Unilever has said it expected its food business to have performed better in 2012 and said innovation will be an important source of gross margin improvement in the division in the new financial year.

Foods growth for the Knorr stock cubes and Flora butter producer was weak in fiscal 2012, in part due to “difficult” markets.

Food sales were up 3.3% to EUR14.44bn, but volumes were down 0.9%. Core operating margin was flat with lower gross margin, reflecting the impact of higher commodity costs, offset by lower advertising and promotions and overheads.

Addressing analysts on the firm’s earnings call this morning (23 January), CEO Paul Polman said he “expected [food] to do better”.

“Our food category underperformed. We continue to remove small non-core parts of our portfolio to get fully behind our innovations. This category plays once more a very important role in the business … as a cash generator and I do not see any reason why we shouldn’t have better growth. We continue to shed the non core parts of the portfolio and will continue to do so.”

The Anglo-Dutch consumer goods giant is currently undergoing a review of the business, which it says is designed to “sharpen” its food portfolio in order to deliver “sustainable” growth for the group. The group is focusing its growth efforts on its faster growing personal care and household business as well as stepping up expansion in emerging markets.

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To date, the pruning of its food business has included the sale of its Skippy, Bertolli and PF Changs frozen businesses in the US, as well and a tomato products subsidiary in Brazil.

Polman told analysts Unilever’s food business, which is 40% weighted to the emerging markets, now comprises three core activities: spreads, dressings and savoury.

Unilever revealed its spreads business saw sales drop on pricing in the fourth quarter and the group’s core savoury business was “sluggish”, despite efforts to revitalise the business by focusing on NPD. In contrast, dressings “continued to perform well” despite an increase in competitive behaviour, the group added.

“In margarines the markets are down and continue to decline but we are actually growing our share in a declining market and managing our cash flow,” Polman told analysts. “That will be a drag on the growth rates but it will be a contribution to the overall financial performance of the company and we will continue to manage it that way without expansion.”

Dressings, Polman said, is “a very health business” and “growing very well”. “We continue to expand that business with a good pipeline of innovation. “Our savoury business is the balance of the business.”

On geographies, he added: “Our emerging market business is growing well, our European business gets the double whammy of being in Europe with mature shares in markets that are down. And then there is a little drag on the savoury business because of non strategic brands that we will continue to look at and find solutions for.”

Polman told analysts that while 2011 had been “one of the most challenging years I could remember”, he said: “I’m not sure 2012 frankly was any easier”.
The CEO said Unilever battled commodity cost inflation in 2012 and said there was “no let up” in competitive pressure in some of its categories. A slowdown in growth in emerging markets and the cumulative impact of austerity measures hitting consumer confidence, also had an effect.

“It requires a different way of running your business to be successful in navigating this volatility,” Polman said. “The businesses that will prosper will be those businesses that can adapt and adjust to this environment. Unilever is fit to compete and consistently achieving performance above industry.

“Many of our competitors have lost ground for too long and I’m sure they will come back in 2013, so we are prepared once more for an even more challenging year. Where we need to focus on is … even better progress on gross margin … as fuel for growth. We are in a better place now than ever to deliver on this momentum we have created.”

CFO Jean-Marc Huet said the company expect “steady gross margin improvement” over the course of the year and is forecasting cost inflation to be low to mid-single-digits.