The divide between Unilever’s high-growth home and personal care business and its food operations has attracted reams of copy. And Unilever’s stronger performance in emerging markets in non-food has prompted much speculation the group could, at some point, split the businesses in two as it expands in developing economies. However, Unilever has repeatedly rebuffed such conjecture – and for good reason.
Unilever is a multinational with a comparatively strong presence in emerging markets, which today account for around 55% of its business. And the proportion of sales generated in developing economies is ever increasing, as revenue growth outstrips that of developed markets. Last week, the company reported sales in emerging markets were up by 10.4% in the first quarter compared to a drop of 1.9% in developed markets.
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Unsurprisingly, Unilever plans to continue growing its business in the fast-growing markets of Asia, Africa and central and eastern Europe. And, as part of this journey, the FMCG giant announced today (30 April) that it hopes to up its stake in listed Indian subsidiary Hindustan Unilever.
Under Indian securities and exchange regulations, Unilever can take up to 75% of Hindustan Unilever shares before the company has to be delisted. While a spokesperson for Unilever insisted the group has “no plans” to go beyond that 75% benchmark, the group is hoping to increase its stake from the 52.48% share it currently holds.
The motivation for this is fairly obvious: Unilever wants to take a larger cut of the potential profits it expects the Indian business to generate in years to come. It is prepared to pay a premium (of around 25% on Unilever Hindustan’s current trading price) in order to secure that future revenue stream.
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“This represents a further step in Unilever’s strategy to invest in emerging markets and offers a liquidity opportunity at what we believe to be an attractive premium for existing shareholders,” Unilever CEO Paul Polman said today.
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By GlobalDataAs with Unilever’s other emerging market operations, the greater proportion of Hindustan Unilever’s business is generated by its home and personal care operations. Food is not only a smaller part of the business, it is also growing at a slower pace.
So, while further exposure to emerging markets is clearly on Unilever’s agenda, it could at the same time fuel long-running speculation the company could look to free-up cash for expansion, and generate some hefty shareholder returns, by dividing into two: food and non-food.
Certainly, this discourse was back on the agenda last week, when it emerged that the group’s spreads business was one of the weakest first-quarter performers. Stopping short of suggesting a full split, analysts claimed the poor performance could trigger further disposals of non-core units (such as the recent sale of the Skippy peanut butter brand).
“We believe weakness in spreads, the main reason for the soft quarter, could trigger talk of a disposal of the business,” Kepler Capital Markets analyst Jon Cox wrote last week.
However, significantly, Unilever is confident it will grow food sales in time – and that the lag is a reflection of the wider macro-economic environment in emerging markets.
As a spokesperson for the group told just-food this afternoon, as economies develop there is a faster take-up of non-food products – in particular personal care items. Demand for processed and branded foods will follow as consumers become increasingly affluent, the argument goes.
In short, Unilever is confident as emerging economies develop, growth in food will catch up with the non-food side of the portfolio.
In this scenario, the company’s strong distribution channels in non-food will mean that it is extremely well-placed to rapidly meet the needs of consumers as the economy develops and the demand for processed foods grows. If management is in it for the long game – which it certainly seems to be – why, then, would the group consider dividing its operations?
