LONDON (Reuters Breakingviews) - Unilever is half way there on its Kraft Heinz challenge. The Anglo-Dutch owner of Dove soap and Ben & Jerry’s ice cream cut costs faster than expected in the first half of the year by reducing ad spend and paying its suppliers less. Its 20 percent operating margin target looks reachable. Yet with U.S. rival Kraft Heinz free to go hostile next month, volume growth remains too low for comfort.
The unwelcome approach from Warren Buffett-backed Kraft Heinz in February has been positive in one respect. Unilever now looks considerably sharper on costs. In the first six months of 2017, it took 1 billion euros off its expenses. Half came from supply chain efficiencies, while around a third came from brand and marketing spending cuts – replacing ads less frequently sent agency fees down 17 percent. That still leaves a further 5 billion euros of planned cuts to be found. But with a first-half underlying operating margin of 17.8 percent, Unilever looks comfortably on track for a 2020 target of 20 percent.
Its top line is shakier. Underlying sales growth of 3 percent came from price hikes, not selling more goods. Volume growth in Europe and the Americas was negative, markets which account for over half of group revenue. Stabilising currencies in emerging markets should drive consumer demand. And a sale or spinoff of Unilever’s troubled spreads unit – currently in the works – would eliminate one drag on group performance.
For now, Chief Executive Paul Polman will still be looking over his shoulder. The six-month hiatus under British takeover rules that has kept Kraft Heinz at bay expires mid-August. Unilever’s increased bulk since February affords some protection. The U.S. group’s offer valued Unilever at $143 billion, whereas its current market capitalisation is $170 billion. Kraft’s own market capitalisation has fallen slightly to $104 billion. And a 20 percent premium would be needed to get shareholders’ mouths watering.
With profitability on the up, volume growth would bolster Unilever’s takeover defences. Half of the brand and marketing cost savings made so far this year will be ploughed back into souping up its products. That level of investment would be easier to defend if it looked like customers appreciated it.
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