Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Paul Polman, Unilever's chief executive, says innovation is the engine of growth.

With the Anglo-Dutch consumer goods company reporting restrained demand in developed markets in 2015, and warning of more volatility from emerging economies this year, that motor will need to run even faster.

On the Up
Bloomberg

Polman said on Tuesday that Unilever would expand its pipeline of new products and try to get them on the shelves more quickly.

Such ambitions aren't just bland marketing speak. New and innovative brands are becoming an essential way of persuading cash-strapped consumers to keep spending, particularly on the higher-priced goods that will help Unilever continue to hit margin-growth targets.

Unilever's Improving Margin
Bloomberg/Company

Unilever has had some success bringing new products to market already. Dry-spray deodorants have done well in the U.S., while Dove has been rolling out body care lotions apparently inspired by the experience of a beauty spa. Premium toothpaste Zendium is now in nine markets, while there have even been advances in laundry care, cleaning and ice cream.

Overall, Polman estimates that about 60 per cent of its businesses are expanding market share.

But to protect those profit margins, he still has to do more to compete with smaller, nimbler brands -- typically regionally-based -- who've been at the forefront of popular new developments in everything from healthy foods to indulgent desserts and premium popcorn.

The big consumer goods groups should be there first. But often they're not. Unilever has got around this in part by snapping up brands such as Grom, a premium Italian gelato business. The company spent 2 billion euros ($2.2 billion) on acquisitions last year, up from 424 million euros in 2014. 

Dave Lewis, chief executive of Tesco and former Unilever director, has accused the consumer goods companies of too much "renovation" and not enough innovation; revamping product lines rather than bringing in anything genuinely new themselves.

Research and development spending was a modest 995 million euros at Unilever in 2014, on revenue of 48.4 billion euros. But even if Polman forked out more that wouldn't guarantee it was spent wisely. Nielsen, a consumer research group, has found that many new products fail to generate sufficient sales and simply wither on supermarket shelves.

So one area where the consumer giants are going to have to modernize is in connecting with consumers, who are engaging more with brands through social media, particularly Instagram. Harnessing the power of YouTube vloggers has helped Unilever build market share in hair care, for instance.

And Polman shouldn't be shy about dumping product lines where innovation is harder. Foods remains a profitable part of the business, but its operating margin declined sharply in 2015 while sales growth is well behind other categories (as the chart below shows). 

Food Lags
Unilever revenue is increasing faster in other categories
Company

A big part of that under-performance comes from the spreads division, whose brands include Flora and I Can't Believe It's Not Butter. Polman has restructured the division already, bringing it together with more fashionable baking, and has now changed its management.

He says that with the spreads unit generating cash, it would be criminal to give it away at a knock-down price. But for a division whose sales are estimated at less than 5 percent of total Unilever revenue, it's weighing too heavily. If Polman wants to be more nimble, he should lighten the load.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net