LONDON — Attention all beauty and wellness entrepreneurs: polish those decks and ramp up the sales forecasts because Unilever is ready to splurge on prestige brands as it seeks to grow with bolt-on acquisitions.
Unilever’s chief executive officer Alan Jope, who’s been through a brutal few weeks following the company’s aborted bid for GlaxoSmithKline’s consumer health care arm, was bullish in laying out the future growth strategy now that multibillion-pound acquisitions, such as the GSK one, are off the table.
Jope said he wants to triple the size of Unilever’s Prestige beauty business, which includes Dermalogica, Ren, Hourglass, Paula’s Choice and Living Proof, from 1 billion euros to more than 3 billion euros in the next few years.
Beauty and Personal Care was the largest Unilever division by turnover in fiscal 2021, and Prestige Beauty is one of the fastest-growing parts of that portfolio, notching double-digit gains over the past year.
During a call following Unilever’s full-year results announcement, Jope said prestige and wellness products, such as vitamins and supplements, are now making “meaningful contributions” to overall sales growth, and was clear that Unilever wants to own a bigger share of the market.
“We’ve already identified what we think are the most attractive growth prospects, and you can see evidence of that in our behavior over the last three years. The bulk of our capital deployment in M&A has been in luxury beauty, health and well-being and in the VMS (vitamins, minerals and supplements) business, and we think those trends are going to continue,” Jope said Thursday.
“The world is becoming a little bit more affluent, and that’s associated with an increased concern with health and well-being. It’s a secular trend, and we are absolutely resolved to move our portfolio in that direction.”
Since 2017, the bulk of Unilever’s capital investment has gone into prestige beauty, personal care and “functional nutrition,” or vitamins, minerals and supplements.
The corporate giant, owner of brands ranging from Dove to Domestos bleach, has poured some 16 billion euros into 29 Prestige beauty and wellness acquisitions.
The strategy is paying off: In the fiscal year ended Dec. 31, Prestige beauty saw underlying sales growth of 24 percent, while Functional Nutrition notched 22 percent growth in the 12-month period.
“It’s an exciting agenda for me, and for the company, to pursue,” said Jope, adding that Unilever also has a big opportunity to grow its prestige portfolio in China now that the country has ended all mandatory animal testing for most general cosmetics.
Unilever Prestige was launched in 2014, and has grown under the aegis of Vasiliki Petrou, executive vice president and group CEO. In 2020, the division reported 700 million euros in turnover, and Jope highlighted on the call that it’s now a 1 billion euros business.
Jope also noted that prestige brands have another edge: most of them are sold through drugstores, independent retailers, direct-to-consumer or online — rather than in supermarkets or corner shops — making them less sensitive to price wars.
In addition, those high-end brands can leverage their e-commerce distribution to market effectively, connect with customers, create communities and offer unique experiences.
Late last month, Unilever unveiled a reorganization of its management structure that underlines just how important luxury beauty and wellness is becoming.
As reported, Unilever’s plan is to become “a simpler, more category-focused business,” organizing itself around five business groups: Beauty & Wellbeing; Personal Care; Home Care; Nutrition, and Ice Cream. The new setup is expected to generate around 600 million euros in cost savings over two years.
Beauty & Wellbeing will comprise Hair Care, Skin Care, Prestige, Vitamins, Minerals and Supplements, while Personal Care will include lower-priced, less glamorous products such as deodorant and toothpaste.
Each business group will be responsible, and accountable, for its own strategy, growth and profit delivery globally, and evidence of the changes will come to the fore in the second half of the year.
Jope was keen to signal that, after consulting with Unilever’s major shareholders, the company was ready to move on from last month’s takeover debacle which saw the share price collapse, and the reported arrival of activist investor Nelson Peltz’s Trian Fund Management.
Shareholders and analysts have been agitating for Unilever to make high-growth, meaningful acquisitions — and disposals — and to focus on exploiting opportunities within the current portfolio.
Jope said he’s happy to oblige.
“We’ve spent extensive time talking to shareholders in the last three weeks, and what we hear consistently is support for this direction of travel and feedback that the transaction that was previously under discussion was too big, and at the wrong time,” Jope said.
“So we park it, and we move on, but that certainly doesn’t mean we’re out of options or out of ideas. In fact, we’re excited about the agenda that lies ahead.”
While the acquisitions focus may be on luxury beauty and wellness, Unilever has also said it plans to hang onto the Elida group of personal care brands, which includes Q-Tips, Caress, Tigi, Timotei, Impulse and Monsavon. They will be part of the new Personal Care portfolio.
Unilever had originally planned to sell the cluster of brands, which had combined revenues of around 600 million euros in 2020, but it now believes it can create more value if it manages Elida as an independent unit within the overall business.
Beauty and Personal Care was Unilever’s largest division in the full year, notching 21.9 billion euros in sales, up 3.8 percent on the previous year.
The company said all categories delivered good growth apart from skin cleansing, which declined following elevated demand in the prior year. Skin care grew by a high-single digit as retail channels reopened in 2021.
The Prestige division grew in the double-digits with all brands benefiting from e-commerce growth, and a recovery in beauty channels compared to the prior year.
New innovations in Prestige Beauty included Dermalogica’s biolumin-c and sound sleep cocoon, and Ren’s zero waste packaging.
The company added that underlying operating margin in Beauty and Personal Care was flat in 2021, with “high material inflation” in palm oil having a particularly high impact on gross margin despite stepped-up pricing.
In the 12 months to Dec. 31, overall turnover was 52.4 billion euros, up 4.5 percent on an underlying basis, and 3.4 percent on a reported one. Analysts had expected 4.3 percent organic growth for the year.
The underlying operating profit margin of 18.4 percent was also in line with market expectations.
Reported operating profit was 8.7 billion euros, 4.8 percent higher than the previous year, while net profit rose 9 percent to 6.6 billion euros on a reported basis.
In the current year, the company said it expects underlying sales growth to be in the range of 4.5 percent to 6.5 percent, which is well ahead of analysts’ forecasts.
In 2022, underlying operating margin is expected to be down, and range between 16 percent and 17 percent, with the first half impacted more than the second half.
Unilever said it expects profit margins to be restored “after 2022,” with the bulk coming back in 2023 and the rest in 2024. In a further gesture to shareholders, it has set a share buyback program of up to 3 billion euros over the next two years.
Looking ahead, Unilever said it expects “very high input cost inflation” in the first half of more than 2 billion euros, adding that figure may moderate in the second half to around 1.5 billion euros.
The company noted there is a much “uncertainty on the outlook for commodity, freight and packaging costs.”
The company pointed to a 60 percent increase in the price of crude oil, which impacts the cost of resins, transportation and packaging, and a 130 percent increase in the price of palm oil, which impacts all of Unilever’s product categories.
Unilever’s share price closed down 1.29 percent at 37.79 pounds on the London Stock Exchange on Thursday.