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Morningstar | Unilever Taking the Right Steps to Compete in Intensely Competitive Markets

Amid fragmentation in consumer profiles and retail and marketing channels, along with lower barriers to entry for startups, most consumer staples multinationals are fighting strong organic growth headwinds, and many are cutting costs in order to spend to drive growth. With value growth in most categories currently running at little more than 2%, not all of the large caps will be successful in regenerating growth to the 4%-5% range they used to enjoy. In the case of Unilever, however, we think the management team is taking the right steps to reignite growth in some highly competitive categories.The law of large numbers is unfavourable for the large-cap consumer companies, and moving the needle on Unilever's EUR 50 billion top line in a low-growth environment is challenging, especially as growth is largely being driven by niche, local, and artisanal brands. To tackle this, Unilever has adopted the 70-20-10 rule, whereby global brands make up 70% of the company's innovation, with local needs being served by the remaining 30%. Further, the country category business team structure empowers local managers to deliver products to market at speed, bypassing the lengthy global approval process.Strategies to streamline the cost structure include 5S, which is focused on supply-chain and gross margin efficiencies; zero-based budgeting, which has replaced budgets and spending targets with operational KPIs and primarily focuses on marketing spending and overheads; and Connected 4 Growth, which has delivered a 15% reduction in middle and senior management.The financial targets accompanying these strategies include EUR 6 billion in cumulative cost savings by 2020, two thirds of which will be reinvested; a 20% operating margin and 100% free cash flow conversion; and increased acquisition activity and direct returns to shareholders. We approve of these measures, and we think they are broadly achievable. With a wide economic moat, built around its supply-chain advantages, and strategies that attack the heart of the challenges facing the industry, Unilever has a better chance than most of its peer group of reigniting growth in the medium term, in our opinion.