To compare companies like Nestle, Danone and Unilever may appear a futile exercise to some – given the different categories in which the three food giants operate. However, analysts in Europe and the US do study and draw parallels from the financial performance of all three companies – as well as forecast how each will fare in the year ahead. Dean Best looks at how the firms performed in 2010 and how they may progress (or otherwise) in 2011.
It’s approaching the end of February and the bulk of the world’s largest food companies have filed their annual results – at least those which report on the basis of a calendar year.
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Financial media and analysts have studied the numbers for signs of how food makers are navigating what remains a fragile recovery in many markets in the West and perhaps over-heating economies in the East.
Europe’s three food heavyweights – Nestle, Unilever and Danone – have all booked their results for 2010 and, while they are clearly different businesses in some ways, it is useful to compare how each company fared last year – and how they may perform in 2011. The three companies are leaders in a number of food categories and how they deal with the recovery – and with powerful retail customers, particularly at a time of volatile commodity costs – can provide lessons for the thousands of smaller competitors operating in their sectors.
Unilever was the first to report at the start of the month. The Anglo-Dutch conglomerate posted a 26% rise in annual profits thanks to lower restructuring costs, proceeds from business disposals and, notably, accelerating underlying sales in the final three months of 2010.
However, on the day the results were announced, Unilever’s shares fell as analysts pointed to a fall in fourth-quarter margins amid rising commodity costs. The investment community was also concerned about Unilever’s ability to deal with a more expensive raw-material bill this year, although one senior executive at the Knorr soup maker told just-food that the company could “deal” with commodity inflation.
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By GlobalDataTwo weeks later, Danone’s shares rose as the French company reported a 38% jump in its earnings for 2010. Lower financial costs helped the bottom line but operating profit was up 12% on the back of a 14% increase in sales. Danone chairman and CEO Franck Riboud said emerging markets had driven the gains and, looking at the company as a whole, he said the yoghurt maker would “aim to outperform our competitors” in 2011.
Last week, Nestle posted a rise in 2010 profits, boosted by proceeds from the sale of its shares in eyecare business Alcon. Stripping out that disposal, net profit from continuing operations was down – although EBIT and sales rose. Nestle insisted it had “outperformed” the market, its shares rose and analysts were broadly upbeat about the Swiss company’s performance.
Yesterday, Nestle restated its 2010 sales figures after adopting a new accounting method. The change saw Nestle deduct trade spend – including discounts and certain allowances and promotions to retailers – from its proceeds of sales, rather than the marketing line. As a consequence, Nestle’s annual sales were lower but the company said the change would “align us more closely with our peers”. Nestle also switched from reporting EBIT to trading operating profit, a change it again said would make its results more comparable to its competitors.
So, with the numbers in – and Nestle’s restated figures considered – who performed strongest in 2010? For some, Danone caught the eye. “Danone is navigating the pricing environment better than I had expected,” Morningstar analyst Philip Gorham tells just-food.
“I think Nestle is doing a pretty good job too, but its growth will slow when [coffee business] Nespresso cycles harder comps next year. I would describe Unilever’s performance as solid but I would have expected more than the 5% revenue growth that they finished the year with, given their emerging markets growth opportunities.”
Jon Cox, head of Swiss research at Kepler Capital Markets in Zurich, labelled Danone the “clear winner” in terms of sales growth due in the main to the company’s acquisition of Russian dairy business Unimilk last June.
“Purely looking at the top line, Danone probably will potentially be the fastest growing of the three in the short to medium term. Danone has focused on volume-led top line growth over the last 18 months and has been successful,” Cox says.
Danone, however, perhaps has not matched the margin growth seen at Nestle, Cox suggests. “Nestle has a good mix – top line and the margin growth, which maybe Danone hasn’t got around to getting,” he explains. “This is reflective of the more value add of Nestle’s portfolio on an overall basis.”
Cox also characterises Unilever as “the dark horse” of the three companies after seeing its top line and margins grow across the whole of 2010. “In terms of valuation, Unilever has the most potential in terms of a re-rating. People rate it still as a slow growing European food company,” he says. “If you get top-line growth [in 2011] somehwere close to 5% and above, then you could see a quite dramatic re-rating come through on that stock.”
At the start of 2011, with commodity costs rising, there was the fear that manufacturers would not be able to easily pass on those costs to retailers facing a weak consumer outlook. Cox, however, believes the results of Nestle, Danone and Unilever – for all the relative differences in performance – would have settled nerves.
“There was a scare at the start of the year that with the high commodity costs that [manufacturers] wouldn’t be able to pass on prices. The results reassured. We saw good growth in Q4 from all of them when the comparables started to get pretty tough because obviously the rebound started in Q4 of 2009,” Cox says.
All three companies have different challenges ahead in 2011, not least in maintaining margins in the face of the commodity storm. However, the added-value flavour of Nestle’s portfolio – and Danone’s to a certain extent – should help protect margins. As the fourth quarter of 2010 showed, Unilever may find it tougher, although it remains bullish.
“The results season shows that food companies with strong brands will survive quite easily and will be able to increase prices,” Cox says.
Analysts, meanwhile, also often look to each company’s exposure to emerging markets as a factor when estimating their future performance. Nestle’s restated sales may mean that the proportion of sales it makes from those markets – said to be around 35% in 2010 – is now higher. Over half of Unilever’s total turnover is in emerging markets but the bulk of its business in those markets is in home and personal care.
As an investor, Unilever’s presence in emerging markets would be an attraction. Gorham suggests that Unilever “really dominates some important markets, such as India”. However, looking squarely at each of the three companies in terms of food, Danone wins out, with half its sales in 2010 coming from emerging markets in the wake of the Unimilk deal. Unilever has been vocal in recognising that it has to build its food presence in emerging markets, with the bulk of its food business in the mature and recently-depressed markets of North America and western Europe.
As well as the battle to win over wary western consumers, expansion in emerging markets is likely to be a key issue for all three companies this year and more investment is almost certain. Investors will be watching those moves with interest.
