The market likes nothing more than a spot of blood-letting. But in the case of Unilever (ULVR), the decision to cut 1,500 management jobs was essentially foisted on the group through institutional pressure. It’s never a good sign, though an increasingly frequent one due to the rise of the activist investor.
The business is to be reorganised around five distinct segments: beauty & wellbeing, home care, personal care, nutrition, and ice cream. You wonder how long it will be before that’s reduced to a quartet, although management has been warned that attempts to offload Ben & Jerry's could be stymied by the brand’s political activism – get woke, go broke!
Management maintains that health, beauty, and hygiene “offer higher rates of sustainable market growth”, and there is certainly evidence to suggest that sales for thematic products linked to “wellness” and “self-care” picked up appreciably during lockdown.
But shareholders would probably be concerned if they thought the reorganisation was only a response to pandemic-linked effects, thereby primarily reactive in nature. The announcement of the job cuts was somewhat short on specifics and they may have been simply designed to support operating margins, with the aim of quelling shareholder rebellion. We shall see.
Timing is everything. Unilever is now hawking its fast-moving consumer goods (FMCG) at a time when inflation is running at a multi-decade high. Prices for key commodities such as palm oil, tea and packaging card rose to unprecedented levels through 2021 and they could surge further if supply chain issues or geopolitical tensions escalate.
Discretionary incomes are likely to come under further pressure due to a continued tightening of central bank monetary policy. The general view on Wall Street is that the US Federal Reserve will start to run down its balance sheet from midway through the year, but the mere prospect has been enough to accelerate the rotation out of growth stocks.
A prolonged low interest rate environment rendered long-duration assets more attractive, but the prospect of reduced liquidity has triggered a reassessment of higher-growth speculative stocks. Essentially, the immediate cost of investing to secure later gains rises, so the current price falls – that’s the theory, at any rate. Who knows? A year from now, central banks may have fully embraced Modern Monetary Theory and the printing presses could be running at full tilt.
Unilever is among the 10 largest FMCG stocks by market capitalisation, but size is probably less important in the current inflationary environment than the pricing power and elasticity of its product offering. Ideally, you do not want your customer base to be overly sensitive to variations in the price or demand for your product. Usually, this boils down to the essential or non-essential nature of certain goods, but consumer behaviour during lockdowns reinforced the notion that higher margins on premium items can more than make up for lower overall spending. So, perhaps FMCG stocks such as L'Oréal (FR:OR), Christian Dior (FR:CDI), or even Pernod Ricard (FR:RI) could offer a safer haven in an inflationary economy than a company selling bleach and washing-up liquid.
The advantage of premiumisation, or at least the willingness of punters to fork-out for life’s little luxuries, will become more evident as discretionary incomes shrink. But another key change under way in the FMCG space, one that has been accelerated due to the impact of Covid-19, centres on supply-chain management.
Unilever and industry rivals such as Procter & Gamble (US:PG) had spent years building lean global supply chain networks, which they suddenly needed to adjust to the impact of the pandemic. Price efficiencies through inventory reduction and asset utilisation have given way to a focus on resilience. We are also seeing improved transparency in sourcing, partly a consequence of the gathering roll-out of environmental, social and governance (ESG) mandates. The cost implications for the FMCG segment are difficult to quantify at this stage, not least of all because the we are witnessing a concurrent increase in digitalisation.
Whether Unilever’s business model, or indeed its supply chain arrangements, will attract market support amid an inflationary surge, probably matters less than the intensifying focus on management’s decision-making process following the abortive attempt to purchase the consumer healthcare arm of GlaxoSmithKline (GSK). Canning 15 per cent of your management workforce may not be enough to placate an activist hedge fund like Trian Partners, to say nothing of Fundsmith supremo Terry Smith, so it’s unsurprising that some market watchers believe that the consumer giant could now be in play.
