October 19, 2017 / 10:32 AM / a year ago

Breakingviews - Unilever struggle gives hope to predators

Unilever CEO Paul Polman speaks at the Bloomberg Global Business Forum in New York, U.S., September 20, 2017. REUTERS/Brendan McDermid

LONDON (Reuters Breakingviews) - Unilever’s struggle gives hope to predators. The consumer giant that fended off a bid from Kraft Heinz earlier this year reported weak third-quarter sales on Thursday. Chief Executive Paul Polman is sprucing up brands, but the more pedestrian Unilever’s performance, the more vulnerable it becomes.

The maker of pot-noodles blamed factors beyond its control for a weak third quarter, which saw sales excluding disposals and acquisitions rise by 2.6 percent, well short of analysts’ expectations of 3.9 percent. The hot summer meant people ate less ice cream, while hurricanes disrupted spending and shipping.

Yet the figures also reflect longer-term challenges. Growth in developed economies is slow, and health-conscious customers are changing their habits, meaning consumer goods companies cannot rely on old brands. One example: Halo Top, a family-owned healthy ice cream brand, grabbed share in North America. Unilever reckons just half its products took a bigger slice of their respective markets, down from around 60 percent in previous years.

Polman is making the right calls. He is selling dying brands, like margarine, buying new ones, and finding fresh ways of distributing products, like direct-to-consumer subscription services. And while the outlook in Europe and North America is dull, emerging economies are growing quickly. Unilever is also pushing up margins: analysts expect the company to convert 20 percent of sales into operating profit by 2020.

Still, Polman can’t rest easy. Unilever will need a strong fourth quarter if it is to meet its target for sales growth of 3 to 5 percent this year. More disappointments could revive takeover interest. Investors might look more favourably on Kraft Heinz’s near-30 percent operating margin if Unilever’s growth remains little better than average. Activist investors who are taking on ever-bigger targets such as Procter & Gamble, might also see the company as a candidate for deeper cost cutting and more radical surgery. Unilever’s battles are far from over.


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