Unilever..."is your margin simply just too high?"
Unilever..."is your margin simply just too high?"
The London giant finally posted a year of volume growth, but analysts are wondering if the prices are too high.
After eight straight quarters of losing sales volume, Unilever reported two-quarters of positive volume growth. The London-based giant, selling everything from Dove Soap to Ben and Jerry's ice cream, closed 2023 with .2% higher volume than the previous year. For the year, underlying sales increased 7%, driven almost all by price increases. Notably, the fourth quarter saw growth accelerate to 4.7%, driven by 1.8% of volume.
Despite these gains, not everything is rosy. Last year, only 37% of Unilever's business grew faster than the competition as consumers pivoted towards more affordable brands. This was mostly prevalent in Ice Cream and Nutrition, which saw volume declines of 6% and 3%, respectively. For most of 2022, prices across the business increased double digits for four straight quarters.
Management is doubling down on its so-called 30 Power Brands to counteract the share losses. These brands account for 90% of the company's total growth and 75% of volume and saw an 8.6% increase in sales last year. Price decreases aren't really an option.
Unilever plans to bolster these brands through increased marketing investments, including a significant push in digital and eCommerce, which grew by 16% in 2023. It's essentially an application of the Pareto Principle, named after the Italian economist Vilfredo Pareto. At the turn of the 20th century, Pareti observed that 20% of the population controlled about 80% of Italy's wealth, meaning their success would have an outsize impact on the country's future.
Unilever is doing the same thing here, only focusing on driving premiumization through its "core brands."
Not everyone is sold.
The company controls about 20% of the global ice cream market and is hemorrhaging sales to competitors. Instead of outright list price changes, Unilever is boosting advertising and promotions (which are temporary price decreases.) "That suggests that profitability was still too high, and pricing needs to be adjusted," an Analyst from Sanford Berstein and Co. said. "Given the disconnect that's so obvious in the results, is your margin simply just too high?"
Management argued that the integrated nature of ice cream (refrigerated supply chain combined with traditional RGM strategies) makes it a bit more complicated.
Unilever is betting on premiumization, not price.
Premiumization is the practice of charging more for products by offering new value or innovation
An example of this strategy in action is Vaseline Gluta-Hya, a premium skin cream with a new vitamin C technology. It retails for about 5x the price per ounce of traditional Vaseline jelly.
The company claims it has a new, rigorous methodology to ensure this happens profitably. But again, what management team doesn't claim that?
"We don't expect negative pricing for the whole group," an executive told investors.
This is tied to ongoing SKU rationalization.
SKU rationalization involves streamlining product offerings to reduce complexity and costs, focusing on high-performing and strategically important products.
Significant SKU rationalization efforts were undertaken to simplify operations and enhance scalability, resulting in a mid-20% reduction in SKUs, which impacted competitiveness and volume.
Personal Care would be in tough shape if it wasn't for developing markets.
The Personal Care division represents about a quarter of company sales and increased nearly 9% in 2023, driven notably by mid-teen deodorant growth.
For the full year, volume in developed markets was down 1.8%.
"Despite the strong financial performance of our Personal Care business, we are disappointed with the erosion of competitiveness in the U.S., where we have been too slow in responding to the consumer shift to an emerging super-premium segment," CEO Hein Schumacher said.
Looking for vertical integration in materials
The company is looking for acquisitions throughout its supply chains, specifically noting surfactant cost disadvantages in North America.
Surfactants help shampoos and body washes lather up and spread smoothly over people's skin.
They said it:
CEO Hein Schumacher on if its prices are too high:
That competitiveness number is bottoming out. We are not happy with that. I've been -- we have been very, very clear on that. However, we are not sitting on our laurels. We have given -- we've presented a clear action plan by the end of October and exactly around the themes that you talked about, which is about unmissable brand superiority, making sure we develop the market and the categories, making sure that we drive up our margin and so forth. That is what we're doing. That is what we're executing against. And that is not something that you turn in 1 quarter, but we have also signaled that we're going to -- that you should see improvement on this in the balance of 2024.