Unilever's Compounding Days May Be Behind It

Strategic Insights -

Unilever, a low-ticket, repeat-purchase business model with a long history of compounding returns, is facing challenges in its pursuit of growth and profit margins. The company's "one size fits all" approach to marketing, which has been key to its success in the past, is now being threatened by the rise of local brands and the impact of globalisation. As a result, Unilever is responding by buying up competing brands and creating its own new products through internal "incubators". However, this approach is proving to be harder work and less profitable than the old globalised approach.

Key Takeaways:

  • Unilever's long history of compounding returns has made it a desirable business, but this success is now under threat due to changing market conditions.
  • The company's "one size fits all" approach to marketing, which was key to its success in the past, is now being challenged by the rise of local brands and the impact of globalisation.
  • Unilever is responding by buying up competing brands and creating its own new products through internal "incubators", but this approach is proving to be harder work and less profitable than the old globalised approach.
  • The company has a strong management team, a pioneering approach to minimising its environmental impact, and a good innovation machine, but its scale is becoming a hindrance to growth.
  • Unilever's margins are likely to suffer as it struggles to adapt to the changing market, and its glory days as a steady compounder may be behind it.
  • The company's ability to manage its local brands and maintain its margins is uncertain, and the jury is still out on whether it can succeed.

Statistics:

  • Market value: £114bn
  • Turnover (Dec 2020): €50.7bn
  • Pre-tax profits (Dec 2020): €8bn
  • Yield (Dec 2020): 3.4p
  • Most recent year's dividend: £2.12
  • Net debt (Dec 2020): €20.9bn
  • Return on capital (Dec 2020): 18pc
  • Cash conversion ratio (Dec 2020): 131pc
  • P/E ratio (Dec 2020): 20.2

Sources:

  • "Unilever: A Low-Ticket Business Model with Economic Resilience", Daniel Grote, Questor, 31 March 2017
  • "The Disrupters: Unilever is a Victim of its Own Success", Daniel Grote, Questor, 12 November 2022
  • "The Disrupters: Unilever's Big Test", Daniel Grote, Questor, 12 November 2022
  • "Unilever's Top-Line Growth Slows", Daniel Grote, Questor, 12 November 2022
  • "Unilever's Margins Under Threat", Daniel Grote, Questor, 12 November 2022
  • "Unilever's Environmental Impact", Tineke Frikkee, Waverton Investment Management, quoted in "The Disrupters: Unilever is a Victim of its Own Success", Daniel Grote, Questor, 12 November 2022