Soft soap

Unilever's emerging weakness is a strategic hazard

Unilever's weakness in emerging markets is a strategic hazard. The company, in common with peers, had already acknowledged headwinds from developing markets. In an unscheduled after-hours update on September 30, the Anglo-Dutch consumer products company put firm numbers on its problem.

Unilever said it expects to report revenue growth of three per cent to 3.5 per cent for the three months to the end of September. Analysts were expecting 4.5 per cent to five per cent from the maker of Dove soap and Knorr stock cubes. Brazil, India and Indonesia are proving especially tricky. Currency swings are hurting too. Cue corrective nudge in the stock market.

The shares fell on October 1. Actually, they might have fallen more than they did. Yes, the scale of the revenue downgrade appears relatively modest. But look more closely and the difficulties are cast into sharper relief.

Unilever generates about 57 per cent of its sales in emerging markets. So the relatively modest overall sales growth decline translates into a steeper slowdown in the newer markets. Sales from the developing world had been climbing at something like 10 per cent. The recent record suggests Unilever might now be lucky to get six per cent.

While revenue growth is weaker in the developing world, it is almost absent in developed markets. In Unilever's most recent scheduled update, the company said sales in the older established markets were "flat to down." These markets, which contribute more than two-fifths of groupwide revenue, remain a drag on growth.

Unilever has to be wary of complacency. Investors may need the comfort of being told, in detail, how it will tackle the emerging-market headwinds, as well as the anaemic operations in the developed world. But Unilever, and its investors, would be mad to overdo the fright.

The broad strategic plan, established now for 10 years or more, is to run hard at emerging markets. Despite hazards such as those now highlighted, that remains the right thing for Unilever to do.