- Unilever is currently our largest holding in the Fund.
- The strength of Unilever’s brands translates into strong returns on capital which have been consistently in the 15-20% range over the last three decades.
- UL's botched (and short-lived) attempt at acquiring GSK’s consumer arm elicited a violently negative response from the investment community.
The following segment was excerpted from this fund letter .
Unilever ( UL )
Headquarters: London, United Kingdom
Founded: 1885 as Lever Brothers and merged with Margarine Unie. in 1929 to form Unilever.
In 1895 the Lever brothers created a new brand of hand soap. Inspired by the growing demand for hygiene products, the Lifebuoy brand of soaps was launched to ‘make health infectious’. 128 years later, the Lifebuoy brand continues as a leading soap brand – albeit without the coal tar-derived ingredients list. In fact, the market research firm Kantar ranked Lifebuoy as the global #3 most chosen FMCG brand in 2020, just below Coca-Cola ( KO ) and Colgate ( CL ) – an astonishing fact given the age of the brand. While the brand is largely absent from shelves here in the UK, it is a juggernaut in Asian markets, and is the #1 brand in India.
There are two observations about the Lifebuoy story which tell us a lot about Unilever, which is currently our largest holding in the Fund.
The first is the enduring power of brands in the consumer goods market. According to Kantar’s list of most chosen brands, the top 20 global marques have an average age of 116 years, with over half being founded in the 19th century. Fashions come and go, but there is something special about low-cost consumable goods that advantages strong, time-worn brand names.
In that context, then, it is positive that Unilever is arguably the predominant home of such brands. In fact, of the top 20 global brands, Unilever alone owns six, with a further eight brands in the global top 50. In fact, of Unilever’s 400+ brands, over four fifths are ranked #1 or #2 in their market. Examples include Dove, Surf, Knorr, Sure and, of course, Lifebuoy.
Lifebuoy’s particular strength in Asia highlights another defining feature of Unilever: its strength in emerging markets. About half the company’s sales come from emerging markets. We think emerging markets have a number of long-term trends supporting growth.
- First, fast population growth supports volumes with more mouths to feed and people to wash.
- Second, rapid expansion of middle classes with greater disposable income supports the premiumization trend.
- Finally, while we are seeing private labels take share from brands – particularly in Europe – the structure of the retail market in developing markets should see brands continue to support their market share.
The strength of Unilever’s brands translates into strong returns on capital, which have been consistently in the 15-20% range over the last three decades. The relative stability of the company’s returns on its capital base underlines the stability in the wider business, as well as the economic value-add the group brings to its customers.
While the “big picture” at Unilever is, we believe, encouraging, it would be remiss not to mention some of the developments which have grabbed headlines over the past six months. The company’s botched (and short-lived) attempt at acquiring GSK’s consumer arm elicited a violently negative response from the investment community. While we were not against the transaction in principle, we believe the investor reaction was indicative of a broader unhappiness with Unilever management.
Indeed, we have great sympathy with Terry Smith, who this year derided Unilever’s search for “brand purpose”. Does Mayo really need a deeper purpose? We are therefore encouraged by the early signs of activism, with Nelson Peltz entering the fray in the spring when he took a 1.5% stake in the company and joined the Board. If he can do what he managed at P&G ( PG ) – spark a reorganization and cut costs – we will be very happy indeed.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Mayar Capital - Unilever: Consistent 15-20% Returns On Capital