‘A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot’
Author of the article:
Financial Times
Judith Evans and Harriet Agnew in London
Jars of Hellmann’s mayonnaise, produced by Unilever Plc., stand on display at a supermarket in London, U.K. Photo by Chris Ratcliffe/Bloomberg files Launching his strategy for Unilever last year, chief executive Alan Jope held up Hellmann’s mayonnaise as a brand with a purpose: “Fighting against food waste — that is the purpose of Hellmann’s,” he said.
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Now the mayonnaise has come back to haunt him. With Unilever’s share price languishing, top-10 shareholder Terry Smith this week launched a scathing attack on Jope’s approach, calling the mayonnaise example “ludicrous”.
“A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot,” he wrote.
Smith’s reprimand was the most public sign yet of investor discontent with Unilever, one of the world’s largest consumer goods companies, whose shares linger only slightly above their price when it fought off a bid from Kraft Heinz almost five years ago.
He is also the latest unhappy shareholder to express the view that companies seeking to pursue principles may end up sacrificing profit.
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Unilever’s smaller French rival Danone last year lost its chief executive Emmanuel Faber, an advocate of responsible capitalism, to activists claiming he had neglected shareholder interests.
Consumer goods companies have faced intense pressure to reduce their environmental impact. But Smith said Unilever’s management had been “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”.
Marco Taricco, co-chief investment officer at Bluebell Capital Partners, an activist that campaigned at Danone, said: “We fear that ESG [environmental, social and governance factors] has increasingly been used by chief executives to justify underperformance.
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“If you’re the CEO of a publicly listed company, your first priority should be to create shareholder value, striking the right balance between financial and non-financial targets. This was the message we delivered to Danone.” Taricco said Bluebell had not looked at Unilever as a target, however.
There is little doubt that performance has faltered at the maker of Magnum ice cream, Domestos bleach and Dove soap, despite Jope’s assertion last year that “there is a clear and compelling business case for sustainable business driving superior growth”.
The company has really deprioritised growth…there’s a lack of consumer relevance that is grating
Bruno Monteyne
Sales growth has lagged behind rivals that are also highly rated for sustainability, such as Nestlé, while investors have been repeatedly disappointed by its margin guidance. Its developed markets business has also trailed emerging market divisions such as India’s Hindustan Unilever.
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“The company has really deprioritised growth…there’s a lack of consumer relevance that is grating,” said Bruno Monteyne, analyst at Bernstein.
Monteyne argued Unilever should invest more in marketing its brands and should buy and sell businesses more aggressively, having taken two years to dispose of its tea division, the latest major sale.
“People will immediately compare it with Nestlé, which is doing multiple deals each year,” he said. Investors were “openly talking” about the potential departure of Unilever’s current management, three years after Jope took his role, he added.
Martin Deboo, analyst at Jefferies, said he thought the root of Unilever’s problems lay in its food business, where it should sell off more divisions.
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Multiple investors said they disagreed with Smith’s view that Unilever’s problems stem from its pursuit of responsible capitalism.
“There is no denying Unilever has been lagging [behind] peers, but it’s a bit unfair to suggest that Unilever’s focus on sustainability is a smokescreen to hide its shortcomings,” said Sébastien Thevoux-Chabuel, head of responsible investment and a portfolio manager at France’s Comgest, a small shareholder in Unilever.
“From its early origins, a social purpose has been anchored in Unilever’s DNA. More than an undue obsession with ESG, Unilever has, like Danone, mostly suffered from unfortunate product categories and geographical exposure.”
From its early origins, a social purpose has been anchored in Unilever’s DNA
Sébastien Thevoux-Chabuel
Jamie Isenwater, founding partner at Ash Park Capital, which also owns a stake, said Unilever’s underperformance was “a manifestation of having hiked margins too far in response to the Kraft Heinz bid, and nothing to do with them publicly displaying their sustainability credentials”.
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“Being a leader in corporate and social responsibility clearly brings substantial benefits. Unilever is among the most sought-after employers in almost all their markets,” he said.
Regulators and investors have strengthened ESG disclosure requirements, notably requiring companies to report how they take all stakeholders into account in decision making.
Richard Bernstein, founder of activist fund Crystal Amber, said: “Terry Smith is misdirected in blaming Unilever…A lot of funds simply won’t invest in companies if they score badly on the ESG disclosure front and proxy advisers will tell investors to vote against their reports.”
Unilever’s underperformance made it an attractive target for an activist such as Nelson Peltz’s Trian Partners, said bankers, investors and analysts.
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Bernstein said Unilever looked vulnerable: “It’s undervalued with strong brands, there is debate around how management can improve performance, and the cost of capital is cheap.”
Others drew parallels between Unilever and rival Procter & Gamble, which was the target of a campaign by Peltz, who sat on its board for three years until last year. P&G’s shares have sharply outperformed Unilever during that period.
More On This Topic Gold struggles to attract investors as interest rates rise ETFs hit record in Canada with BlackRock, Vanguard, banks dominating Investors gear up for ‘gold rush’ in metaverse hardware “Activist investors will look at P&G and say: Is there a similar thing to be done at Unilever?” said Paul Kinrade, a senior adviser at Alvarez & Marsal, a professional services firm that tracks activist activity. Trian declined to comment.
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Article content Comgest has been selling down its stake in Unilever, not because of its sustainability strategy but because of concerns over lack of growth.
Despite his criticism of Unilever’s “purpose-led” strategy, Smith said he continued to own its shares “because we think that its strong brands and distribution will triumph in the end”.
Isenwater said he too was sticking with the stock. But he said the next test for Unilever would be its response to inflation. “What may prove very key . . . is how they deal with input cost pressures which are clearly going to put some shorter term pressure on margins,” he said.
“If they take spend away from other areas in order to shield themselves from that input cost pressure, that is going to exacerbate the problems they have already made for themselves.”
© 2022 The Financial Times Ltd
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