Unilever (NYSE:UL) is the second largest consumer goods company in the world behind Procter & Gamble (NYSE:PG). It competes with the likes of Colgate-Palmolive (NYSE:CL) and Procter & Gamble, across a variety of product segments including personal care products (hair care, skin care and deodorants), detergents, surface cleaners and oral care products. Unilever also owns a wide portfolio of packaged food items such as soups, cheese spreads, margarine, ice creams etc. Its key competitor in this segment are Nestle and ConAgra.
The company has a wide geographical footprint, and deep penetration in the emerging markets. It currently generates over 50% of its revenues from emerging markets, and the company’s growth plans are strongly focused in this direction. Unilever wants to earn as much as 75% of its total revenues from emerging markets by 2020.
The company’s revenues stood at $65 billion in 2011, compared to $59 billion the year before. A major driver for this growth was Unilever’s robust sales in emerging markets, especially in personal care products such as soaps and shampoos. In 2011, the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) margin stood at around 15%, a marginal decline over the previous year’s margins.
The two most valuable product segments for Unilever which we’re going to evaluate in this analysis are food and personal care.
The Food Division
The food division consists of the grocery segment and includes brands like Helmann, Becel and BlueBand, which offer food spreads and dressings. The segment also includes Unilever’s ice cream business, which operates through popular brands such as Wall’s, Algida, Cornetto and Magnum.
The Grocery Segment
The grocery segment contributed around 30% to total revenues in 2011, down from around 35% in 2008. The segment contributes around 36% of the company’s stock price, making it the company’s most valuable segment. In absolute terms, the segment’s total revenues have gone down from $21 billion in 2008 to around $19 billion in 2011. The company has seen market share in the segment (at a global level) decline by around 9 percentage points since 2008. A major reason behind this decline has been the company’s decision to offload major chunks of its food business in recent years.
Key Trends In The Grocery Segment
1. Focused portfolio with fewer offerings: A majority of the grocery segment’s sales come from developed markets, unlike other segments. This is because packaged foods haven’t really taken off in a big way in emerging economies due to different lifestyle choices. But with the economy stagnating in most developed economies, demand for packaged food has not seen much of a rise over the last few years.
In order to focus on bigger opportunities, the company is consolidating its wide portfolio in grocery products towards a select portfolio consisting of only the most popular and profitable brands. This strategy has caused overall sales to slide in the recent past, but we expect the decline to stop from 2012 and market share to hold steady at current levels in the near future.
2. Improved profitability due to key divestments: Unilever’s policy of focusing only on the most profitable brands in this segment has led to decline in sales but provided a boost to company’s bottom line. The operating margin for the segment stood at around 15.6% in 2009, but now currently stands at 20%. We expect the company to at least hold on to its margin levels in the segment in the near future.
3. Increased uptake in emerging economies may provide long term growth: Unilever’s grocery sales are largely limited to developed economies right now. However, with time we expect the emerging markets to open up with lifestyle changes and increasing levels of disposable income, driving the uptake of packaged foods in regions like India and China.
The Ice Cream Segment
Unilever’s ice cream segment contributes around 12% to the company’s revenues, and around 7% to the total value of its stock. The segment has been performing well in terms of sales in recent years, with revenues increasing from around $6.6 billion in 2008 to $7.8 billion in 2011. The company’s ice creams have sold well in emerging economies, and a few of its products (such as Magnum) have also performed particularly well in the U.S., largely because of innovative packaging, advertising and new flavors. We expect the company to continue on this growth trajectory in the future.
The segment’s robust top line growth has come at the cost of the segment’s margins as Unilever continues to play the price card for attracting consumers, especially in emerging economies. The company’s relative lack of pricing power has seen operating margins decline steadily from around 14% in 2008 to around 8% in 2011.
We believe the company’s margins are close to bottoming out in the ice cream segment. As the company gains dominance in terms of market share, we expect Unilver to gradually strengthen its pricing. This should have a positive impact on the segment in the long run.
The Personal Care Division
Unilever is a traditional powerhouse in global markets in skin care products, with leading market share in soaps and shampoos in both developed and emerging economies. The company dominates global sales of soaps with brands like ‘Dove’ and ‘Lux’ under its belt. The company’s ‘Vaseline’ range of skin care creams is the largest selling product in its category, both in the U.S. and at a global level.
Personal care products contributed to around 40% of the company’s total revenues in 2011, and around 44% of the company’s stock value. In absolute terms, the division’s revenues have increased from around $15 billion in 2008 to around $21 billion in 2011.
Key Trends in Personal Care
1. Deep sales channels in emerging economies driving sales growth: Unilever’s strong foothold in the emerging economies of South and South East Asia is allowing it to tap the boom in demand for personal care products in these regions. The company has very deep sales channels in countries such as India and Indonesia with its brands visible even in remote towns and villages. Competitors such as P&G are finding it hard to match Unilever in this respect.
2. Expanding portfolio through key acquisitions: The company’s efforts at displacing competitors in segments such as hair care have gained pace in recent years with some key acquisitions. In 2011, Unilever acquired European personal care company Alberto Culver, which generated annual sales in excess of €1.2 billion (US$1.6 billion) in fiscal 2010. With the acquisition, Unilever becomes the world’s leading company in hair conditioning, the second largest in shampoo and the third largest in styling. In the hair care segment, Unilever has traditionally trailed close competitor Proctor and Gamble, especially in developed economies.
3. Beating competitors on lower prices: As opposed to close competitor P&G, Unilever’s personal care products are generally available at a lower price point. This is helping Unilever make market share gains both in price-sensitive emerging economies as well as developed economies, where consumers are becoming increasingly price-conscious due to turbulent economic conditions. Moreover, Unilever has carried over ideas first implemented in emerging markets, using it to drive sales in developed markets facing economic slowdown, such strategies include smaller packaging in order to provide consumers with a low entry point for products.
The company’s focus on beating competitors through lower pricing is also made evident by Unilever’s operating margins. The company’s EBITDA margins in the hair and skin care segment have consistently hovered around the 17-18% mark over 2008-11, while P&G’s EBITDA margins in beauty products have stood at over 21% for 2008-11. Meanwhile, P&G’s margins stood at nearly 26% in 2008, but have been declining steadily ever since, as the company has focused on reducing prices in order to catch up with Unilever, especially in emerging economies. Despite this, we expect Unilever to continue to make strong gains and keep P&G at bay in personal care products in the near future.
We currently have a Trefis price estimate of $39 for Unilever, which is in line with the market price.