Updating the market on its 2020 performance, Unilever reported underlying full-year sales growth of 1.9% in the fiscal to €50.7bn. However total sales were down 2.4% while underlying operating profit fell 5.8%, driven by currency depreciation.
“2020… I think it's stating the obvious to say it was far from business as usual. Typically, we would start this presentation by sharing our underlying sales growth, underlying operating margin earnings and cash. But in this year of incredible volatility and uncertainty, we prioritized three things: that was volume-led competitive growth, absolute profit and cash delivery,” CEO Alan Jope told analysts and investors.
Looking at these metrics, he suggested there had been a ‘clear step change’ in Unilever’s competitiveness versus a year ago. More than 50% of the company’s brands are now winning value share, the chief executive noted.
And he stressed that Unilever's ‘focus on operational rigor and excellence is working’. Excluding negative currency impacts, underlying profit was actually up 0.7% at €9.4bn.
But, looking to the future, Unilever signalled its intention to up its focus on organic growth, with less emphasis placed on efforts to build operating margins.
Investing for growth
In order to raise its growth rate, the company plans to tilt its investment strategy towards areas of the business that it has identified as higher growth.
“Our strategy here is quite clear. We will continue to evolve our portfolio towards higher growth segments in Home Care, Beauty, Personal Care and Foods, both the choices we make for organic investment and in the acquisitions and disposals that we pursue,” Jope revealed.
“The places where we choose to deploy our capital will be guided by these clear investment criteria. Are the spaces we're focusing on a sufficient size? Are they intrinsically higher growth? Do they have strong potential in the growth markets of the future? Can we see a route to market leadership? And finally, are they in product categories that are sensitive to Unilever's marketing and technology know-how?”
As the company applies this criteria to its portfolio, two of the categories that ‘really start to emerge’ – and where we should expect ‘the lion’s share of our capital deployment in the years ahead’ – were identified as plant-based foods and functional nutrition.
Unilever indicated that this investment would come in the form of spending behind its existing brands and M&A to support the portfolio adjustment.
“You will see a sequential step-up in our investment in R&D over the next three years with our recently opened foods innovation centre at Wageningen in the Netherlands as a good example of that commitment to stepping up our R&D spend. This is how we'll win with brands as a force for good, powered by purpose and innovation.”
Sustainability still sells
For some years, Unilever has proudly insisted that its sustainable brands outsell those that are not seen by consumers to be purpose-led.
This is still the case, Jope insisted, stressing that Unilever’s sustainability mission will remain at the heart of its future strategy, particularly as the Knorr-to-Magnum manufacturer works to step up growth rates.
“There is clear, growing and compelling evidence that sustainable business drives superior growth. Now the growth equation is quite straightforward. It's that measurable brand purpose grows measurable brand power. And brand power, in turn, drives market share and growth,” he stressed.
Sustainability can be leveraged as a point-of-difference for Unilever’s brands, particularly given the company’s long-term work to drive improvements.
“Being a genuinely sustainable business is not easy. It takes long-term commitment and deep expertise that only come with time and with effort. And so we see our leading position on this unique strength as we enter an era defined by the expectations of consumers that businesses must play a positive role in society as an important advantage.”
Pointing to shifting consumer sentiment around personal and planetary health, Jope said consumers – notably Gen Z and Millennials – ‘care more about the positive impact of the brand choices they’re making’.
“We're only seeing that trend accelerating. Faced with the huge social and environmental crisis in the world, we know that sustainability matters more to young people than ever before, and that young people, in particular, feel strongly that it's time for businesses and brands to show more responsibility.”
What about the bottom line?
All this talk of investing in growth appeared to spook Unilever investors somewhat.
Unilever’s share price also fell after the results were announced, with the stock down nearly 15% over last year.
“We think that the reason for the weak performance of the share price is that the company made it clear that it would focus on organic growth in the future, focusing less on operating margins,” Stifel analyst Alain-Sebastian Oberhuber noted.
Indeed, Oberhuber said that he expects the group’s medium-term growth to come at the expense of margin.
“We expect a gradual improvement in volumes, combined with a stronger acceleration in price due to inflation in 2021,” he noted. “However, we reduce the underlying operating profit margin estimate for FY-21E to 18.6% (from 19.4%) and for FY-22E to 18.6% (old 19.5%). In our view, Unilever will invest more behind its brands to gain share [with the] aim of above 60% of its portfolio in value market share gains.”
With the fall in Unilever's share price not yet showing signs of abating, the difficultly of balancing the long-term objectives of sustainable business growth against the shareholder drive for short-term returns is once again in the spotlight.
Unilever management might be keen to point out that the company's investment in sustainability is actually driving efficiencies. "On cost and on risks, the picture is clear. Throughout our operations and supply chain, sustainable practices save us money. Since 2008, we've avoided some €1.2bn of costs as a result of sustainable sourcing and eco-efficiencies in our factories," Jope argued.
But are investors listening?