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During the recent economic downturn Unilever’s Western European markets were the worst hit (6% decline in turnover for fiscal 2009) and so the company has announced strategic steps to re-establish growth in the region.
These include the acquisition of Sara Lee’s personal care brands (Western Europe accounts for around 80% of Sara Lee’s beauty and personal care business) and more recently it has announced the sale of its remaining frozen food operations in Italy; frozen foods is no longer a core business area for the company which will concentrate its resources on brands with better growth potential.
However, Unilever’s position in Western Europe’s packaged foods market is still reliant on slow growing (oils and fats, ice cream) or still moderately-sized segments, such as soup. The company could benefit from further expansion in more prospective food categories in the region, such as functional dairy products or chilled processed food.
Unilever has been restructuring its food operations in recent years and has readjusted its business focus, away from frozen processed food and oils and fats, towards ice cream, sauces, dressings and condiments and soup.
The announced sale of its Italian frozen food division further reduces Unilever’s presence in the segment, leaving the company present in frozen processed food only in the US, with approximate retail value sales of US$325 million.
However, growth prospects in the US frozen food category over 2009-2014 are significantly brighter, with a 1.7% CAGR forecast, resulting in a US$2.9 billion gain in absolute value terms, while in comparison over the same period Italy’s frozen processed food category is expected to expand by a mere US$134 million.
The recent economic turmoil has had a different impact on various packaged food categories in different regions. The overall Western European frozen processed food category is expected to perform well over 2009-2014 with a 1.7% CAGR.
However, this growth will mainly be fuelled by Germany (3.0% CAGR) and France (2.9% CAGR), with these two markets combined set to account for over 60% of absolute value expansion of US$2.6 billion over the period.
Given Unilever’s presence in European frozen foods after the 2006 divestment of the Bird’s Eye and Iglo labels was restricted to Italy, where the forecast for the category is less dynamic (1% CAGR) and its scale of operations were also reduced, the divestment was a strategic exit from a market where generating growth would be a huge challenge.
One of the reasons behind Unilever’s lower growth than its competitors is the company’s category positioning. Its presence in well performing, large categories, such as dairy products, is fairly weak; around 5% of its Western European food sales came from dairy products in 2008.
However, in the Western European dairy category, nearly 60% of its sales derive from functional yoghurt. Further expanding its scale of operations in dynamic and high-margin categories should offer the company a good platform for growth.
Chilled processed food in Western Europe is a particular area of business to which Unilever should turn its attention. Over 2009-2014 it is expected to achieve a 1.7% CAGR, and in absolute retail value terms the category will account for over 30% of the region’s market expansion, the highest proportion of any segment.
The region’s growth is largely fuelled by markets such as France and Italy. Unilever currently has a minor presence in the category, with a 0.4% regional value share, mainly generated in Germany, with sales of around US$230 million. However, expanding the scale of its operations in the segment and expanding geographically, potentially via acquisitions, could add significant dynamism to Unilever’s performance in its currently stagnating Western European markets.
Despite a healthy growth forecast for the Western European frozen processed food category, the divestment of its Italian business was a logical strategic step given the division’s narrow geographical reach.
Growth categories upon which to focus in the Western European packaged food market are chilled processed food and functional dairy products. However, Unilever’s currently small scale in these segments would need to be enhanced via investment in brand development, R&D and potential acquisitions in order to fully benefit from its expected growth.
Whether it chooses to do so will depend on the priority the company gives to its foods business over other operations, while the recent US$1.9 billion Sara Lee acquisition could limit its ability to make large-scale acquisitions in the near future.