Unilever has some of the world's best-known food and drink brands, including Knorr, Lipton and Ola, and has been increasingly concentrating its efforts on developing this branded business over the last four years as part of its Path to Growth programme.
Hundreds of minor brands have been sold off under this programme, theoretically enabling the company to focus on building sales of its leading brands. But with just six months of Path to Growth left to run, Unilever finds itself in some ways in a more precarious position than in 1999 when the restructuring programme began.
First quarter sales dropped by 2 per cent to €9.8 billion, although this was partly to do with the number of disposals since the first quarter of the previous year. Underlying sales were just 0.4 per cent ahead, however. Operating profits were 1 per cent lower at €1.5 billion even excluding the impact of exceptional items and goodwill amortisation. Including these items, net profits were some 15 per cent lower than in the first quarter of 2003 at €530 million.
Sales of the company's leading brands did grow by 1.3 per cent, however, although this was well short of the 5-6 per cent target set by the company last year.
"It is strong brands that best take advantage of our category knowledge and the scale benefits of Unilever; they have the margin structure to support a sustained programme of innovation and competitive levels of support," said Unilever co-chairman Niall Fitzgerald. "However, we are not happy with the short-term sales performance and action is being taken to address this."Among the leading Unilever brands to blame for the poor performance was Slim Fast, the weight loss system which has suffered badly from the rapid rise in popularity of the Atkins diet in key markets such as the US and the UK. In the US alone, the poor Slim Fast performance contributed to a 2.1 per cent drop in sales during the quarter.
But if branded sales were disappointing, Fitzgerald said that there was a welcome improvement in gross margins, helped by the savings generated by Path to Growth and a better product mix. This was partly offset by an increase of 20 basis points in advertising and promotions - all the more necessary in a weak global economic climate when consumer spending levels are low.
European food brands which performed well during the quarter include Bertolli, the European olive oil market leader which benefited from brand extensions into the pasta sauces, dressings and toppings segments, as well as Lipton, whose ready-to-drink ice tea brand continued to grow across the continent on the back of new flavour variants.
But the competitive conditions in the spreads market meant that Unilever's brands such as pro-activ struggled to compete with retailers own labels during the quarter, in particular in recession-hit Germany where the discount food retailers (which stock most non-branded goods) increased their market share.
Unilever has attempted to counter this decline with the launch of a number of new products, such as the Cremefine range of dairy cream alternatives pro•activ milk and yoghurt line extensions.
Frozen foods remains a problem area for the company, with too broad a portfolio and too few high-margin products, and Unilever is undertaking a major cull of a its frozen food brands to combat this problem, taking an inevitable hit on sales in the short term. Strengthening its frozen food portfolio through line extensions such as Knorr frozen and Slim•Fast frozen helped redress some of the balance in the first quarter, however.
The dressings market also had mixed results, with France in particular remaining tough. There was, however, good growth for Hellmann's in the UK and Calvé in Russia, as well as a steady improvement from Knorr in Poland, offsetting tough conditions in both Germany and the Netherlands.
In the US, Unilever sought to offset the decline in Slim Fast sales through the launch of its own range of low-carb diet foods under the Carb Options sub-brand for its Wishbone, Lipton, Hellmann's and Skippy brands. Slim Fast also has its own range of low-carb products, but these have as yet failed to compensate for the major drop in sales of the core weight loss brand. The company said it would relaunch these low-carb products later in the year along with a major extension to the range.
Low-carb ice cream variants also drove growth in the US market.