Unilever: three steps to beauty — cleanse, tone, moisturise

What now, Unilever? The consumer group emerges from a bruising few weeks — pilloried by a sizeable shareholder, a £50bn bid in tatters — back where it began: a heavyweight defensive stock trading sideways.

Three steps would help clean up the mess. One, while other targets are out there, scratch big acquisitions off the agenda. Shareholders clearly are not fans; the depressed share price has undervalued its currency and executives cannot afford the distraction.

Next up, there should be discussion about whether new blood at the top is needed. Boss Alan Jope presumably pounced on GSK’s healthcare unit with board backing, so his should not be the only scalp if it comes to that. But executives failed to engage first with shareholders, something that could have avoided an expensive misjudgment. A similar case could be made for the ultimately abortive bid to unify the group’s structure under a single Rotterdam entity, before reversing course and settling on London.

Whoever is in charge should prioritise investment in the business, including in prices. Unilever, seeking to give investors reason to stick around after it rebuffed a $143bn bid from US food group Kraft Heinz, bought back shares and expanded margins. Operating margins rose an aggregate 250 basis points over the three years following the early-2017 bid, well above the historic run-rate. Top line growth wilted, from 3.7 per cent in 2016 to 2.9 per cent two years later.

This is the margin reset strategy deployed at consumer products peer Reckitt Benckiser under new boss Laxman Narasimhan. Tailwinds have helped: pandemic shoppers stocked up on Reckitt’s disinfectants and other cleaning products. Unilever’s timing is less fortunate given input cost inflation. Worse, Reckitt’s share price performance has trounced its rivals by some 17 percentage points.

Yet Unilever has been here before and so too have peers such as food giant Nestlé and distiller Diageo, both of which went on to stage impressive recoveries without recourse to big-ticket splashy deals. Unilever, with its cache of strong brands and savvy in marketing and distribution, can certainly do likewise. But margin resets are painful. Unilever is a stock for the very patient.

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