Unilever braces for COVID-19 economic downturn: ‘A deep global recession has already started’
The coronavirus pandemic cast a long shadow over yesterday’s conference call with Unilever management.
As CFO Graeme Pitkethly sombrely noted, the World Health Organization (WHO) reported a ‘record increase’ in confirmed cases of this ‘terrible disease’, with ‘more than 12m cases globally’. As if underlining the point, in the space of around 24 hours the WHO figure rose to more than 15m confirmed cases this morning.
“The risks presented by the pandemic have not reduced,” he told analysts and investors as the company discussed its second-half results.
This leaves Unilever – and the world – preparing for an uncertain, but decidedly gloomy, economic outlook. “The only certainty at the moment in economic forecasting is that there's a huge range of possible outlooks, each containing differing assumptions, mostly driven by the scale and duration of lockdowns, the impact of restricted living conditions on consumer spending as lockdowns are eased, as well as ultimately the timeline for a vaccine,” Pitkethly observed.
Unilever is not betting on a rapid bounce back. “We believe that talk of a quick recovery is definitely at the optimistic end of the scale. A deep global recession has already started and consumer habits are changing quite dramatically.”
These changes are sparked by a ‘rapid rise in unemployment across markets’. Even people who manage to hold onto their jobs are likely to pivot to a more frugal outlook, saving more and spending less, management at the Knorr-to-Mangnum manufacturer believes.
Alongside Unilever CEO Alan Jope, Pitkethly noted that price will become ever more important to purchasing decisions in the months – and possibly years – to come. “In a recession, the role of price, value and affordability will be paramount in driving the penetration of our brands,” he suggested.
Improving penetration reflects the importance that Unilever management places on maintaining, and growing, its volume sales when the economic environment turns sour.
“Improving penetration has a direct positive impact on volume growth and volume market share. And we know from experience of many crises over the years that protecting volumes during a recession is key to long-term competitive growth. In fact, brands which grow volume during recessions tend to grow value share over the subsequent five years 1.4 times faster than those that don't,” Jope explained.
The chief executive said that Unilever is already making headway on this metric. “We've seen strong recent increases in our household penetration for our brands and now just over 50% of our business is winning volume market share.”
‘Living with COVID’
Hopes for a vaccine remain high and many are optimistic that the world will be able to put the lockdowns and social distancing now shaping our daily lives behind us in short order. Only this week, UK Prime Minister Boris Johnson suggested normality could return ‘by Christmas’.
Unilever management does not share this rosy assessment. “We're moving out of response mode to living with COVID-19 as a permanent feature. There is no quick fix. A new normal will emerge,” Jope predicted.
The London-headquartered consumer goods giant is preparing itself to operate within this ‘new normal’. And much can be learnt from how it has been able to adapt in the first six months of this tumultuous year.
Releasing its first-half earnings yesterday, the company beat analyst expectations on both revenue and margin.
Unilever reported six-month sales of €25.7bn, down 1.6%, with an organic sales decline of 0.1%. The market had been expecting a steeper drop of 2.3%. Unilever’s underlying operating profit totalled €5.08bn versus consensus forecasts of €4.72m.
According to Jope, this can be attributed to the speed at which Unilever has adapted to the conditions emerging from the COVID-19 crisis.
“We've unlocked new levels of agility as we responded to record levels of growth, and frankly, record levels of decline in some countries and categories all at the same time,” he said.
In Unilever’s Food & Refreshment business, the out-of-home channel fell off a cliff as restaurants, theatres and events were forced to shutter. In total 42% was wiped off this revenue stream.
In contrast, in-home and e-commerce witnessed rapid demand growth. “The hidden jewel in the portfolio has been our in-home food and refreshment portfolio that has grown by 17% in the quarter as consumers have eaten more soups, used more meal kits, and accompanied their meals with mayonnaise and a nice ice cream as dessert.
“Foods & Refreshment e-commerce business to consumer business grew by 139% in the second quarter, and that was driven by our ice cream home delivery, Ice Cream Now.”
Jope expects some of these changes will have sticking power. “Online shopping, especially online grocery shopping, will not revert to pre COVID levels once social restrictions are no longer in place.”
Importantly, Unilever was able to support growth in these businesses and brands by pivoting its manufacturing and supply chain operations.
“We've been able to scale up to support massive surges in demand… and pull back where we've seen major drops. An important part of this responsiveness has been to reduce our overall complexity.”
‘Now is not the time for complexity’
According to the old US Navy design principle, ‘Keep it simple, stupid’, most systems work best if they are simple rather than complicated. Simplicity should therefore be a key goal in design.
In a multinational organisation that operates numerous brands, across multiple categories and geographies, this may be easier said than done. But reducing complexity is nonetheless an important priority for Unilever.
This is particularly notable in the company’s approach to innovation.
Jope elaborated: “Now is not the time for a lot of complexity in our innovation program. During this crisis, we're focusing on the innovations that bring higher incremental turnover.”
Innovation efforts are being focused on ‘fast-growing channels’, particularly e-commerce, and the group has cut ‘over’ 20% of ‘the tail of innovations’. “We've reassessed all of our innovation plans in the light of COVID,” Jope noted.
The company also confirmed plans to divest from its €2bn tea business, with the exception of its operations in India and Indonesia as well as its RTD tea JV with PepsiCo, having announced a strategic review of the unit in January.
“The balance of Unilever's tea brands and geographies and all of our tea estates have a very exciting future, but this potential can be best achieved we believe as a separate entity. A process will now begin to achieve this separation, which is expected to conclude by the end of 2021.”
‘Don’t lose sight of the climate crisis’
While management’s recession playbook focuses on the importance of price to appeal to cash-strapped consumers and the need to drive complexity out of its business, Jope was quick to stress that this cost and price focus extends to its investment in sustainability initiatives.
“While the world continues to grapple with the devastating effects of COVID-19 and the issues of escalating inequality, it's more important than ever that we don't lose sight of the climate crisis and the very real and serious threats that it creates for all of us,” he insisted.
“Climate change, nature degradation, biodiversity decline, water scarcity, they're deeply interconnected problems. And we're committed to find ways to tackle them simultaneously.”
In June, the group announced a set of commitments to tackle climate change, including the target that all its products will be carbon neutral by 2039.
And, while Unilever is stepping up its investment in sustainability, the group plans to leverage this to build stronger relationships with its consumers through a higher marketing spend.
“It's never been more relevant for brands to demonstrate their positive contribution to society and address the issues that our consumers care about in an authentic way. So, we're investing more of our marketing spend on communication, which is explicitly purposeful.”