Has Unilever got its mojo back?

Unilever, purveyor of Dove, Domestos and Hellmann’s, has made headlines for the wrong reasons in recent years. Growth and margins have disappointed, its acquisition strategy has left investors scratching their heads, and the share price has languished.

But change is afoot. 

Unilever has a new Chair, Finance Director, and, crucially, a new CEO with an ‘Action Plan’ to turn performance around. 

Unilever has been its own worst enemy

Investor scepticism towards Unilever is understandable. Its operational execution over the last decade has left a lot to be desired. 

Unilever has been slow to respond to evolving trends. Innovation – the lifeblood of consumer goods companies – has been less impactful than it might have been. And too often, Unilever has been outmanoeuvred by more agile, entrepreneurial peers. As a result, many of its brands have lost ground to competitors (only 37% of Unilever’s business is winning market share on a rolling 12 month-basis). 

Portfolio re-shaping (e.g. acquisitions and disposals) could have reignited growth. But time and again, Unilever has missed the mark. 

The disposal of weaker brands has occurred at a glacial pace, while its acquisition strategy has been questionable. Back in 2016, it spent an eye-watering $1 billion on Dollar Shave Club – a subscription service for grooming and shaving products – which has not lived up to expectations. Meanwhile its proposed £50 billion acquisition of GlaxoSmithKline’s consumer business a few years ago led to an investor backlash and was rapidly aborted. 

The proof is in the pudding    

They say numbers never lie. For Unilever, this rings true.

In the last decade, sales and operating profit have increased at a compound annual rate of 1.8% and 3.6%, respectively. And performance has got worse, not better. 

Over the last five years, Unilever’s operating profit hasn’t grown, and its operating margins remain well below pre-pandemic levels. When combined with a falling valuation, it means Unilever’s share price is lower today than five years ago: 

Unilever's financial performance over last 5 years

Unilever share price (£)

New CEO – a lot to like

The appointment of Hein Schumacher as Unilever’s new CEO last summer was a surprise to some. He previously led Dutch dairy co-operative Royal FrieslandCampina.

However, I find a lot to like in Schumacher’s ‘Action Plan’. And while previous turnaround plans promised much but delivered little, this feels much more credible.

"Fewer things, done better, with greater impact”

Schumacher's mantra is about getting back to basics. This means a renewed focus on the biggest brands, instilling greater accountability and simplifying the business. Large acquisitions have effectively been ruled out and disposals accelerated. Cost savings will be pursued with renewed vigour, and part of the savings will be reinvested in branding and marketing.

A key aspect of the plan is a focus on bigger and bolder innovation. 

Unilever desperately needs to accelerate sales growth. Its aim is to become a research and development powerhouse, churning out meaningful innovations that make its brands really stand out. 

It’s unlikely to be a quick fix. Cultural transformation is never easy, especially for a company of Unilever’s size. Having said that, it sounds like there could be a lot of low hanging fruit to go after. And Hein Schumacher has already shown a willingness to take bold steps with the recently announced plans to separate out its ice cream business.

I think it’s a good move. Ice cream is a lower-margin business and has struggled recently, losing share to competitors. A separation (via a sale or separate listing) could simplify the group, free up resources to invest in the biggest brands and improve Unilever’s growth and margins. 

Running harder to stand still

Although I am attracted to Unilever’s turnaround plan, I think there is probably a limit to what the new CEO will be able to achieve.

While self-inflicted missteps haven’t helped Unilever’s cause in recent years, this isn’t the only reason it has struggled. I believe the competitive environment for Unilever and its peers has intensified.

Success for a consumer goods giant used to rely largely on two things: dominating shelf space in stores and large TV advertising budgets. The internet has levelled the playing field to some extent. Smaller players who were previously locked out of stores can take advantage of ‘unlimited’ online shelf space, while the advent of social media offers scope for smaller brands to reach a mass audience quickly and efficiently. 

Private label competition also presents a growing threat, in my opinion. The rise of discount stores combined with a greater focus from major supermarkets on own-brand products, has encouraged downtrading across many consumer categories. The recent cost of living crisis has accelerated this, meaning many consumer goods companies have experienced unprecedented volume declines.

Put simply, there is a limit to how much people will pay for household brands. While moderating inflation may stem the pressure, I don’t think the threat from private label will go away. This means brands will likely have to work harder to attract and retain customers.

Why I’m watching from the sidelines

I think Unilever probably has less pricing power than it did 10 or 15 years ago, meaning it will have to work harder to grow revenues and margins. This is why Unilever’s turnaround desperately needs to succeed.

The plans laid out by Unilever’s new CEO Hein Schumacher seem highly credible. In fact, I’m more confident in Unilever’s management today than at any time I can remember. If I were running a 50-stock portfolio, I’d probably own it.

But I’m not. I only own 15 companies in my Quality Shares Portfolio which means I can afford to be very picky. For now, I’m happy watching Unilever from the sidelines.