Unilever struggles in home market

Developing and emerging markets are once again a key driver of growth for Unilever, with strong sales in buoyant markets.

Conditions in Western Europe generally remain difficult for the company,which said it must improve its competitiveness there. The company was hit hard particularly in the UK, France and the Netherlands, mainly in home and personal care products and in its frozen foods division.

Meanwhile sales in central and eastern Europe grew strongly, particularly in Russia across all home and personal care categories and in the savoury and dressings categories.

Consumer-goods companies such as Unilever, Nestle and P&G have struggled to boost sales as consumers rein in spending in the EU. The EU's supermarkets have been cutting prices, forcing producers to provide goods for less at a time when input and commodity costs have been rising.

Cost pressures will continue and opportunities to pass these on through price increases are likely to remain limited, group chief executive Patrick Cescau stated yesterday in releasing thecompany's second quarter results.

"We do not expect significant change in the market environment in the rest of the year. Input costs and investment behind our brands will increase the pressure on margins,"​ Cescausaid.

The food sector accounts for 49 per cent of the Anglo-Dutch group's sales, drinks eight per cent and home and personal care for the rest. As the largest consumers products group in the world thecompany had a turnover of €39.1bn in 2004. Europe accounts for 43 per cent of sales and the US 32 per cent. Asia and Africa accounts for 25 per cent of turnover.

The company five year programme to cut about 1,200 under performing brands did not work to generate the six per cent sales growth it had forecast in 2004, when sales grew by 0.9 per cent. Sales ofits SlimFast diet products fell dramatically as consumers turned from meal-replacement products in favour of other weight- loss methods such as the Atkins high-protein diet.

Meanwhile rivals such as P&G continue to go from strength to strength. P&G this week said its second quarter sales were up 10 per cent, with profits rising by nine per cent. P&G will top Unilever as the largest consumer group once its proposed merger with Gillette gets regulatory approval in all its markets.

This year the company has refrained from making predictions. In February, Cescau said his priority was to return the business to growth through improving competitiveness marketplace, and reversethe market share losses suffered by the Anglo-Dutch conglomerate during the latter half of 2003 and through 2004.

For him this meant increasing marketing spend, price cuts, organisational changes and a management shakeup. Unilever cut prices on products including detergent, ice cream and spreads in Europe toattract consumers.

Unilever's strategy seems to have at least kept the company in a holding position as it figures out what to do next.

The company is still suffering in its main European market, which sales fell by 0.6 per cent in the second quarter, compared to a two per cent decline in the first quarter this year.

"We are no longer losing share in Europe, but neither have we regained the share we lost during 2004,"​ Cescau stated.

He noted that western Europe remains a difficult market for the company, with weak consumer demand and no let up in the price competition between retailers.

The company estimate the growth rate ofthe categories and regions in which is growing at between three per cent and 3.5 per cent.

Within this, the European markets are flat, North America is growing at around 2.5 to three per cent.

Ice cream sales were the only bright spot in Europe. Elsewhere, sales were flat to slightly down in spreads and cooking products, in savoury and dressings and in beverages after a strong first quarter.

On the other hand, performances in European home and personal care and in frozen foods remain disappointing, he said. The company has maintained market share for its brands.

However the company is losing market share as consumers continue to shift towards the commodity end of the category where the company is not represented, he said.

In the European home and personal care sector sales continue to be heavily impacted by the share the company lost during 2004 and in the first quarter of this year.

The company is responding to the Europe problem by consolidating its regional supply chain management into a single organisation that will manage sourcing activities from procurement through toprimary distribution.

Overall the group's sales grew by 3.3 per cent by volume, turnover from continuing operations grew only one per cent.

Before the effect of a €353m write off relating to the value of the company's Slim Fast business, operating profit increased by five per cent in both the quarter and the half year. With thewrite-off Unilever suffered an 18 per cent decline in operating profit.

The company's global market shares in both foods, and home and personal care products have stabilised since the beginning of the year, Cescau said.

"We take this as a clear indication that we have indeed improved our level of competitiveness compared with 2004,"​ he told journalists.

Operating margin continued to fall. It was 12.4 per cent in the quarter. The figure includes a reduction of 3.4 percentage points from the SlimFast writedown. Operating margin in the half year was13.7 per cent, 1.4 percentage points lower than last year, including the impact of the SlimFast write-down. Restructuring costs in the half year were lower by €124m, while profits on disposals andasset sales were higher by €47m.

The writedown is in addition to a €791m charge already taken for SlimFast earlier in the year.

"The reason for this additional charge is that the meal replacement category in the US has continued to decline, and at a faster rate than we anticipated,"​ he said. "Year-on-yearsales in this category are down by around 25 per cent. Although our market share is increasing again, the sales base from which we project future growth is now considerably lower than we previouslyassumed."​

Cescau said Unilever is focusing on developing products with health benefits, such as versions of its frozen desserts. The company has extended its pro.activ line of cholesterol-reducing foods inthe UK and Portugal and added Knorr Vie to its line up. Knorr Vie is a drink containing half the recommended daily allowance of fruits and vegetables.

To help fund the additional research and advertising spending on its brands, Cescau said Unilever will save about €700m a year by 2006 by closing support offices worldwide.

"Following on the success of our cholesterol lowering products, these new products incorporate naturally occurring milk peptides which have been scientifically shown to help control bloodpressure as part of a healthy diet,"​ the company stated in its results release. "We are first to market with this technology and it is yet another example of the consistent flow ofinnovation that has driven our Flora/Becel heart health brand to double digit growth during 2005."​

Edible oil and other key agricultural commodity prices are lower year-on-year for the company, but this is more than cancelled out by the higher mineral oil price, affecting particularly home andpersonal care raw materials, packaging and distribution. In the first half of the year Unilever absorbed around €275m of additional material and distribution costs, equivalent to a year-onyear increase of about four per cent.