Mon. Jan 24th, 2022


With the launch of its Unilever strategy last year, CEO Alan Jope presented Hellmann’s mayonnaise as a brand with a goal: “To fight food waste – that’s Hellmann’s goal,” he said.

Now the mayonnaise had returned to him. With Unilever’s share price dwindling, Top 10 Shareholder Terry Smith launched a scathing attack on Jope’s approach this week, calling the mayonnaise example “ridiculous”.

“A company that feels it has to define the purpose of Hellmann’s mayonnaise has, in our opinion, clearly lost the plot,” he said. wrote.

Smith’s reprimand was the most public sign yet of investors’ dissatisfaction with Unilever, one of the world’s largest consumer goods companies, whose shares were just slightly above their price when it fought a bid from Kraft Heinz almost five years ago.

He is also the latest unlucky shareholder to have expressed the view that companies that want to pursue principles can ultimately sacrifice profits.

Unilever’s smaller French competitor Danone last year Emmanuel Faber, CEO, loses, a proponent of responsible capitalism, to activists who claim he has neglected shareholder interests.

Terry Smith launches a scathing attack on Unilever
Terry Smith launches scathing attack on Unilever © Micha Theiner / Cityam / Shutterstock

Consumer goods companies have come under intense pressure to reduce their environmental impact. But Smith said Unilever’s management was “obsessed with disclosing sustainability evidence at the expense of focusing on the fundamentals of the business”.

Marco Taricco, co-chief investment officer at Bluebell Capital Partners, an activist campaigning for Danone, said: “We fear ESG [environmental, social and governance factors] was increasingly used by general managers to justify underperformance.

“If you are the CEO of a publicly listed company, your first priority should be to create shareholder value and find the right balance between financial and non-financial targets. That was the message we delivered to Danone. ” However, Taricco said Bluebell did not see Unilever as a target.

There is little doubt that performance at the Magnum ice cream, Domestos bleach and Dove soap maker is faltering, despite Jope’s assertion last year that “there is a clear and compelling business case for sustainable business that drives excellent growth”.

Sales growth lagged behind competitors who are also highly regarded for sustainability, such as Nestlé, while investors were repeatedly disappointed by its margin guidance. Its developed market business has also pursued emerging market divisions such as India’s Hindustan Unilever.

“The company has really downplayed growth. . . there is a lack of consumer relevance that is frightening, ”says Bruno Monteyne, analyst at Bernstein.

Monteyne argued that Unilever should invest more in the marketing of its brands and buy and sell businesses more aggressively, after it took two years to tea section, the latest big sale.

“People will immediately compare it to Nestlé, which does several transactions every year,” he said. Investors “spoke openly” about the possible departure of Unilever’s current management, three years after Jope took over, he added.

Line graph of total returns in US dollars (base) showing Unilever lagging behind its peers

Martin Deboo, analyst at Jefferies, said he thinks the root of Unilever’s problems lies in his food business, where he should sell more divisions.

Several investors have said they disagree with Smith’s view that Unilever’s problems stem from its pursuit of responsible capitalism.

“There’s no denying that Unilever is lagging behind its peers, but it’s a bit unfair to suggest that Unilever’s focus on sustainability is a smokescreen to hide its shortcomings,” said Sébastien Thevoux-Chabuel, head of responsible investment and a portfolio manager at France’s Comgest. a small shareholder in Unilever.

“From its early origins, a social purpose has been anchored in Unilever’s DNA. “More than an improper obsession with ESG, Unilever, like Danone, has mostly suffered from unfortunate product categories and geographical exposure,” he added.

Jamie Isenwater, founding partner at Ash Park Capital, which also owns a stake, said Unilever’s underperformance was “a manifestation of the fact that they increased margins too far in response to the Kraft Heinz bid, and had nothing to do with they do not display their sustainability credentials in public “.

“Being a leader in corporate and social responsibility clearly brings significant benefits. “Unilever is one of the most sought-after employers in almost all of their markets,” he said.

Regulators and investors have strengthened ESG disclosure requirements, which in particular require companies to report on how they consider all stakeholders in decision-making.

Richard Bernstein, founder of the activist fund Crystal Amber, said: “Terry Smith is wrong to blame Unilever. . . Many funds will simply not invest in companies if they have a weak figure on the ESG disclosure front and authorized advisers will urge investors to vote against their reports. ”

Unilever’s underperformance has made it an attractive target for an activist like Nelson Peltz’s Trian Partners, say bankers, investors and analysts.

Bernstein said Unilever looks vulnerable: “It’s undervalued with strong brands, there’s debate over how management can improve performance, and the cost of capital is cheap.”

Others drew parallels between Unilever and rival Procter & Gamble, which was the target of a campaign by Peltz, who sat on his board for three years until last year. P & G’s shares outperformed Unilever during this period.

“Activist investors will look at P&G and say, ‘Is there a similar thing to do at Unilever?’ says Paul Kinrade, a senior adviser at Alvarez & Marsal, a professional services firm that monitors activist activity. Trian declined to comment.

Comgest is selling off its stake in Unilever, not because of its sustainability strategy, but because of concerns about lack of growth.

Despite his criticism of Unilever’s “targeted” strategy, Smith said he continued to own his shares “because we think its strong brands and distribution will eventually prevail”.

Isenwater said he also sticks to the stock. But he said the next test for Unilever would be its response to inflation. “Which may be very key. . . is how they handle input cost pressures that will clearly put a shorter term pressure on margins, ”he said.

“If they take away spending from other areas to protect themselves from that input cost pressure, it will exacerbate the problems they have already created for themselves.”



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