilever’s favor. The company has a broader and more well-established sales channel than its rivals, with access to some remote parts of countries such as China and India. The company has well-established credentials in the market, making it a name that consumers can trust. The company also has significant cross-selling opportunities, courtesy its vast portfolio of products. Unilever itself is highly committed to increasing its revenues from emerging market. According to a statement made by Paul Polman, the company’s CEO, Unilever aims at increasing its business in the developing markets from the present 56% to nearly 75% by 2020. 
Although a significant chunk of this is expected to come from product segments in which Unilever has a better footing (such as personal care), packaged food sales will also need to increase. Overall, our long-term outlook for the company remains positive. We expect improved returns for Unilever in the food segment in emerging economies, effectively making up for the top-line loss seen in the developed regions.
We currently have a Trefis price estimate of $39 for Unilever, which is in-line with the market price.Notes:
- Unilever Press Release, July 2012 [↩]
- “Skippy suitors include ConAgra and B&G, says report; but Unilever remains tight-lipped“, November 2012, Food-Navigator USA [↩]
- “Emerging Markets Will Drive Growth Says Kraft Foods“, November 2011, LiveMint.com [↩]
- “Using the right Levers for emerging markets“, November 2012, The Hindu Business Line [↩]