Unilever’s $16 billion move shows a shift is happening in consumer products
On any given day, 2.5 billion people use Unilever products, spanning 400 brands. As the sustainability movement gains more traction as consumers avoid plastic pollution, this success has put a big target on the company’s back.
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Unilever Plans to merge food business with spice manufacturer McCormick It’s the latest move in an industry struggling to stay relevant as the growth model that has powered major consumer products companies for decades is eroding.
As the post-pandemic pricing supercycle weakens and growth stalls in huge markets like China, the industry’s giants are moving away from the bigger-is-better conglomerate model and moving towards what experts call “targeted scale.”
The tie-up between Unilever and McCormick highlights a shift in strategy among consumer products companies that prioritize dominating certain categories rather than assembling a diverse portfolio of unrelated brands.
“The rules have changed and many big [consumer products] Ernst & Young wrote in its State of Consumer Products Report last year: According to the consulting firm, size now matters less and success will be determined by relevance to consumers and capital markets.
Unilever said on Tuesday it would sell most of its food business, which includes the Hellmann’s mayonnaise and Marmite brands, to US-based McCormick, owner of Cholula hot sauce, for $15.7 billion.
Doubling
The logic behind the latest moves in the industry is simple: Companies are shedding low-margin, high-complexity units to double down on “power categories.”
In Unilever’s case, that means pivoting to high growth in health and beauty care, which includes big brands like Dove, Dermalogica and TRESemmé.
British company too Last year, he wound up his ice cream business and founded Magnum, the world’s largest independent ice cream company.
The world’s largest food and beverage producer Nestlé similarly, it said it plans to sell its ice cream business to focus on portfolios led by its strongest brands.
The consumer goods space has also seen mega-deals between Kimberly-Clark and Kenvue, bundling brands like Huggies and Kleenex with Band-Aid and Tylenol. Kimberly CEO Mike Hsu said the move is a step toward moving into higher-growth, higher-margin businesses.
In December, European officials approved a $36 billion deal for Mars to acquire Kellanova to create a snack-focused giant.
Jens Weng, global consumer and healthcare leader at EY-Parthenon, told CNBC it’s about the “right to win” in a particular category.
The safe bet in question
For decades, investors have flocked to consumer giants because they offer stable returns that outperform bonds. But according to Weng, this “safe bet” status is challenged by the lack of real volume growth.
The problem now is that old growth drivers such as the emerging market middle class and the Chinese superbike have stalled, Weng said.
“Organic growth becomes difficult, then inorganic growth options come to the table,” Weng said. “That’s why all my clients and all the major consumer packaging, FMCG companies… place great emphasis on mergers and acquisitions.”
In what he calls “targeted scale” change, companies no longer focus on country combinations, but instead target investments in categories where their brands have a leading position in the market.
It comes against the backdrop of the growth of private label retailer brands, e.g. Walmart’s Great Value series and others, where products are manufactured by third parties but sold only under the retailer’s own name. These products are often cheaper to purchase and still yield higher profits for the retailer.
The growth of private label retailer brands means the market for branded products is shrinking, leaving less room for growth for consumer staples companies to seek growth in categories in which they do not have leading positions.
“This is why companies are giving up non-strategic category positions,” Weng said.
He added that with a more focused portfolio, it often becomes easier to achieve better performance because a company can direct all its energy to that category, even if it carries concentration risk.
