Unilever is seeing almost completely the opposite of the growth trends we would have predicted pre-Covid-19

Unilever, with its mix of food and HPC, is a bellwether for consumer staples – so its first-half results next month should tell us much more about how the sector has been affected by Covid-19. We expect good and bad news.

The trends in Unilever’s portfolio are a microcosm of the challenges faced by many fmcg companies, perhaps amplified because it is both a food and HPC company. Its out-of-home ice cream business (sales €3bn) will be hit hard as there has been no Easter sell-in, and despite the heatwave, beaches have been practically empty. Its €2.5bn foodservice operation is also under tremendous pressure and could be down by as much as two-thirds.

Its personal care business (with the notable exception of skin cleansing) is also struggling, particularly grooming, as people work from home and have less usage occasions. This looks increasingly structural as flexible working appears to be one of the biggest changes in behaviour due to Covid-19. Its small but fast growing prestige cosmetics business will be hit by channel closures that e-commerce growth will not be able to fully offset.

The good news is that its slow-growth foods business is booming, as scratch cooking is being revived and comfort eating all the rage. Its hygiene and laundry business is also well positioned to benefit, with handwashing trends forever changed. In short, almost completely the opposite of the growth trends we would have predicted pre-Covid-19.

The picture is no less complex by geography or by channel. Management are confident that Asia (especially India) can bounce back quickly, helped by their favourable portfolio mix to household and hygiene, but the prospects for Latin America are much less positive, with Covid-19 hitting the region hard. Unilever has struggled to grow in the US for years but it is starting to fight back in the battlegrounds of US ice cream, tea, hair and mayonnaise against entrenched competitors.


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By channel, e-commerce growth has exploded. In just 10 weeks in the US, there has been the same penetration increase in e-commerce as there has been in the previous 10 years. Right now what matters is household penetration. In Unilever’s biggest markets, household penetration is up 400bp vs the last quarter, which shows its competitiveness is improving. Hanging on to these new consumers once lockdown eases will be the next big challenge.

Being able to cope with this extreme level of volatility makes agility the most important corporate trait of all. To this end, Unilever has moved from a monthly to a weekly planning cycle. It is manufacturing only its biggest and most productive SKUs, and has deployed small squads in areas such as receivables collection, and is ensuring it has the right price points for its brands in a recession. It has cut 20% of projects from its innovation funnel to only focus on the biggest, boldest ideas that will move the needle. It has increased its sanitizer production from two sites to 60 sites and increased capacity by six hundred times. It was able to launch a new Lifebuoy sanitizer in Vietnam in just 25 days.

None of these actions is a nice to have: they are a must have. The world economy may be in the deep freeze, but consumer trends have never changed faster. It all means that investments in digital and big data have never been more important.

In terms of profitability, the focus is on cash preservation and absolute profit rather than percentage margin. There clearly will be some operational margin deleverage from lower volumes and negative channel mix, with out of home consumption moving in home, but how much is not clear. Unilever hasn’t abandoned its 20% margin target but it is not a priority right now. Our analysis shows it is spending at competitive levels in brand and marketing, but its capex and particularly its R&D spend is lagging its peers.

Spending more is not really the problem: the issue is consistent execution and developing more impactful innovation. P&G has shown the way in recent years and Unilever needs to follow suit and prove it can sustainably grow at the top end of its 3%-5% organic growth range.

Unilever has a very competitive value portfolio especially in emerging markets (which account for 60% of its sales), in which if consumers trade down, it doesn’t mean they have to trade out of Unilever’s portfolio. Management made the salient point that those companies that are able to grow volumes in a recession tend to grow value share in the years after a recession. This makes the imperative to improve competitiveness even more acute.

Unilever has a history of coming out of crises stronger than it went in, but once again it will need to prove its mettle. If successful it could pave the way in showing the fmcg industry what the ‘new normal’ really looks like.