Here’s How Unilever Plans to Revive Growth

by Trefis Team
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A slowdown in the emerging markets and heavy foreign exchange fluctuation during the last two years have taken a toll on the fortunes of global consumer processed goods companies. Unilever (NYSE:UL) is no exception – sluggish sales and currency headwinds dragged its revenues down by 3% in 2013 as well as 2014. The recent economic downturn and uncertain growth prospects in the emerging markets raises the question as to what Unilever is doing to overcome the adverse macroeconomic environment.

To revive growth, Unilever has pinned its hopes on a three-pronged strategy involving portfolio optimization, changing the focus of innovation, and sustainable practices. [1] In this report, we look into each of these aspects of Unilever’s growth strategy in detail.

Our price estimate of $39 for Unilever is about 10% lower than its current market price.

See our complete analysis for Unilever here

Portfolio Optimization: Focus on Premium Personal Care

Portfolio optimization is the main pillar of Unilever’s long-term growth strategy. Under this plan, Unilever is strengthening its position in the premium personal care segment under its ‘Prestige’ category of brands. Towards this end, Unilever has sped up its acquisitions in the high-end personal care products segment since last year. In the last one month alone, it acquired three skincare brands: Murad, Dermalogica, and Kate Somerville.

Unilever’s acquisitions in the personal care space so far have been relatively small in size. For instance, Dermalogica had revenues of $240 million in 2014, while Murad’s revenues were $115 million. Comparatively, we estimate that Unilever’s total revenues from skin care stood at $15 billion in 2014. [2] This puts incremental revenues from the two aforementioned acquisitions at a mere 2% of Unilever’s skin care division. The company has not disclosed the terms of any of its acquisitions, making it impossible to evaluate if Unilever made the purchases at a bargain or overpaid for them.

Unilever’s increased focus on the personal care business is clear from the persistent increase in personal care’s share of revenues in the company. In 2008, personal care accounted for 28% of the company’s total revenues, which increased to 37% by 2014. (Read: The Rise of Personal Care in Unilever’s Portfolio) The increase in market share was accompanied by a gradual expansion in Unilever’s market share in the skin and hair care, deodorants, and oral care businesses. The company now plans to bolster its ‘Prestige’ portfolio of brands in the premium personal care segment.

On the other hand, the revenue share of Unilever’s foods business steadily declined from 35% in 2008 to 28% in 2014. This had raised speculation that Unilever may be planning to exit from its foods business completely. (Read: Unilever: Key Trends to Watch in 2015) However, Unilever recently stated that it is focusing on driving volume growth in its foods business by “addressing new opportunities.” [1] Unilever may still continue to divest its underperforming foods brands, but it may be safe to assume that the company intends to retain its presence in the foods business for the near future.

Innovation: Shift of Focus to Product Discovery

According to Unilever, so far the company focused its R&D efforts primarily on “deployment”, that is, supply chain mechanisms. Now, it plans to shift its primary R&D focus to “design”, or product packaging. It also intends to increase resource allocation to product discovery, meaning creation of new products. [1]

Unilever expects this shift of focus in its R&D strategy to result in a 20% increase in future incremental revenue. It also claims that 75% of its new innovation will be “margin accretive”. The company did not provide details of how it arrived at these estimates. Nevertheless, we concur that Unilever’s new R&D strategy has the potential to give a boost to its product portfolio as well as revenues.

This is because R&D efforts in “deployment” results in a better supply chain, which results in better margins but doesn’t affect a company’s top line. In contrast, innovation in product development and packaging are directly correlated to revenue growth. Therefore, a higher focus of R&D efforts in these two areas is likely to result in higher revenue growth over the long term.

It should be noted that Unilever has mentioned a change only in the allocation of R&D resources and not in the total R&D spending. Therefore, we believe that this change in strategy will not have a notable impact on our EBITDA margin forecasts.

Sustainable Practices: Environmental Consciousness is Good for the Business

As part of its long term growth strategy, Unilever plans to combine commercial growth with sustainable practices. Sustainable practices involve according a high priority to procuring raw materials through sustainable sources and minimizing water consumption and wastage, among other things. Unilever expects that such sustainable practices will result in cost savings of €200 million. Further, the company also claimed that its brands with a social purpose have grown at double the rate of the rest of the business. [1]

We have previously postulated as much in context of Unilever’s rival Kimberly-Clark’s (NYSE:KMB) strategy of increasing the proportion of alternative raw materials in its products. (Read: Kimberly-Clark’s Push For Alternative Raw Materials Kills Two Birds With One Stone) Procurement of raw materials through sustainable sources not only reduces input costs over the long term, but also contributes to a brand’s perception among the environmentally conscious consumers. Publicizing such practices results in additional PR points for the company, which goes towards building brand value over the long term.

It is worth noting that a Nielson survey last year showed that 55% of online consumers polled across 60 countries admitted that they would be willing to “pay more for products and services provided by companies that are committed to positive social and environmental impact”. [3] In fact, as many as 52% of the survey respondents check the labeling of products to ensure that the brand is “committed to positive social and environmental impact.”

Thus, it is clear that such environment-friendly practices provide the dual advantage of improving the bottom line as well as the top line over the long term. However, unless Unilever provides concrete details of its sustainable practices plan, it is not possible to quantify the impact of this strategy on its future revenues and margins.

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Notes:
  1. Unilever at Deutsche Bank Conference, June 11, 2015 [] [] [] []
  2. Based upon 2014 annual average exchange rate of $1.1766 per Euro []
  3. Global consumers are willing to put their money where their heart is…, Nielsen, June 17, 2014 []
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