Unilever Expects Weaker Sales In H2FY14 Despite Strong Emerging Market Demand
Unilever (NYSE:UL) presented a business update for H2FY14 at the Sanford C. Bernstein Strategic Decisions Conference on September 17, 2014. The company stated that market growth for consumer goods has slowed from 2.5% in Q2FY14 to less than 2%. [1] This commentary from Unilever resulted in the biggest fall in nearly a year for Unilever’s shares. Recently, cosmetics major L’Oréal also raised concerns on slower market growth for the latter half of the year. [2]
In the first half of FY14, the Anglo-Dutch conglomerate had revenues of €24.1 billion (~$33 billion), down almost 5.5% from a similar period last year. However, underlying sales continued to remain robust, growing 3.7% from H1FY13. The company also presented some insights into its smallest operating division, the Home Care business. Unilever’s Home Care sales stood at €4.5 billion (~$6.2 billion) in H1FY14, representing about 18% of Unilever’s turnover. Sales from the business declined 2.8% year-on-year in H1FY14, although underlying sales expanded nearly 7% during the same period.
In this article, we present key takeaways from Unilever’s presentation. We have a Trefis price estimate of $47 for Unilever, approximately 10% higher than its current market price.
See our complete analysis of Unilever here
Sluggish Performance from Developed Markets to Persist Through H2FY14
Unilever’s developed markets of North America and Europe posted flat sales in H1FY14 on a year-on-year basis. Although this growth rate was considerably better than -1.3% it registered in H1FY13, demand in developed markets continues to remain extremely sluggish. Sales from North America expanded negligible 0.4% last quarter while European sales dropped 0.8% last quarter from the year-ago period. Unilever has stated that the market growth rate for consumer goods in developed economies has fallen into the negative.
In the North American market, Unilever’s personal care division experienced healthy growth. However, the foods unit continued to face significant headwinds. While refreshments and dressings posted good growth in volumes, Unilever elected to sell the Ragu and Bertolli pasta sauces and Slim-Fast businesses in H1FY14. A three businesses are leaders in highly competitive categories. [3] In Europe, Unilever had positive growth in the U.K., France and Nordic countries while Spain and Greece continued to see some recovery. However, challenges in Central and Eastern European markets weighed on overall performance, dragging down sales growth.
For the second half of fiscal 2014, we expect the ongoing Eurozone crisis to weigh on Unilever’s results. In particular, the company believes its Foods segment should weigh on its results from developed markets for the second half as consumption falls. We believe the North American market is likely to perform better than other developed economies, driven by a relatively stronger economic recovery in play. Overall, developed markets continue to face significant headwinds from weak consumer demand across the Foods and Personal & Home Care product categories.
Greater Consumer Stickiness for Home Care Products to Expand Share
Unilever’s Home Care division has contributed to nearly 18% of FY13 sales, at €9 billion. The division consists of three product lines: fabric cleaning, fabric conditioners and household care products. The fabric cleaning product line, which includes brands such as Ariel, Skip, Surf and Radiant, accounted for nearly €6 billion in sales in FY13. Fabric conditioners such as Comfort and Snuggle accounted for about €1 billion in FY13 sales while Household care brands such as Cif, Domestos and Sunlight generated about €2 billion in FY13 sales.
The Home Care division has accounted for nearly 18% of Unilever’s sales for the past 10 years. Comparatively, the revenue share of the Foods division fell from 36% in 2004 to 27% in 2013. We believe Home Care products are less discretionary than Unilever’s products in the Foods category. This increases the stickiness in demand from consumers in a weak economic environment when consumer propensity to spend declines. Within the Home Care division, we believe the fabric cleaning and household care product lines are relatively less discretionary than the fabric conditioner line.
Additionally, the Home Care division has much greater exposure to emerging markets. Last fiscal year, Unilever generated nearly 80% of Home Care sales from emerging markets. Comparatively, we believe this share from emerging markets for its Foods division is much lower. This strong position in emerging markets for the Home Care division, along with a less discretionary nature of these products, has been the reason for a decent performance historically. Going forward, we believe its emerging market presence will lift overall performance for Unilever’s Home Care division.
The company is planning to build new product formats such as concentrated liquid and capsule-based detergents and super-sensorial fabric conditioners. [4] Moreover, Unilever also plans to enter markets of Ethiopia and Myanmar and leverage its existing strength to launch new products like Cif in Brazil and Omo in the Middle East. [4] These initiatives should build on Unilever’s already robust emerging market position within the Home Care division. However, the current inflationary environments in Asia-Pacific and Latin America could partially depress reported sales for new products.
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Unilever comments spark share price fall, Financial Times, September 2014 [↩]
- L’Oreal Shares Retreat as Agon Lowers Forecast for Market Growth, Bloomberg, September 2014 [↩]
- Unilever H1FY14 Press Release [↩]
- Unilever Bernstein Presentation [↩] [↩]