Unilevers spreads business is estimated to enjoy margins of over 20%

Unilever's spreads business is estimated to enjoy margins of over 20%

What will Unilever do with its spreads business? After that part of the company's portfolio was a factor in first-quarter sales that missed analyst expectations, the question has returned to the minds of some in the investment community.

Unilever's operations in emerging markets - where it sells more home and personal care products than food - continue to thrive (suggesting, meanwhile, that Nestle's issues in these regions are more company-specific). The company also continues to expand in fast-growing markets, as its decision to up its stake in its Indian subsidiary demonstrates.

All that means Unilever's food operations, which at present are weighted to mature markets like Europe and North America, are in the spotlight. The first three months of the year were not all bad for Unilever in food: it saw growth from its savoury and dressings businesses.

However, questions are again being asked about its spreads operations, which saw sales fall in the first quarter. The future of Unilever's spreads operations, which include brands like Flora and Becel, has been a continued subject of debate in recent years - we asked CEO Paul Polman about it at the Consumer Analyst Group of Europe conference in 2011 - but the company has continued to stand by the business.

That said, some believe another quarter of falling spreads sales - and the fact it was a key factor in Unilever missing analyst forecasts - could see talk of a disposal return. "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.

But there appear to be a few obstacles to a sale. One, Unilever's spreads business - it accounts for around 7% of turnover - is a sizeable asset with a presence in markets around the world. Many potential suitors are regional (think Arla Foods, Dairy Crest or US co-ops like Land O'Lakes). "They are the global leader in the category; all the other players are regional character or often things like co-operatives. I struggle with who would have the strategic intent or financial capacity to buy it," Investec analyst Martin Deboo tells just-food. With the capital intensive nature of the spreads business and volatile dairy prices meaning uncertainty in profits, the division is unlikely to be top of the list for many private-equity firms.

Moreover, though struggling for top-line growth, Unilever's spreads assets are estimated to be highly profitable. Investec estimates margins from Unilever's spreads business are over 20%. A disposal would likely be dilutive to earnings. As well as a lack of obvious buyers, the financial benefit it brings to Unilever, even if sales are under pressure, suggests a sale is unlikely. Deboo points to the savings Unilever enjoys with having products like spreads and dressings in its portfolio. "There's quite a lot of procurement synergy with the dressings business so a [sale] would destroy a bit of value there," he says.

Speaking after its first-quarter sales were announced, Unilever was insisting it would stick with the spreads and business and look to tighten up its marketing and innovation. "We need to win on taste, improve the communication of the health credentials of our brands. And we have closed taste gaps in most of our products and we are addressing the remainder. And at the same time, we will continue to build consumer appreciation of the healthiness of our spreads. We're moving to fewer, more natural ingredients and clean labeling supported by some great communication," CFO Jean-Marc Huet said.

Even with a weak quarter putting spreads under fresh scrutiny, with potential buyers thin on the ground and the profit benefit it gives to the company, Unilever is likely to persevere with the business and keep trying to turn it around.