Unilever stirs the pot with review of global tea business

FILE PHOTO: A shopper picks up a box of PG Tips tea bags at a Sainsbury's supermarket in London - Reuters

Reuters: Unilever will conduct a review of its global tea business, including the PG Tips and Lipton brands, in an apparent strategy rethink by Chief Executive Alan Jope in the face of slowing group sales growth.

Jope has previously said the company was invested in turning around the tea business over the longer term, but the change of plan could soothe concerns of investors who have lamented a lack of urgency in transforming Unilever’s struggling food and refreshment business.

“We will look at all options for the (tea) business,” Unilever finance chief Graeme Pitkethly said after the company’s results on Thursday showed group sales grew at their slowest in a decade in the past quarter.

Pitkethly said tea is a good performer in emerging markets and in the premium category but all regions and all parts of the business would be considered for review. Options include a partial or full sale of the business, he said without giving a timeframe.

The company said the review was triggered by the sales slowdown of traditional black tea in developed markets as consumers shift towards herbal tea. Black tea is the dominant part of Unilever’s tea business, Pitkethly said, selling in 60 countries and generating 3 billion euros ($3.3 billion) in annual sales.

Unilever has been suffering elsewhere, too, with stuttering growth in India and China, two of its biggest emerging markets, while intense competition in North America and Europe has also hampered efforts to hit full-year growth targets.

Shifting tastes

The food and refreshment business - which makes Lipton teas and Hellmann’s mayonnaise among others and contributes 40% to group sales - has been hit particularly hard in North America and Europe as consumers reach for healthier options.

“We are pleased to see some progress on the disposals strategy,” Liberum analyst Anubhav Malhotra said of the review, while Jefferies analysts said it could kick-start further moves to unlock value in the food and refreshment division.

Six months after taking the helm in January last year Jope announced his attention to target sustainability rather than topline growth. The CEO said he would streamline Unilever’s vast portfolio by focusing on what he described as “brands with purpose”, adding that these were its fastest-growing assets.

The so-called brands with purpose, including Dove, Knorr and Persil, contributed almost two thirds of revenue and drove 75% of sales growth in the first half of 2019, the company said. Among those that don’t cut it, Jope has identified Marmite, Magnum Ice Cream and Pot Noodle.

There have been no disposals as yet, though rivals Nestle and ABInBev have each sold food operations worth billions of dollars over the past year to refocus on their core businesses.

The maker of products as diverse as Dove soap and Ben & Jerry’s ice cream reported fourth-quarter underlying sales up by a slightly better than expected 1.5%, though this was still the slowest quarterly growth since at least 2009.

Growth focus

“There is no clarity around the two key issues: how will sales growth rise back to the top end of the 3-5% target range, and is this something management are focusing on, or are their 2020 margin targets more of a focus,” said Freddie Lait, founder of Unilever shareholder Latitude Investment Management.

Jope’s focus, however, is on growth, he said on Thursday after the results from his first full year in charge showed annual turnover grew 2% while underlying sales gained 2.9%.

“If it does come to a trade-off between margin and growth, we will certainly prioritise growth,” he told analysts.

On its long-term outlook the company said it would step up execution and improve brand awareness and availability while seeking to accelerate innovation in on-trend areas such as plant-based foods.

The shares are up 11% over the past year, slightly outperforming the FTSE 100 index, which has been roiled in recent weeks by growing concerns over the potential economic damage from the coronavirus outbreak in China.

Unilever said the impact of the coronavirus outbreak was too early to quantify but it could affect a fifth of its China professional food service business because fewer people will eat out. China contributes 5% to Unilever’s total sales.

The Anglo-Dutch company said it expects a stronger second half in 2020, helping it to achieve full-year underlying sales growth in the lower half of a 3-5% range.