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When we wrote about Unilever in March 2017 we summarised its appeal in one paragraph: it offered, we said, “a low-ticket, repeat-purchase business model with economic resilience and pricing power, generating high, compounding returns on invested capital and converting its earnings consistently to cash, a strong balance sheet and long-term dividend growth, which has averaged more than 10pc over the past 50 years; despite the current low inflation environment the company continues to grow its dividend at 6pc per annum”.
This is a description of the kind of business you should never sell. The question is: does it still meet that description?
Let’s zoom in on one word of it: “compounding”. This is the ability of an enterprise to recycle its profits into new opportunities that are equally profitable. Do that consistently and your shareholders will be happy. Over many decades Unilever’s new opportunities have taken the form of selling its existing brands in new territories and buying or developing new brands.
Key to its success in doing this profitably has been its “one size fits all” approach to marketing: ideally you want each of your products to be sold under the same brand everywhere and for your advertising of each brand to work everywhere. This keeps your costs down. Unilever adopted this aspect of “globalisation” long before the word become ubiquitous.
Here we arrive at the first of the company’s problems: globalisation is stalling for a variety of reasons, from a popular belief that it has ended the rise in living standards for many in the West, to a desire for more robust supply chains less dependent on an unpredictable China and better able to cope with upheavals such as the pandemic.
In sympathy with this trend, the rise of globalised brands, at least when it comes to the food, personal care and cleaning products that Unilever sells, is also under threat.
“For a long time global brands have been the place to be and Unilever has ridden the wave,” says Tineke Frikkee of Waverton Investment Management. “But now local brands are gaining share, helped by technology.”
Before the internet came along it was almost impossible to create a successful brand from scratch if you lacked the kind of marketing clout, backed by a big budget, that came with being a long-established, deep-pocketed company such as Unilever. You used the profits from your existing brands to nurture new ones – exactly the kind of compounding we spoke of.
This has changed. Now start-ups with novel ideas and catchy names can get consumers’ attention with a clever social media campaign or the use of local online “influencers”. These quirky products, well rooted in their places of origin, can establish a rapport with target customers in a way that a big-budget advert for Persil, say, cannot.
Now Unilever and its ilk are perfectly aware of this and are responding in a number of ways. In some cases they are simply buying up these competing brands to develop them in house and market and sell them more widely via their existing distribution networks. Otherwise they are trying to create their own new products, sometimes via internal “incubators”.
This may succeed in the sense that sales growth is maintained but it’s harder work than the old, globalised approach. You may have to pay a full price for those brands you buy or tailor your marketing to each locality, or simply find that they don’t have what it takes to be truly global brands.
All of this means less top-line growth and lower margins. “It is hard – how do you manage all these local brands? For us the jury is still out on whether Unilever can do enough to grow and maintain margins,” says Frikkee. At the same time the company has been selling some of the older brands that have run out of steam, although Frikkee says its record as an astute buyer and seller of brands is “mixed”.
“Unilever is very well managed: it has great teams, a pioneering approach to minimising its environmental impact and a good innovation machine,” she adds. “The problem is that the bigger you get the harder it is to keep growing and as its markets fragment its scale becomes a hindrance. Addressing this is like turning around an oil tanker. It is gently regaining market share.”
It feels like Unilever is running hard to stay still and we have to fear its glory days as a steady compounder are behind it. It’s no more than a hold.
Questor says: hold
Share price at close: £43.58
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