Unilever is frustrating its shareholders. Last year’s stock market “rally in everything” bypassed the consumer goods giant entirely. The shares fell by a tenth and, at £39.42, stand roughly at their level of five years ago, soon after the group adopted a supposedly energising cost-cutting and deal-making overhaul in response to its close encounter with Kraft Heinz’s financial engineers. There have been developments since then, such as the offloading of the low-growth PG Tips tea business a couple of months ago, but none has stirred excitement.
Here’s fund manager Terry Smith, explaining to investors in his £29bn Fundsmith fund via his annual letter on Tuesday why the stock was a bottom-five performer in the portfolio: “Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”
Smith cited the row over Unilever brand Ben & Jerry’s refusal to sell ice-cream in the occupied Palestinian territories, but offered other examples: “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert – salads and sandwiches).”
Make up your own mind about the Ben & Jerry’s affair (note that its founders enjoy semi-autonomy under the Unilever umbrella), but Smith’s criticisms play into a general sense that Unilever has drifted back into comfortable mode. In reality, the corporate emphasis on “purpose” may not be the problem since it has always been part of Unilever’s makeup. Rather, it’s the failure to convert those “value” credentials, which are supposed to be a commercial advantage these days, into serious acceleration in the profits line.
At the nine-month point last year, Unilever still showed underlying sales growth of 4.4%, so in the upper half of its totemic 3% to 5% range, but the share price underperformance versus its peers is striking. It can’t simply be explained by the fact that Nestlé has shifted mountains of pet food during the pandemic and Unilever isn’t in that game.
It’s more a case of chief executive Alan Jope’s expansionary ambitions in areas such as nutritional supplements, plant-based food and e-commerce beauty products looking lacklustre and very long term. Unilever, by reputation, is a formidable marketing machine, but the pace of transformation feels pedestrian versus expectations set after Kraft Heinz was defeated.
The lesson of that episode was that the best defence against interlopers who don’t share your values is a high share price. With a stock market value of £101bn, Unilever is surely out of range for would-be bidders these days but rumbling among shareholders carries its own dangers. Jope must know it goes wider than one fund manager. Others ask why Unilever’s rivals are better at sticking to their profit margin guidance, to which there is no simple answer.
A couple of strong quarters might banish the doubters and restore faith in Unilever’s brand and distribution clout, which are the qualities that persuade Smith to stick with the investment. But it needs to happen. A pandemic and inflation in the price of raw materials do not make Jope’s life easy, but he is now in his third year in the job. It is the point at which he is expected to deliver more than purposeful mayonnaise.
Heathrow boss indulges in a flight of fancy
Heathrow never passes up an opportunity to grumble about travel restrictions and its regulatory lot, and, sure enough, its chief executive, John Holland-Kaye, was at it again as passenger numbers for 2021 were revealed to be 19.4 million, lower than in 2020 and less than one-quarter of pre-pandemic 2019’s figure.
On travel restrictions, Holland-Kaye may be winning the argument slowly, but he’s pushing his luck in warning about “a return to the Heathrow hassle days of the early 2000s” unless the Civil Aviation Authority, which sets landing charges, focuses on “an outcome that improves service, incentivises growth and protects affordable private financing”.
Come on, the CAA, in its interim ruling last month, allowed Heathrow to raise its charges by 56% to £30.19 a passenger from the start of this year. The final outcome is awaited in the spring but, if 56% is an approximate guide, the airport’s wealthy owners should count their blessings. In pursuit of revival, shareholders in every airline have already been expected to dig deep.