FOR a company that prides itself on purpose, Unilever Plc has lacked a sense of direction for several years and shareholders, including feared activist Nelson Peltz, want new chief executive officer Hein Schumacher to fix it.
The outsider, plucked from the dairy cooperative Royal FrieslandCampina, faces his first big test this Thursday when Unilever reports third-quarter earnings and lays out a plan for investors frustrated by a company that botched a £50bil takeover and is struggling to grow volumes.
“There’s a new sheriff in town,” said David Samra, managing director of Artisan Partners, which more than doubled its holding in Unilever last month to more than US$800mil in a show of confidence in Schumacher.
The challenge for Schumacher, he said, will be avoiding distractions, improving operations and growing profit sustainably in a company which stretches from making ice cream to soap and vitamins.
Since Unilever fended off a US$143bil on takeover attempt by Kraft Heinz in 2017, the company has pursued profitability at the expense of investing in its brands.
This has led to lost market share and sluggish growth which it’s unsuccessfully tried to plug with expensive and sometimes ill-conceived acquisitions.
Unilever is now winning market share in less than half of its business and the worst inflation in four decades has pushed shoppers to white-label products.
With an activist on the board and growing concerns that food companies are increasingly vulnerable to the surge in weight-loss drugs, Schumacher will need to make decisions fast.
Some shareholders will push him to consider the often-rumored breakup of a group which generates €60bil a year in revenues.
“The easy option is just get rid of nutrition or focus more on specialist segments like plant-based,” said Tineke Frikkee, head of UK equity research and fund manager at Waverton Investment Management, which has about £20 mil of shares.
Unilever is already trying to accelerate disposals of some its smaller brands.
In September, Reuters reported that Unilever had hired Morgan Stanley and Evercore Inc to sell a portfolio of non-core beauty and personal care brands, known as Elida Beauty.
It includes brands such as Tigi, Timotei and St Ives. Unilever has also been reducing the number of product variations it offers.
“They have already trimmed the portfolio a lot,” Frikkee said. “They’ve got big brands and then a long tail of not so successful brands. They’re starting to deal with that and they can do more and be more ambitious.” Investors like cash-generative companies, such as Unilever and rival Nestle, for their steady dividends and stable, predictable growth. That can often mean executives need to avoid the temptation to splash out on big, flashy acquisitions.
“It’s very difficult, especially for a new CEO sitting on a pile of cash, to not be eager and enthusiastic about utilising it, and there’s always a ready investment banker with a deal in hand where the seller knows a lot more than the buyer,” Artisan’s Samra said. In the last few years, investors have criticised Unilever for prioritising a purpose-led strategy at the expense of focusing on the fundamentals of the business.
Terry Smith, manager of the Fundsmith Equity Fund, previously said Unilever had “lost the plot” while investor Nick Train suggested the company had ‘long Covid’ with pedestrian results.
Unilever, which declined to comment, reckons its purposeful brands – such as Hellmann’s mayonnaise which aims to root out food waste – perform better than standard ones.
However, its performance is lagging Nestle. The company’s abortive attempt to buy the consumer products division of GlaxoSmithKline Plc, which would have added brands such as Sensodyne toothpaste and Advil painkillers to Unilever’s portfolio, only angered investors further.
Unilever’s public row with the independent board of Ben & Jerry’s, an ice cream brand it owns, was a significant distraction for management. And now Unilever is the subject of a public relations campaign to pressure it to leave Russia over its invasion of Ukraine.
Shareholders made their dissatisfaction clear in May when they registered a non-binding protest vote against an executive pay package, upset at Unilever’s poor performance and changes to the incentive structure.
Shareholder advisory groups raised concerns that Schumacher’s salary was higher than that of his predecessor Alan Jope.
Rebuilding trust will require a corporate mea culpa. The Dutchman needs to start by acknowledging what’s gone wrong, argues Bernstein analyst Bruno Monteyne.
“The most important thing is to change the culture of the company from being self-congratulatory and complacent.”
Schumacher will also need to demonstrate that the interests of Peltz’s Trian Fund Management, which holds a 0.4% stake in Unilever, don’t override those of other shareholders.
Terry Smith has already complained once that Unilever has neglected him to accommodate Peltz. Schumacher’s appointment also speaks to the veteran activist’s influence.
The two worked together at ketchup-maker Heinz from 2006 to 2013. At the time of his appointment, Peltz said he was “delighted to learn he was among the top candidates” to become CEO.
His arrival is one of a string of executive changes at Unilever.
Graeme Pitkethly will retire as chief financial officer by the end of May next year, and chair Nils Andersen will hand over in December to Ian Meakins, the chair of catering company Compass Group Plc. Chief digital and commercial officer Conny Braams has also left.
“Unilever appears to have assembled a high caliber team,” said Sue Noffke, head of UK equities at Schroders.
“However, just like football it is difficult to be certain of who will win the championship from looking at the line-up of players at the start of the season and their pedigrees, it’s how effectively they operate as a team.” — Bloomberg
Sabah Meddings and Dasha Afanasieva write for Bloomberg. The views expressed here are the writers’ own.
