LONDON – Transformation is on track for Unilever P.L.C., which maintained growth momentum during the second quarter, but a slowdown in emerging markets and soft results in ice cream and spreads continue to challenge the company.
“After years of underperformance we set out to become a sustainable growth company, and this meant investing more; investing behind our brands, our people, as well as capabilities,” said Paul Polman, chief executive officer, during a July 25 call with financial analysts to discuss second-quarter earnings. “We also strengthened the innovation funnel, with bigger and better launches that we now roll out faster.”
Other strategies over the past year have included eliminating unprofitable s.k.u.s (stock-keeping units), shedding its Skippy peanut butter brand and frozen meals businesses and improving cost efficiency.
“All of this has enabled us to deliver consistent, competitive, responsible and profitable growth,” Mr. Polman said. “Above all, it has helped us to improve gross margins, despite the increased competitive intensity and, yes, challenging macroeconomic conditions.”
Emerging markets, which represents 60% of Unilever’s business, helped drive an underlying sales growth of 5% during the quarter, but the company acknowledged a “noticeable slowdown.”
“Brazil, Russia, India and China have all seen downgrades to growth forecasts, and the markets in which we operate certainly have slowed,” Mr. Polman said. “Many of the currencies have weakened at an accelerated pace and … significantly.”
In spite of these hurdles, investments in innovation and market development helped Unilever post a 10% sales growth in emerging markets in the first half of the year.
“The good thing is that having the strongest brands in these markets allows you to deal with that better than our competitors and find the right balance,” Mr. Polman said.
Benefitting from stronger innovation is the company’s food portfolio. Savory and dressings showed solid growth during the quarter, while continued progress in refreshments was boosted by recent tea launches.
Spreads, however, delivered frustration from what Mr. Polman explained as “self-inflicted” challenges.
“It is about staying price competitive,” he said. “It is about getting the right taste. And it is about the perceived naturalness of our products. That is the way to unlock the growth in this category, and that is also the way that the growth is merited in this category as the healthy alternative to butter. It will take time, but we have the technology, marketing skills, scale and now also the organization to deliver.”
Ice cream also suffered softer sales, as a result of competition and adverse weather conditions.
“We’ve been successfully building a more global ice cream business, as you know, with 40% of our sales now in emerging markets where the sun tends to shine for more of the year,” Mr. Polman said. “That meant that we could … compensate for a very poor start to the season here in Europe and the U.S., as well as rationalize portfolios by eliminating low profitability but still grow overall on this business.”
For the second half of the year, the company remains focused on ramping up innovations, rebasing costs and pushing for improved performance in its food portfolio, which Mr. Polman said is “stronger than it was.”“The footprint is more skewed toward emerging markets now, and we have disposed of many of our businesses around the peripheries where, as a result, our sales are now concentrated on fewer bigger brands,” he said. “It’s also probably now the most focused food portfolio of its kind with leading positions globally. That, I believe, is particularly important when it comes to leveraging the R.&D. to bring our innovations to market across the countries and regions.”