For the second time in five years, Unilever’s board of directors has an unwelcome American on its hands.
Unilever shares rose 5% Monday morning as investors digested news that activist investor Nelson Peltzhas built a stake. The London-based consumer-goods company that sells Dove soap and Dollar Shave Club razors last week called off an unpopular $68 billion bid for GlaxoSmithKline’s consumer-healthcare business. Mr. Peltz’s Trian Partners fund began buying shares in the British business before news of the Glaxo approach broke, but the misstep gives him extra leverage to push for change.
Investors have been unhappy with Unilever’s performance for several years. Since Kraft Heinz’s aborted bid for the business in early 2017, the stock has delivered annual shareholder returns of 8%, including dividends. Competitors Nestlé and Procter & Gamble returned double as much over the same period, arguably helped by activist campaigns. Daniel Loeb’s Third Point fund disclosed a $3.5 billion stake in Nestlé in 2017, while Trian Partners made a similar-sized bet on P&G the same year. Shares in the U.S. consumer giant have roughly doubled since the activist got a board seat in early 2018.
Unilever’s problems could be trickier to fix. Trian never pushed to replace P&G’s chief executive, or to break up its portfolio. The activist’s latest target may need both. A sale or demerger of Unilever’s slow-growth food brands like Knorr stock cubes may already be in the cards, based on comments from Chief Executive Officer Alan Jope last week. But considering it took two years for Unilever to sell its tea business, food could be a drag on sales growth for some time.
Whatever happens to Unilever’s portfolio and management team, investors should probably brace themselves for a margin reset. Unilever cut costs aggressively after the Kraft Heinz approach to boost its bottom line. The average annual increase in the company’s operating margins was 0.8 percentage points in the years after the aborted bid, a nearly threefold increase on the previous rate, based on Barclays analysis. Larger marketing and research budgets may be needed to revive sales growth.
Inflation will complicate any turnaround plans. This year, Unilever’s cost of goods sold will increase by 15%, according to Barclays. Although its competitors have the same problem, Unilever’s inflation challenge is more intense because of its sales skew toward emerging markets, where prices are rising even more sharply than in the U.S. Heftier grocery bills in countries like Brazil and India could encourage pinched shoppers to trade down to cheaper brands.
Unilever’s fourth-quarter results, due next month, will give clues about how much work needs to be done. Growth in volumes as well as price increases would be a positive sign. Management will also explain what happens next after the Glaxo failure. Unilever’s frustrated shareholders may be happy to see the U.S. activist, but shouldn’t expect a quick fix.
