Unilever has suggested it will work to further rationalise its portfolio – opening up the possibility more disposals could be in the offing – as it looks to focus on fewer, stronger brands in order to “max the mix”.
In recent years the group has pursued an aggressive disposal agenda, offloading a swathe of food brands including the Skippy peanut butter business in the US earlier this year. Unilever is understood to be seeking buyers for its European meat snack brand, Peperami, and its US salad dressing business Wish-Bone.
Disposals weighed on the group’s first-half net sales, trimming 1.1% off the top line. However, Unilever suggested it is likely to continue to rationalise its portfolio in order to concentrate on businesses that generate higher returns.
“We have disposed of many of our businesses around the peripheries. As a result our sales are now concentrated on fewer bigger brands… nearly two-thirds of our turnover is now in our four billion-euro food brands as a result of the aggressive divestiture of non-strategic assets. These are brands with strong equities and broad relevance. It is also… the most focused food portfoio of its kind with leading positions globally,” Unilever CEO Paul Polman told analysts during a conference call this morning (25 July).
Unilever is also working to reduce the number of SKUs it carries, Poleman continued. The firm has cut its SKUs by around 20% “but we have a lot more to go”, Polman added.
“Some people will say you need more SKUs to grow. I actually am in the camp that if you have less SKUs you can grow better. If you have more SKUs there are always some SKUs on life support and you know the [UK] National Health Service is becoming pretty expensive. Rationalising these are actually helping us to bring in more focus.”
While Polman conceded Unilever’s rationalisation plan could dent the group’s sales in the short term, he insisted that, looking beyond quarterly results, the group would reap the operational benefits. “Longer term it gives you better brands and better equities,” he insisted.
Even as Unilever is increasing the focus within its food business, Polman emphasised the group remains committed to the turnaround of its under-performing spreads unit. The Dutchman said he was “frustrated” with the progress made in spreads to date, but insisted Unilever “knows what we have to do”.
“It is about staying price competitive, it is about getting the right taste, and it is about the perceived naturalness of our products. That is the way to unlock growth in this category…. it will take time but we have the technology, marketing skills and now the organisation to deliver.”
As the company looks to strengthen its remaining brands, it will focus on increased marketing and innovation. Polman suggested innovation will also be key to improving margins as it focuses on more premium products. “One-third of future innovations are set to deliver above average margins,” he revealed.
Unilever reported a 40 basis point improvement in core operating margins and a 120 basis point improvement in gross margins this morning. Operating profit rose 14% in the six month period, the group reported.
Shore Capital analyst Clive Black attributed the improved operating performance to management’s efforts to rationalise the portfolio and build its innovation pipeline.
“Gross margin advancement reflects the benefit of new innovation as well as pruning activities where management felt that category and market profitability was too low. Such work was clearly evident in H1 but in a measured manner more is to come, particularly against an increasingly competitive and challenging market context,” Black observed.
The company is also working to grow its food brands in emerging markets, which now account for around 40% of “food brand equity”, Polman said.
While the firm has seen a slowdown in emerging market growth, which nevertheless remained in the double digits, Polman suggested Unilever is well-positioned to grow in developing countries, even if they are no longer as buoyant.
“Brazil, Russia, India and China have all seen downgrades to growth forecasts and the markets in which we operate certainly have slowed,” Polman said. “Some people continue to be concerned on the emerging markets. The economies are slowing down, especially in China and Brazil. We deal with this by launching new brands… by stepping up our innovation base and [controlling costs].”