Every day, 2.5 billion people use Unilever products across 400 brands. This success creates a bigger goal for the company as the sustainability movement gains further momentum as consumers avoid plastic pollution.
Sajjad Hussain | AFP | Getty Images
unilever’s Plan to merge food business and spice manufacturer mccormick It’s the latest move in an industry struggling to maintain the status quo as the growth model that has supported major consumer goods companies for decades is fading away.
As the post-pandemic price supercycle fades and growth in large markets like China stalls, industry giants are moving away from the bigger-is-better conglomerate model and toward what experts call “targeted scale.”
Unilever’s partnership with McCormick highlights a shift in strategy among consumer goods companies, which prioritize dominating specific categories rather than simply assembling a diverse portfolio of unrelated brands.
“The rules have changed, and many large (consumer products) companies face an inexorable drift toward irrelevance,” Ernst & Young said in last year’s State of Consumer Products report. The consulting firm says size is now less important and success is determined by relevance to consumers and capital markets.
Unilever said on Tuesday it would sell most of its food business, including its Hellmann’s Mayonnaise and Marmite brands, to US-based McCormick, owner of Cholula Hot Sauce, for $15.7 billion.
double
The logic behind recent industry moves is simple. Companies are cutting low-margin, high-complexity units to double their “power categories.”
For Unilever, that means pivoting to high-growth health and beauty care, including big brands Dove, Dermalogica and Treseme.
The British company also spun off its ice cream business last year to create Magnum, the world’s largest independent ice cream company.
The world’s largest food and beverage manufacturer nestle Similarly, the company said it plans to sell its ice cream business to focus on its portfolio led by its strongest brands.
The consumer goods space also saw big deals between Kimberly-Clark and Kenvue, which combined brands like Huggies and Kleenex with Band-Aid and Tylenol. Kimberly CEO Mike Hsu said the move is a step toward refocusing the company on high-growth, high-margin businesses.
In December, European regulators approved a $36 billion deal for Mars to acquire Keranova and create a major company specializing in snack foods.
It’s about the “right to win” in certain categories, Jens Wen, global consumer and health leader at EY-Parthenon, told CNBC.
Safe bet in question
For decades, investors flocked to consumer goods giants that offered stable returns that outperformed bonds. But Wen says its “safe bet” status is challenged by a lack of real volume growth.
The problem now is that old growth engines such as the emerging market middle class and China’s supercycle have stalled, Wen said.
“When organic growth becomes more difficult, inorganic growth options become a consideration,” Wen said. “That’s why all my clients and all the major consumer packaged goods and FMCG companies are so focused on M&A.”
In a shift he calls “targeted scale,” companies are no longer focusing on a mix of countries, but instead targeting investments in categories where their brands have a leading market position.
This comes on the back of growth in private label retail brands such as: walmart’s Great Value line and more. The products are manufactured by a third party but sold only under the retailer’s own name. These products usually generate higher profits for retailers, even though they are cheaper to purchase.
The growth of private label retail brands means the market for branded goods is shrinking, leaving less room for consumer staples companies to seek growth in categories in which they don’t have a leading position.
“That’s why companies abandon positions in non-strategic categories,” Wen said.
A more concentrated portfolio often makes it easier to outperform because a company can focus all its energy on that category, even if it comes with concentration risk, he added.
