As one of the world’s largest consumer goods groups, Unilever is always in the spotlight, both for its financial performance and for its laudable bid to become a more sustainable company. In a two-part interview, Dean Best talked to Unilever CEO Paul Polman about its low-growth food arm and the slowdown in emerging markets.
“Let’s go and help the British,” Unilever CEO Paul Polman jokes as he strides cross the “Knorr chefmanship centre” in the southern German town of Heilbronn.
just-food is the only Brit among of a group of journalists learning a few recipes from Unilever’s in-house chefs as part of a two-day event to mark the 175th anniversary of the start of the Knorr business.
And Polman, the chief executive of one of the world’s largest consumer goods companies, has his apron on, ready to help cook a risotto. The conversation, however, quickly turns to one area that seems to have gone off the boil – the emerging markets.
There has been growing evidence of a slowdown in the world’s key developing economies in recent quarters. Brazil, Russia, India and China are about to see out a year when growth will be stronger than in many parts of the West but also at its lowest in a decade – excluding 2009 when the BRICs felt the impact of the global financial crisis.
The recent cooling of the Chinese economy has hit demand for commodities, which has notably impacted Brazil and Russia. Currency devaluation has squeezed consumer incomes, particularly in Brazil and India. Lower oil prices and an easing in global trade has affected Russia, where internal investment has also fallen and inflation remains stubbornly high.
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By GlobalDataLike many FMCG groups, Unilever has not been immune to the slowdown. Earlier this month, Unilever warned its underlying sales in the third quarter of the year will come in below expectations – in part due to the deceleration in emerging markets.
The announcement made mainstream business headlines and prompted questions about whether companies with significant operations in developing economies could rely on those markets to help offset stagnation in the West. In 2012, over 55% of Unilever’s total sales – food, as well as its home and personal care brands – came from emerging markets.
So what does Polman make of the slowdown and the prospects for emerging markets? He notes the 9% fall in sales in what IBM calls its “growth markets” that the technology giant posted 48 hours earlier and acknowledges the recent move by the IMF to lower its estimates for global economic growth on the back of slower growth in markets like Brazil and India. However, the Dutchman insists the situation should not be exaggerated.
“These growth levels are coming back to more normal levels now [but they are] still very high growth levels compared to Europe and the US. It’s all relative,” he says. “Some journalists who don’t do their homework are saying ‘Oh, it’s not too good to be in emerging markets because growth rates have come down.’ That’s peanut thinking. The other thing that people don’t understand is, if China grew 10% or 12% five years ago and they grow 7% now, that’s more in absolute because the economy has got bigger but everyone is saying ‘Oh, they are slowing down.’ All that stuff is a load of baloney, just to fill newspapers.”
The majority of Unilever’s sales in emerging markets has, historically, been in home and personal care products. Unilever’s food business – it groups ice cream, a sector in which it is the world’s largest player, in its “refreshment” division, alongside tea – has been mostly focused on the developed and mature markets of North America and Europe.
However, the international expansion of stock, soups and bouillion brand Knorr means half of Unilever’s sales in emerging markets are now in food. Knorr is Unilever’s biggest brand – that includes food and non-food – and generates around EUR4bn sales a year. Knorr’s recent growth has, Unilever says, been driven by markets in Africa and Latin America. “In the key [African] countries of Nigeria, Kenya and South Africa, it’s very big,” Polman says. “We have very good businesses in Mexico, Argentina and Brazil also.”
Knorr is a brand continuing to grow strongly. Sales were up almost 5% in the second quarter. Unilever, when it reported its results for the quarter, cited “consumption building activities” in Africa and the global What’s for Dinner marketing campaign, which takes in countries from South Africa to Canada.
But can any of Unilever’s other food brands achieve such an international reach? Is it easier to roll out deodorant or shampoo brands worldwide than food, for which tastes can remain local? Okay, the company has had success with Knorr but one could argue products like stock cubes fulfil are a more base product that can translate across cultures. Unilever’s more international home and personal care business is growing quicker than its food portfolio, which Knorr aside, is largely centred in the slow-growth markets of North America and Europe. The different growth rates are prompting questions about the longer-term prospects for Unilever’s food portfolio among some in the investment community. Being able to expand its food brands into faster-growing markets appears important to the future of those products – and, as a consequence, the future growth of the business. Unilever’s personal care business saw underlying sales grow 10% in 2012. The division cannot be expected to continue to sustain that level of growth, meaning other parts of the business, like food, will have to enjoy an improved performance.
Could Unilever’s other food brands be expanded internationally like Knorr? “Actually we have done very well with Magnum globally,” Polman replies, dipping into the company’s ice cream cabinet – and technically its refreshment business.
But what about from the food division? Polman says Unilever already has “five market leaders” in food – including ice cream and its tea business Lipton. “We have a EUR20bn food business with five brands: Lipton, ice cream, Knorr, Hellmann’s [mayonnaise] and then our spreads business. With five brands, all market leaders, we have a EUR20bn business. Our food business is for that reason stronger than anyone else because a lot of the food companies have a lot of EUR10bn brands all over the place.”
The Unilever chief also points to the company’s recent disposals, which he suggests has made its food business more focused. Polman has talked often in recent years about “weeding and feeding” its food operations – offloading some brands and investing in others as a way of driving growth from the business. This year, the sell-offs have continued, with the sale of US-based peanut butter business Skippy to Hormel Foods and the disposal of another US asset, dressings business Wish-Bone, to local firm Pinnacle Foods.
“What we have done with our food division is gotten rid of all the non-strategic brands that are only in one country,” Polman says.
There has been talk Unilever is looking to dispose of food brands worth between another EUR500m and EUR750m of sales, although Polman says the company has not set such a figure. “We don’t set targets on disposals. Our disposals is basically getting rid of non-strategic food business. We have done most of that work now, there might be a few more but, you know, we are a EUR50bn company so there is always this EUR500m on the bottom. That sounds like a lot but there’s always EUR500m you have to clean out,” he says.
Could Peperami and Bifi, the meat snacks brands said to be up for sale, be next? “It could be,” Polman says, before noting with a laugh: “I mean everybody is speculating on everything because if you don’t have something new in the newspapers, nobody is going to read it.” However, he adds: “But we always look at what makes sense, what doesn’t make sense.”
In part two of just-food’s interview with Polman, the Unilever CEO discusses the future of a food business some have said the company could look to sell – spreads. Click here for part two of the interview.
