News that Unilever has sold its Skippy peanut butter brand comes as little surprise. The well-flagged disposal follows a number of divestments in the packaged food space. The consumer goods giant is clearly hoping that its food interests will benefit from greater focus, while the decision to shed a largely US-leaning brand reflects Unilever’s disposition towards emerging markets. Katy Askew reports.

Unilever announced yesterday (3 January) it has entered into an agreement to sell Skippy, its US peanut butter business, to Hormel Foods for US$700m. The sale comes at the end of a review of the business and is designed to “sharpen” its food portfolio in order to deliver “sustainable” growth for the group.

In the context of Unilever’s group operations, Skippy is a relatively small business which booked revenues of around $370m last year. The vast majority – around 85% – of Skippy’s sales are generated in the relatively stagnant and highly-competitive US market, where it is the second-largest seller behind JM Smucker’s Jif.

According to details released by Hormel Foods, Skippy’s US sales are growing in the “low single digits” and – while Hormel believes there is room to grow share in the US – it is clear that any such attempt will come at a cost in terms of the brand’s margins.

This would likely represent an issue for Unilever. If Skippy’s normalised profit margins stand in the region of 10-15%, as was suggested by Hormel management during a conference call after the deal was announced, they already lie below Unilever’s food average of 17-18%. In addition, the business is heavily exposed to volatility in the commodity markets through its reliance on peanut prices.

The decision to shed the brand, coupled with the previous move to sell-off its US Bertiolli and PF Changs frozen food brands to ConAgra, suggests Unilever is further shifting its business to focus on driving growth in emerging markets. Indeed, the combined revenues generated by these disposals mean the company has off-loaded units that account for a total of around 8% of US retail sales.

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By GlobalData

“Representing just over 0.5% of group sales (and just over 1% of developed market sales) this is obviously a modest deal, but together with the exit from US frozen foods, it continues to skew Unilever towards emerging markets,” Panmure Gordon analyst Graham Jones observes.

Unilever is one of the best-positioned multinationals in emerging markets, which currently account for over 50% of group sales. Clearly, the firm is confident the developing world holds the greatest long-term potential for profit growth.

While the sale of Skippy increases the proportion of revenue Unilever generates in emerging markets, it simultaneously increases the proportion of revenue generated by the group’s personal care units.

Unilever has insisted it remains committed to the food side of its business. However, it has focused its attention largely on its faster-growing personal care and household products business which has a strong presence in emerging markets and boasts an organic growth rate of about 10%.

The group has made a number of acquisitions in this space, while simultaneously trimming back its food portfolio in a series of divestments over the past four-to-five years.

As Euromonitor senior company analyst Ildiko Szalai tells just-food, historically when Unilever has sold off one of its food units it has reinvested the proceeds in the personal care side of the business. If this strategy continues to be pursued, Szalai warns that Unilever risks making its food businesses increasingly less relevant.

Significantly in the shorter term, Szalai suggests Unilever will have to consider ways to grow its North American business, which is its “worst performing” unit.

“Given that they have said they are not planning to divest the whole US food division, they still need to do something with it. Volumes are still declining. They have to do something – if not divestment they will have to consider other options to make it grow.”

The sale of Skippy suggests Unilever believes its US business will be better-positioned to turn its fortunes around if it is a leaner, meaner machine. In the US, Unilever’s remaining business will be focused on its branded ice cream offering and – to a lesser extent – its tea, spreads and dressings line-up.

But improving the performance of these units will require investment. The US is a highly competitive and saturated market and operating in it requires money. Money to spend on marketing, money to spend on innovation and NPD, money to spend on promotions and pricing.

Unilever is, however, pouring significant investment into a number of areas – notably ice cream, where its innovation levels have been high. The company has invested heavily behind product development with the launch of new Ben and Jerry’s varieties and marketing that aims to communicate a distinct brand identity.

In 2011, the group also launched its single-serve Magnum brand into the US market, a sign, Jones argues, that Unilever is “confident they can grow their business in even the most competitive of markets”.

However, it is perhaps worth noting that Unilever is coming up against Nestle’s powerful Dryers and Häagen-Dazs brands in the market. Again, Unilever finds itself in a position where share gains are likely to be costly and marginal at best. Nor is the group likely to benefit from incremental growth because, although it is attempting to carve out a niche in the less-popular single-serve sub-category, the US ice cream market is not experiencing growth.

As Unilever looks to move its food operations in the US forward, it faces some significant challenges. If it is to be successful in this endeavour, the consumer goods giant must find a growth area that will keep US food relevant in terms of the group’s overall growth strategy.

For further insight into Hormel’s plans for the Skippy brand, click here.