(CPG Brain) Why Unilever consumer health pivot is going to be expensive

 










Our last article on the Anglo Dutch consumer goods giant Unilever spoke to the rising costs of ethical ambition through its subsidiary Ben and Jerry’s decision exit the occupied territories and pain in the neck you know what storm that followed. However, the costs of Unilever’s ethical ambitions are nothing compared to the costs the company are going to incur pivoting away from food to consumer health. 


While Unilever ambition to move towards consumer health make sense and may prove to be shrewd decision down the line, the speed the company is moving is concerning both investors and more importantly rating shops. Unilever proposes to make this pivot through selling its food brands and using the proceeds to acquire consumer health assets which is all well and good but we, investors and ratings shops find it hard to believe they can make this pivot without taking on a lot of debt. Fitch came and publicly warned Unilever that its aggressive consumer health through an acquisition of Glaxo Smith Kline’s and Pfizer’s consumer health business could lead to credit downgrade effectively costing them their A+ credit rating. 


The consequence of a credit downgrade is that would mean Unilever will have borrow money at higher rates which may constrict which projects Unilever can pursue (oh that’s why there selling their food business). Used to borrow at low rates, Unilever may have to pursue riskier projects due to a higher hurdle rate which could affect Unilever’s valuation. 


However, given how fast Unilever are moving and how aggressive they pursued a deal for GSK’S consumer health business, it looks like they’ve taken that downgrade into account. Like many of us, the pandemic forced people to look at their lives and the same applied to businesses, Unilever took a look at its business and (especially food) brands saw plenty it didn’t like. Whether it’s soaring food prices, thin margins or the newsworthy sketchy supply chains that put them at odds with their ethical ambitions (can’t fight for equality when exploitation is rampant throughout your supply chains), Unilever resolve to move out the food business rock solid. With inflation soaring, it would sense to slow down as has enough pricing power to pass on procurement costs to consumers however Unilever seem to be of the opinion that rising costs could see consumers use cheaper discounted brands to ease the pressure on their pocketbooks. 


Whatever the case, Unilever are dead set on becoming a consumer health goods monster come hell or high water, credit downgrades be damned. Like we’ve mentioned, this isn't the worse move as the margins are better and the headlines are less embarrassing (no international political debacles when you leave a market for instance) however this pivot will be a painful and may lead to dismissals if even look like it won’t work (Alan Jope were looking at you) but with consumer health being a more stable business, it's only a matter of time before any tumult its share price or performance corrects itself. 


In sum, Unilever’s move away from its food business and the baggage that comes with it makes sense but the speed and aggressiveness the company it’s making transition at is concerning as trying to get an oil tanker to move as quick as a speedboat has disaster written all over it. 

Comments

Post a Comment

Popular posts from this blog

(CPG Brain) Consumer staples and pricing power: a love affair gone sour?

Image
    “ The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business”. (Warren Buffet)         When writers use block quotes like the one above, it’s usually for effect or give lens into what’s to follow or sometime just use someone’s else's word instead of theirs to give their fingers a break (guilty as charged). However, in this case, the block quote from famed investor Warren Buffet pretty much is why wrote article many companies, thanks to rising inflation and supply chain costs, dread: do you have pricing power?   For many, growth stocks Inflation and threat of interest rates has hit them hard but nothing hits harder than finding out after years growing and establishing a business that you ...
Read more

(CPG Brain) Unilever: the battle of Unilever 2021/22 is over but the war has begun.

Image
  It’s over! The great Unilever shareholder rebellion or 2021/22 has come to an end after CEO Alan Jope listened (read got his arm twisted) to his shareholders and announced Unilever will not pursue further M&A along with a massive 3bn share buyback program and 1500 in job cuts.   We thought the company was moving too fast into consumer health but how quick they drooped their plans under shareholder pressure was a relief but also a little concerning (more on that later) This is a major win for shareholders stopping the company’s management making an expensive pivot to consumer health largely in reaction to rising production costs and COVID-19 related supply chain disruption . Management plans to pivot to consumer health would see Unilever almost certainly take on more debt which bad for shareholders as it muddies Unilever’s strong balance sheet and may eventually see the company announce a dividend cut. Add to that the company potentially risking a credi...
Read more

How to beat up on your suppliers - a Walmart masterclass

Image
  To be fair, all companies on planet look to get the most out of  their  suppliers in the way of price reductions but we’ve never seen a companies this good at squeezing concessions out of  it 'suppliers  at scale.   Whether it’s gouging suppliers with strict guidelines or announcing “modernization” projects that suppliers through price concessions and distribution fees, Walmart are scarily efficient at beating their suppliers like no other retailer on earth. We would argue that the Bentonville based retailer would have really stiff competition from Seattle based e-commerce giant and sworn enemy Amazon if they had to deal with sellers on its platform directly but Amazon finds its own special way to squeeze efficiencies wherever they can find it (more on that another time).   However, Walmart stands alone in its control over suppliers as it quite simply can externalize costs to its suppliers as suppliers simply cannot afford to avoid doing busines...
Read more