Unilever is a Cautionary Tale for U.S. Food Companies

On July 1, Hein Schumacher took over as chief executive officer of Unilever. His appointment followed a long search that brought him into the company from Dutch dairy co-op Royal FrieslandCampina, and his immediate mandate was clear: turn the company around.

Over the previous five years, Unilever stock had declined 6%. During that time, adjusted operating income had risen just 3% — total.

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Unilever faced criticism from investors that it had focused too heavily on ESG and neglected the task of driving revenue and profit growth.

Schumacher clearly understood his task. In Unilever’s third quarter earnings report in October, he detailed both the issues facing his company and his plan to address those concerns. On the earnings call, Schumacher spoke for 40 minutes.

And though Unilever gets only about one-third of its sales from food, and a similar proportion from the Americas, the turnaround strategy at Unilever seems to highlight the challenges facing U.S. packaged food companies, as well.

Two things stood out from that earnings call. First, despite the length of his remarks, Schumacher didn’t really seem to offer a transformative strategy. There was a ten-point “action plan”, but none of the points seem to augur much in the way of real change. Schumacher wants to focus on the 30 best brands, which generate about 70% of sales, but items like “build back gross margin” and “scale multi-year innovation” represent outcomes, not strategic decisions.

That led to the second notable aspect of the call: the tremendous skepticism from financial analysts. The general tone was summed up by one questioner referring to the company’s plan for increased innovation: “I’m not 100% clear; what’s different?”

But the last question was perhaps the most pertinent. The analyst noted that the strategic changes were “very similar to [what] basically every other company is doing”. So, she asked, “who are you expecting to gain market share from?”

And that’s the key question for food manufacturers everywhere. With inflation moderating but still above pre-pandemic levels, consumers are trading down to private label.

For Unilever and its U.S. counterparts, the strength of core brands has to be enough to convince consumers to keep paying up.

Last week, Reuters columnist Aimee Donnellan asked whether those brands could pull that kind of weight. She proposed the concept of “edible stranded assets”, comparing legacy brands to oil reserves that, at some point in the future, simply will no longer have any value. More affluent consumers are pivoting toward healthier options, often from smaller, independent manufacturers, while less well-off customers simply can’t or won’t pay the premium for branded options.

Increasing regulatory and social pressure on unhealthy fare adds yet another complication for Unilever’s food business.

Schumacher’s job for now is to create some confidence in the market that his plans to improve execution and innovation will be enough to jumpstart growth and outperform peers. But the fact that those plans boil down, mostly, to simply “do things better” highlights what a challenging road lies ahead.

There isn’t a magic bullet for consumer staples manufacturers anymore.

Because so many markets in so many geographies have become stagnant, the only way to drive growth is through cutthroat competition to gain market share.

That’s why, when tasked with changing the fortunes of a struggling company, Schumacher’s plan is exactly the same as everyone else’s. All major food manufacturers can do anymore is do things better — and hope for the best.

Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites. He’s the lead writer at Overlooked Alpha, which offers market-wide and single-stock analysis every week.

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