Unilever growth concerns return after slow quarter

Storm damage

Unilever’s weather-damaged third quarter swings attention back on to challenges around lumpy growth. The group blamed severe U.S. storms and a disappointing summer in Europe for dampened underlying sales growth of 2.9%, well short of market forecasts of a rise of around 4% on the year before. Inevitably, the outcome will rekindle investor questions over optimal medium-term strategies, after these rose to a crescendo following Unilever’s rejection of an approach from Kraft Heinz this year.  The Anglo-Dutch giant is now likely to have diminished grounds to finesse the case for value creation by investment in core brands, supply chain optimisation and spending €1bn each year on innovation.

Growth slips

The group conceded on Thursday that “competitiveness dropped off a little”, in Q3 to quote CFO Graeme Pitkethly, who also noted market share gains were down to about 50% across the group compared to 60% in previous year. It’s another demonstration that whilst global home and personal care groups like Unilever have formidable resources to deploy to win over increasingly demanding consumers, challenges from unforeseen market shifts and fragmentations, and an abundant supply of upstart rivals at the longer end of the tail, can upset the most comprehensive plans.

Slow spreads

Unilever has tried to plug gaps in its prowess over the last decade by picking up promising new outfits and letting old ones go. With a few standout exceptions however, most of the acquisitions have been strategic, aimed at consolidating market share or increasing vertical/horizontal integration rather than medium-term accretion. And the transaction investors have been most vocal about for years, an exit from the spreads businesses, is only tortuously winding its way through the giant group now. Unilever continues to indicate that either a demerger or disposal remains possible and describes the process as “fully on track”. Ergo, there does not appear to be a great deal of urgency, and there’s the rub. Slow growth in developed markets is being complemented by slow change to meet the challenge.

Step change needed

Unilever’s most powerful potential edge is the scale of its exposure to faster growing emerging markets. Turnover and growth in these dwarfed that of other regions in Q3, but the group acknowledges that realising benefits from such breadth remains a work in progress.  It saw “some early signs of improving conditions”. The natural disasters which disrupted sales in the Americas and volatile trading in South Africa underscore the type circumstances that keep optimism about EM on aggregate in check for now.

Nevertheless, Unilever seems to believe that annual growth goals can still be met, despite being blown off course in the third quarter. But without a step change in growth initiatives investors will remain restive - just as activist groups are tightening their focus on health and personal care giants.