Many investors are well-acquainted with the concept of stranded assets, often associated with the fossil fuel industry.
It envisions a future where oil giants like Shell and Exxon Mobil could find themselves possessing vast reserves of oil that are no longer in demand due to the global push against climate change.
However, consumer goods conglomerates like Unilever, valued at $123 billion, may soon face a similar dilemma in the edible product space.
Unilever, under the leadership of new CEO Hein Schumacher, comprises two distinct divisions. One is the established foods sector, which includes staples like Marmite, while the other encompasses beauty, home, and healthcare products such as Dove soap and Domestos.
In 2022, the food division contributed nearly 14 billion euros in revenue, with the ice cream division, featuring brands like Magnum and Ben & Jerry’s, adding an additional 8 billion euros.
Altogether, edible products accounted for over a third of Unilever’s 60 billion euros in revenue for 2022.
However, Schumacher faces challenges as Unilever’s shares have declined by 25% since late 2019, and its valuation dropped from 15 times expected EBITDA to 11 times, failing to meet the long-term 20% operating profit margin target.
Previous CEO Alan Jope’s emphasis on championing environmental, social, and governance values received criticism for feeling forced onto Unilever’s products.
Schumacher is now shifting focus towards 30 “power brands.”
While these power brands, 13 of which generate over 1 billion euros in annual sales, seem robust for now, they may pose problems by 2035.
Affluent consumers are increasingly seeking healthier food options, and anti-obesity drugs are becoming accessible to them. Sugary brands like Cornetto and Wall’s face potential risks from sugar taxes, as several countries have already introduced such levies.
Schumacher could attempt to rely on lower-income households, but they are often inclined towards cheaper store-brand alternatives.
Unilever is not alone in facing this challenge; Nestlé and beverage giants like Coca-Cola and PepsiCo are also adjusting their portfolios to cater to health-conscious consumers.
Unilever believes in the enduring strength of its brands, referring to them as “indefinite-life intangibles” due to their marketing support and durability.
However, if these brands fail annual impairment tests, they could become a liability.
Selling the less healthy brands might be an option, but it comes with its own challenges, given rising debt costs and the mixed history of Unilever’s previous disposals.
Ultimately, Schumacher must carefully navigate Unilever’s future, balancing the strength of its power brands with the evolving consumer landscape, or risk ending up like fossil fuel giants, hoping for demand where there may be none.