Unilever’s Growth Held Back by Emerging Markets

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Unilever (NYSE:UL) marked a not so healthy start to fiscal 2014 with 3.6% growth in underlying sales (sales from continuing operations excluding acquisitions, disposals and currency movements). This was sequentially lower compared to 4.1% growth achieved in the final quarter of 2013 due to slowing growth in the emerging markets. In the past few quarters, currency devaluation in many developing countries has created inflationary pressures on buyers who in turn have reduced their consumption. Currency headwinds further had about a 9% negative impact on the company’s revenue which fell by 6.3% to EUR 11.4 billion ($15.6 billion) due to foreign exchange losses. [1]

While Unilever’s personal care, home care and refreshments segments delivered underlying sales growth of 4.5% or more, foods sales fell by 1.7% owing to the weakness in margarines that the company has been facing for the past several quarters. The Anglo-Dutch consumer goods giant is taking different steps to turnaround foods but conveyed that investors must be patient because the company is confronting the challenge of driving growth in the declining market for margarines. [2]

We are in the process of updating our $44 price estimate for Unilever’s stock, based on the recently announced results.

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Emerging Markets Hold Back Unilever’s Growth

Unilever achieves the majority of its overall growth from developing economies such as Brazil, Argentina, India, Indonesia, and South Africa. These markets witnessed their currencies depreciate rapidly in the second half of 2013, thus creating an inflationary environment and forcing consumers to reduce buying activity. As a result, Unilever’s Q1 underlying sales growth in the emerging markets decelerated to 6.6% year-on-year from 8.4% in the previous quarter.

Towards the end of the year, Unilever’s CEO, Paul Polman, warned the market that the emerging world slowdown will stay for a long period due to the lack of economic reforms. [3] We believe that Unilever’s growth in home and personal care will decelerate amid a prolonged emerging market slowdown. The home and the personal care categories together generate about 80% of Unilever’s emerging market sales, and hence are most prone to emerging market volatility.  Also, the company intends to raise prices in the developing countries to counter commodity cost inflation which could further weigh on the demand. [2] Despite the deceleration, we think that these categories will grow faster than others as emerging market growth is expected to outpace growth in the developed world.

Foods Will Take Some Time To Regain Momentum

Unilever’s foods business has been suffering due to the sluggish performance of spreads, which generate close to 7% of the company’s total revenue. High promotional activity and pricing competition in developed economies are causing consumers to switch to private label spreads manufacturers. Additionally, health concerns over the presence of trans-fat 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 time frame. [4]

Unilever is working to improve the taste profiles and naturalness of its products by responding to consumer feedback. The company is trying to market margarine as a healthier yet great tasting alternative to butter. It has also divested many of its non-core brands such as Ragu sauce, Wishbone and Skippy in order to increase its focus on spreads. During the earnings call, Unilever’s management announced that divestment spree of its North American foods businesses is now over. [2]

All this helped the company to grow its market share in margarine in both Europe and North America. However, the declining market for margarines pushed foods underlying sales down by 1.7% year on year. We believe that Unilever’s 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 will be a challenge for the company.

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Notes:
  1. Unilever Trading Statement First Quarter 2014, Unilever Investor Relations, April 24, 2014 []
  2. Unilever Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 24, 2014 [] [] []
  3. Unilever CEO Says Emerging Market Slowdown to Last for Years, Bloomberg, December 2013 []
  4. Butter’s Back — Sales Rise as Consumers Seek Pure Ingredients, Ad Age, June 26, 2012 []