Unilever’s (NYSE:UL) foods division, which contributes approximately 25% to the company’s total revenue, has been performing relatively poorly compared to other divisions. Foods revenue declined by about 2% in 2012 and 5% in the first half of 2013, owing to its weakness in spreads, particularly in margarines 
Despite the sluggish performance, Unilever does not intend to dispose of the spreads business as it forms an important part of its overall portfolio and accounts for 7% of its overall revenue. Additionally, the division is relatively more profitable than the company’s other food products. 
In this article, we discuss the challenges being faced by the spreads business and the steps Unilever is taking to counter each of these.
- Unilever 2015Q4 Earnings: Premium Products and Spreads Business in Focus
- Unilever Q4 Earnings Preview: Repeat of Q3’s Blockbuster Performance Unlikely
- How Does Unilever’s EBITDA Margins Compare With Its Peers?
- By How Much Will Unilever’s FCF Grow By 2020?
- How Is Unilever’s Revenue and EBITDA Composition Expected To Change In The Future?
- What is Unilever’s Current Revenue and EBITDA Breakdown?
1. To Address Consumer Concerns On Health: Earlier margarines were considered to be a healthier and lower-fat alternative to butter, which pushed many consumers to use the product. However, rising concerns about the presence of trans fats in margarines that increase the risk of heart diseases has led consumers to shift back to butter. Realizing the trend early, Unilever removed trans fats from its soft spread brands such as Country Crock and I Can’t Believe It’s Not Butter in 2009.  The company intends to increase the naturalness and tastes of its products in the future as consumers become increasingly cautious of processed foods, including margarines. 
2. Closing Taste Gaps To Grow Despite Declining Market: Euromonitor expects retail volumes for margarines to decline at an annual rate of 4.6% during 2011–2016.  Unilever is preparing itself for the dim outlook by closing taste gaps among consumers. It launched Flora Buttery and liquid margarines in Europe. It also recently re-launched the Flora margarine with its old taste after consumers clamored over the reformulated flavor and sales declined by more than 10% from the beginning of 2013 to May.  Besides launching variants that suit consumer tastes and preferences, Unilever plans to improve the marketing of margarines as a healthy alternative to butter. This will help the company better communicate the health benefits derived from the product. 
3. Taking A Hit On Profit Margins To Get Back Share From Competitors: Consumers are switching to alternatives due to high promotional activity and high pricing competition in the spreads industry. This has been one of the major factors causing the decline in Unilever’s spreads business. Hence, the company is working on the pricing of its products. 
Unilever earns higher EBITDA margins on spreads (>25%) compared to the overall foods division, which has margins at about 18%.  This offers it the scope to get back its share by reducing prices for spreads, thereby taking a temporary setback in margins of up to 5 percentage points. The consequent increase in market share from lowering the prices will depend on how competition responds to the company’s move. Even if Unilever decides to take a full 5 percentage point cut in spreads EBITDA margin, and the market share increases enough only to offset the revenue impact of price decreases, we estimate that there will be a limited downside of 2%–3% to Unilever’s stock.Notes:
- Unilever Q2 2013 Earnings Announcement, Unilever Investor Centre, July, 2013 [↩]
- Unilever Q2 2013 Earnings Call Transcript, Seeking Alpha, July, 2013 [↩] [↩]
- Butter’s Back — Sales Rise As Consumers Seek Pure Ingredients, AdvertisingAge, June, 2012 [↩] [↩]
- Best Bits: Unilever Likely To Stick With Spreads, Just Food, May, 2013 [↩] [↩]
- Margarine Performs Embarassing U-turn After Consumers Complained About New Taste, Mail Online, June, 2013 [↩]
- Unilever Q1 2013 Earnings Announcement, Unilever Investor Centre, July, 2013 [↩]