Unilever Going Heavyweight On Spreads With Sale Of Top U.S. Pasta Sauce Brand

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Anglo-Dutch consumer goods company, Unilever (NYSE:UL), has been pruning its portfolio for a while to revive declining sales at its foods division. According to a Bloomberg report, the company is now considering selling Ragu pasta sauce, the crown jewel of its pasta business. Ragu contributes about 40% to Unilever’s $1.2 billion annual pasta sauce sales, as per Euromonitor and Liberum Capital data reported by Bloomberg. Other recent divestitures by Unilever to realign its food portfolio include the sale of its Wishbone, Skippy and Peperami brands. [1]

According to data cited by another Bloomberg report, pasta sauce sales in the U.S. have declined by nearly 6% in the past two years. Broadly in line with this trend, Ragu’s sales have fallen by 18% since 2009. Further, Ragu led the U.S. market in 2013 with about 27% share; however, it is losing ground to private-label players, who have seen their share double to 9% in the last decade on the back of high promotional activity and pricing competition. [2]

Food products such as spreads, savories, dressings and soups generate about $18 billion in sales for Unilever, and account for about 30% of our $44 valuation for Unilever’s stock.

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Similar Weakness Seen In Spreads Category

Unilever is facing similar woes with its spreads business. Consumers in the developed countries are switching to private label spreads manufacturers. Additionally, health concerns over the presence of trans fats in margarines (an important spreads category for Unilever) is leading consumers to shift back to butter and other healthier alternatives. Euromonitor expects retail volumes for margarines in the U.S. to decline annually by approximately 5% over the  2011–2016 tiemframe. [3]

Spreads Is More Important From A Strategic Standpoint

While Unilever has sold many of its under-performing brands, it has also stepped up efforts to bring spreads back on track. That’s because a substantial 7% of Unilever’s $66 billion annual revenues come from spreads. Spreads also have higher profit margins than the overall foods division. [4]

In the last few quarters, Unilever improved the taste profiles and the naturalness of its products by incorporating consumer feedback. The company worked to efficiently market margarine as a healthier but still a great tasting alternative to butter. This helped it to grow market shares in margarine in 11 of its top 14 markets in Q4. [5] We believe that Unilever’s market share in margarine, and also its market share in spreads, will continue to grow as the company ramps up its efforts to establish a stronger foothold in the market. However, driving market growth in the margarine category itself is a challenge that the company will have to confront.

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Notes:
  1. Unilever Said To Seek Up To $2 Billion For Ragu Sauce, Bloomberg, March 04, 2014 []
  2. Selling Ragú: Here’s Why Unilever Wants to Break Out of Jarred Sauce, Bloomberg Businessweek, March 04, 2014 []
  3. Butter’s Back — Sales Rise as Consumers Seek Pure Ingredients, Ad Age, June 26, 2012 []
  4. Best bits: Unilever likely to stick with spreads, just-food, May 01, 2013 []
  5. Unilever Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, January 21, 2014 []