Why Unilever must prevail

Investors should be cheering Unilever’s victory over Kraft Heinz and placing a greater value on the kind of corporate sustainability and resilience Polman’s leadership has created. Lessons from other companies should act to warn investors looking for short-term gain to be very careful what they wish for.

​The remarkably short-lived take-over attempt by KraftHeinz (KH) of Unilever raises some very interesting questions for investors. What price does focussing on short-term gain extract from shareholders?
Unilever’s CEO Paul Polman is well-know for his brand of responsible capitalism, putting long-term sustainability above short-term profit. The Unilever Sustainable Living Plan (USLP) he introduced in 2012 laid out a bold plan to double revenues over a decade while slashing carbon emissions in half. This means moving to sustainable product packaging, wide-spread efficiency gains and ensuring high social and environmental standards across the whole supply chain. The plan should create a positive impact for 5.5 million people, but its impact on Unilever’s bottom line should also catch investors’ eyes.
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Delivering the goods
By April last year, the plan had already led to a saving of 1 million tonnes of CO2 and €100 million through more efficient manufacturing. The company also sent zero waste to landfill across 600 sites in 70 countries, saving a further €200 million. The introduction of compressed deodorant cans reduced the aluminium and propellant gases needed by 25% and 50% respectively. (Polman also waived the patent on the can design to encourage competitors to follow suit.)
Over the last five years, under Polman’s leadership, the company’s share price gain has dwarfed that of the FTSE 100.

Source: FT.com

Pressure mounts
Despite this, Polman now faces pressure from the City to bring his long-term view forward, accelerate growth and boost margins. He has, according to many media reports, six months to demonstrate why Unilever is better on its own before KH comes back with a renewed offer.
This has already seen proposals to cull some of the top brands in the firm’s larder and promises to review ways of delivering more value to shareholders. Unilever shares were trading well above peak-bid-speculation levels, suggesting one of two things: that investors are increasingly certain some major news will be announced in the coming weeks and months that will deliver a sharp pick-up in shareprice, such as another bid attempt or efforts to deliver pay-outs to shareholders; or, investors are realising that Polman’s vision makes the company far more valuable in the long-term. As a but of a sceptic, I’m certain the former is a bigger driver of Unliever’s surge than the latter.

Be careful what you wish for
However, investors should be careful what they wish for. If too much long-term thinking is sacrificed for short-term shareholder gain, Unilever could find itself less able to deliver returns in the long-term. That may compromise the firm’s ability to continue to provide a strong income play for investors, for example, who have benefited from its high, compounding returns on invested capital and ability to consistently convert earnings into cash. All of which has been supported by a strong balance sheet.

The 3G method
Consider, for example, 3G’s track record at some of the companies it has taken over recently. Kraft Heinz sales fell in four of the six quarters following the combination of the firms. In no small part, this is because vicious cost cutting strangles a firm’s ability to innovate. In a sector already struggling to keep up with changing consumer demands, innovation is a key pillar of corporate sustainability.
Unilever, by contrast is ahead of the game. The USLP, for example, included eliminating trans-fats and reducing both sugar and salt content from their food products. Polman has stated in the past that products that meet the highest standards of societal and environmental sustainability perform better. His thinking is clearly more aligned with consumers than those at 3G.
Furthermore, as COP21 is ratified by more and more countries, it won’t be long before environmentally sustainable businesses reap the dividends of their foresight, both in minimising costs, but also in increasing business resilience. And Polman is a leader in this regard.
Look, for example, at Alberta in Canada, where a carbon tax introduced on 1 January this year pushed up gasoline prices by 12% in a month. Gas prices rose 34%. Similar taxes imposed elsewhere will suddenly make Polman’s success in saving 1 million tonnes of CO2 look very commercially astute. And with the World Bank behind a movement to put a price on carbon (which even ExxonMobil’s new head is not able to resist), how long can it realistically be before those gains start to really feed into Unilever’s bottom line?

Leadship
But, what should really scare Unilever investors, is that 3G has considerable form when it comes to replacing corporate leadership, as they did at with Bill Johnson at Heinz, where they changed 11 of the top 12 executives. Without Polman at the helm to drive through innovation in the face of major long-term shifts in consumer appetites, Unilever may find it increasingly difficult to survive. Deep cost cutting of the kind 3G typically enact would potentially hammer the nail into Unilever’s coffin.

Lessons from Pearson
Pearson is a very poignant example of how focussing on short-term gains can ultimately shoot shareholders and management in the foot. The FT’s Neil Collins, in his Inside London comment on 21 January rightly points out that the professional managers who took over a previously family-run business and subsequently obeyed investors rather than thinking about the long-term sustainability of the firm, would have added more long-term value ‘by taking their salaries and lying on a beach, as the business, which now focusses on education in the US, faces existential threat’. By February, the firm had recorded its biggest ever loss of £2.5 billion after lack of innovation and business foresight meant it failed to adapt to digitalisation in the US education sector – it’s core market. Needless to say, Pearson’s shareprice has tracked the company’s fortunes downwards, dramatically underperforming the FTSE 100 and taking investment returns with it.
Investors should be doing all they can to make sure that Unilever, and Polman’s vision for the future of the firm, will prevail. Putting too much emphasis on short-term gain will ultimately end up destroying shareholder value. 3G’s previous tactics, the struggles evident at Kraft Heinz and lessons from other companies such as Pearson should serve as a stark warning to investors that focussing on the long-term is what delivers long-term value.

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