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Unilever May Post Fastest Annual Sales Growth of Polman’s Reign

Unilever Chief Executive Officer Paul Polman
Unilever Chief Executive Officer Paul Polman. Photographer: Simon Dawson/Bloomberg

Unilever may this year post the fastest growth of Chief Executive Officer Paul Polman’s tenure as the world’s second-largest consumer-products maker sells more in emerging markets and lifts prices on soaps and shampoos.

Underlying sales will probably increase 5.2 percent in 2011, according to the median estimate of eight analysts surveyed by Bloomberg. Volume may account for 3.5 percentage points of the growth, with the rest coming from higher prices as the maker of Knorr soup recoups higher costs for commodities. Unilever reports fourth-quarter and 2010 results tomorrow.

“Unilever is entering a period of sustained, strong organic growth,” Goldman Sachs Group Inc. analysts including Alexis Colombo wrote in a report last week. “Management change is acting as a catalyst to drive better execution and improved efficiency.” Goldman has a “buy” recommendation on the stock.

Polman, the first outsider to lead the company in its history, has added 32 new managers to its top 100, cut prices and increased investment in advertising, promotion and innovation in brands including Dove personal-care products for men to restore growth since taking the helm in 2009. He must show he can contend with increased expenses for palm oil, corn and soy beans by raising prices without hurting sales growth.

Under Polman, Unilever is a “much more dynamic company,” said Eric Scher, an analyst at Sanford C. Bernstein in New York. “You’ve seen evidence they’re now gaining share and that’s also because they’ve been innovating better in the last 24 months.”

Clear Shampoo

Unilever’s investments in products such as Knorr bouillon pots and Clear anti-dandruff shampoo have “been working well” in driving sales, according to Richard Withagen, an analyst at SNS Securities NV in Amsterdam. Products from its so-called Genesis innovation program may add to growth in 2011, attracting consumers in emerging and developed markets, he said.

Unilever gets about half its sales outside of the U.S. and Europe and aims to generate 80 percent of growth from countries such as Indonesia, India and China, offsetting stagnant sales in traditional markets affected by slowing economic growth and more aggressive competition. Rival Procter & Gamble Co. generates 37 percent of sales from outside the U.S and Europe.

Yet Unilever still trades at a discount to its peers. The shares, with a price-to-earnings ratio of 14.8, are the cheapest among rivals including Nestle SA, which trades at 20 times earnings, while Cincinnati-based P&G is at 17 times.

‘Middle of the Pack’

For most of the past decade, Unilever’s growth trailed P&G and Nestle, the world’s largest food company. The company, with headquarters in Rotterdam and London, had two CEOs, making it slower to respond to changes in the market, investors said.

“This is a middle-of-the-pack company that gets a bottom-end valuation simply because of the reputation they have,” said Bernstein’s Scher.

Unilever shares gained 2.4 percent in 2010, less than the 6.1 percent advance in P&G. Vevey, Switzerland-based Nestle, where Polman was chief financial officer, increased 9.1 percent.

Unilever may say underlying sales, or revenue excluding acquisitions and currency fluctuations, rose 4.1 percent in the fourth quarter of 2010, driven by selling more goods at about the same price, according to the analysts surveyed. Net income may have climbed 2.4 percent to 851 million euros ($1.2 billion), according to the median of 10 estimates.

Like P&G, which has said increased material expenses will erode profit by about $1 billion after taxes this year, Unilever will need to combat higher commodity costs.

Corn, Soy Beans

The price of corn and soy beans has gained more than 40 percent in the last six months, potentially cutting into profitability. Milk prices have risen 16 percent over the last year, affecting Unilever, the world’s biggest maker of ice cream. Palm oil, which Evolution Securities analyst Warren Ackerman estimates costs the company 2 billion euros to 2.5 billion euros annually, has gained 56 percent in the last year.

Polman “will try and plot more of a middle course between volume speedometer and recovering cost inflation” in 2011, said Martin Deboo, an analyst at Investec in London. Unilever will be restricted in how much it can raise prices, leading to “massive uncertainty about how much margin they’re going to spill in terms of under-recovery” of increasing commodity prices.

Sales growth in 2011 “will be of a lower quality than in 2010,” said SNS’s Withagen, who has a “reduce” rating on the stock. “Volume growth is something a company should focus on, which Unilever’s trying to do, but it’ll come down in 2011.”

The company may be “more sensitive” to rising input costs than its peers, Withagen said, as it may not be able to increase prices as much because of its high exposure to emerging markets, where consumers have less disposable income.

Operating Margin

Unilever’s operating margin, adjusted for restructuring costs, disposals and one-time charges, may widen to 15.1 percent in 2011 from 15 percent in 2010, according to analysts, helped by estimated cost savings of about 1 billion euros. The company may not need to increase advertising expenditure as competitors cut marketing and promotional campaigns, said Investec’s Deboo.

Polman may need to have to sell more units, Ackerman at Evolution said. The spreads, dressings and savoury unit, which represents about a third of sales, is dragging down sales improvements by about 100 to 150 basis points a year, Evolution estimates, and could be reshaped, helping Polman drive revenue.

Unilever may also need to step up sales in its more mature markets as well as in emerging ones, including Europe, “which has long been their Achilles’ heel,” Ackerman said.

“2011 is still going to be a bit of a transitional year,” he said. Polman’s job is “by no means finished.”

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