What will Unilever look like in the coming years? Unilever stood out Monday because the shares rose 8.6% on news of activist involvement and were up throughout the day while the broader market sold off sharply before recovering by the end of the day. The activist, Trian Fund Management, has been involved with numerous CPG companies in recent years, including Procter & Gamble, Mondelez and Heinz. While it’s not yet clear what the activist’s angle is or how exactly it might shape Unilever, it seems likely that it is related to shaping the future composition of the company’s product portfolio.
Unilever shares appreciated 8.6% on Monday, are now down 1% YTD.
Source: Barchart.com Inc.
Like many large CPG companies, Unilever is looking to rebalance its product portfolio toward higher-growth categories, such as health and wellness. In addition to health, beauty and hygiene segments remain core to the company. Looking to expand into new segments, Unilever attempted to acquire the consumer health business from GlaxoSmithKline. That effort failed after Glaxo rebuked multiple bids. Related to those bids, Unilever faced investor pushback on valuation and Unilever’s lack of experience in Glaxo’s product categories that include over-the-counter painkillers. Ultimately, Unilever and Glaxo could not agree on a valuation and ended with Unilever’s announcement that it would not be increasing its final $67.7 billion offer, which Glaxo described as undervaluing the company. Trian Fund’s position in Unilever predated the acquisition attempt, according to multiple media outlets. Unilever has said publicly that it may divest its lower-growth food brands as it rotates brands in its portfolio.
SONAR data suggests that finding reefer capacity continues to be more challenging than finding dry van capacity, which also remains challenging. The SONAR chart below shows that reefer carriers are currently rejecting a whopping 39% of tendered loads (blue line below) whereas dry van carriers are rejecting 20% of tendered loads (orange line below). Both tender rejection rates indicate that contract rates are likely to again march higher this year when they are renegotiated on top of last year’s steep rate increases.
Procter & Gamble is seeing 20%-30% less price elasticity than expected. Price elasticity, or the change in consumer demand in response to rising prices, will be a key indicator this year as CPG companies raise prices further to offset cost inflation. Even after multiple rounds of price increases last year, CPG companies’ price increases are still catching up to the cost increases that they incurred last year. In its just-reported fiscal Q2 of 2022, Procter & Gamble posted 6% year-over-year revenue growth that was split evenly between 3% volume growth and 3% higher prices, on average.
Procter & Gamble’s margin contraction highlights the relative impact of rising freight rates. On a currency-neutral basis, the company’s gross margin contracted 410 basis points. That breaks down into a 400-basis-point headwind for higher commodity costs, 140 basis points from negative mix, 60 basis points from higher freight costs and 20 basis points from product/packaging reinvestment. That highlights that commodities are driving most of the cost pressure while other categories should not be dismissed. The margin headwinds listed above were partially offset by 130 basis points from increased pricing and 80 basis points of productivity improvements.
Therefore, freight costs represented about 10% of the gross cost pressure the company faced in its most recently completed quarter. That is intuitive given that a CPG company’s freight costs are typically around 7%-9% of its cost of sales. Another important implication from P&G’s results is that the company’s price increases (which averaged 3% in fiscal Q2 of 2022) offset only about one-third of the commodity cost inflation in the quarter (~9%). I expect that gap to close in the coming quarters after additional rounds of price increases.
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