Unilever plc (LON:ULVR) is overhauling the business in response to growing competition and a switch in consumer preferences after its third quarter sales missed market forecasts.
As part of the restructuring, the consumer goods giant is shedding unprofitable businesses, cutting costs and raising prices.
Unilever, which owns Marmite, Dove, Sunsilk and Domestos brands, said it is on track to reach its savings target of €6bn and underlying operating margin of 20% by 2020.
But the cost cuts and price increases are only short-term fixes, according to Hargreaves Lansdown analyst, Charlie Huggins.
“Life is becoming more difficult for the consumer goods giants, as competition from smaller, nimbler players intensifies and consumer preferences shift towards niche and alternative brands,” Huggins said.
“To succeed in the long term Unilever will need to adapt its business model, becoming more agile and responsive to changing trends."
Consumer squeeze tightens
AJ Bell analyst also highlighted the challenges Unilever faces with the growing squeeze on consumers’ disposable incomes as inflation outpaces growth in wages in the UK.
Unilever raised prices by 2.3% in the third quarter after a 2.8% hike in the second quarter, to offset weak volume growth of 0.2%. The group blamed the flat volumes on recent hurricanes in the US and poor weather in Europe hurting demand for ice-cream. The company added that consumer demand remained “weak” and the retail environment “challenging”.
“The company sought to compensate for negligible volume growth by squeezing prices higher – a testament to the power of the group’s awesome range of brands, which includes Knorr, Ben & Jerry’s, Marmite, Persil and Domestos,” said AJ Bell’s Russ Mould.
“However, price rose at the slowest rate for seven quarters as perhaps even Unilever found that loyal customers can only afford so much and are becoming ever-more price sensitive – a trend to which Reckitt Benckiser hinted yesterday when it flagged increased competition, especially in areas such as home care (Vanish) and laundry.”
Underlying sales miss forecasts
Underlying sales rose 2.6% as a 6.3% increase in emerging markets offset a 2.3% decrease in developed markets. However, underlying sales growth missed the consensus forecast of 3.9%.
READ: Unilever shares fall as third quarter trading hit by poor weather in Europe, hurricanes in US
Liberum cited the sales miss in keeping its rating at 'hold' and target price at 3,870p.
The broker said it believes the group’s “bold” targets for margins may be unsustainable in the long-term and warned that failure to deliver could lead to a pull-back in shares.
Weakness in mature markets
Whitman Howard said its main concern for Unilever’s organic sales growth outlook and valuation remains its weak mature markets performance.
It noted, however, that Unilever is simplifying its structure. This has included the sale of Unilever’s South African spreads business to investment firm, Remgro, in exchange for Remgro’s 26% shareholding in Unilever South African Holding.
Whitman cut its revenue forecasts for 2017 and 2018, by 1.2% to £54.6bn and 1.0% to £56.3bn respectively. However, it raised its underlying earnings (EBIT) forecasts by 3.6% to £8.9bn for 2017 and by 2.1% to £9.6bn to 2018 as it sees margins improving.
Shares in Unilever were down 4.36% to 4,350p around midday trading.