Unilever (NYSE:UL) has been considered one of the fastest-growing global consumer goods players in the world. In fact, it has the highest exposure to emerging markets compared to its peers like Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL).
Because of the slowdown in the emerging markets' growth, however, Unilever's stock price has dropped by more than 10% in the past six months. I personally think that this was just a short-term issue, as Unilever has been transforming itself under Paul Polman's leadership into a sustainable growth company.
Unilever's strategic transformation
The first phase of the transformation strategy was completed successfully by the restructuring the company's brand portfolio. Unilever divested some of its food businesses, including North American Frozen Foods and Skippy peanut butter, while focusing on the personal and home care categories. The company has also expanded its business in emerging markets. Notably, it has increased its stake in Hindustan Unilever from around 52% to more than 67%.
In the second phase of its strategy, Unilever has been concentrating its efforts on improving its gross margin to enjoy higher profitability, implementing Maxing the Mix, and stepping up cost efficiency programs.
In the Maxing the Mix strategy, the company has relied on innovations. This helps Unilever justify its premium pricing, leading to the higher gross margin. For example, the "Dirt is Good" brand has enjoyed double-digit growth with the help of the new detergent with wash booster. In addition, Axe Apollo and Dove Men+Care also contributed above-market growth for the personal care segment. Paul Polman mentioned that Maxing the Mix was "focusing on more profitable growth opportunities, sometimes foregoing less valuable volume, lending pricing where needed and making sure that our promotions are efficient."
It is also quite interesting that Unilever eliminates the lowest profitable SKUs, and stays away from the businesses which only bring volume but not returns. This guarantees that investors will benefit as the company has been paying more attention to returns and profitability, even though some of the volume will be lost.
Furthermore, Unilever is rolling out the low-cost business models in the laundry and ice cream categories. It is overseeing the total value chain of the business, including material sourcing, manufacturing, advertising and promotion, distribution, and sales. As a result, gross margins have risen by 120 basis points in the first half of the year. The core operating margin has increased by 40 basis points to 14%.
P&G and Colgate-Palmolive also focus on margin improvement
With the return of CEO A.G. Lafley, Unilever's competitor Procter & Gamble also expects a lot of improvement in its operating performance. One of the key drivers behind P&G's operating performance will be $10 billion in cost-saving programs, including $2 billion in overhead savings and market efficiencies, $2 2 billion in operating leverage, and around $6 billion in COGS savings. Since 2012, the company has cut 7,000 office jobs as a part of its cost-saving program. A.G. Lafley will also reduce support staff in emerging markets and shrink factories in developed markets, including the U.S. and Eastern Europe.
Colgate-Palmolive has also considered cost savings as a potential factor for operating performance growth. To that end, the company has been implementing its 2012-2016 Global Growth and Efficiency Program. The program is intended to enhance the company's capabilities through commercial hub expansion, streamlining global functions and optimizing its global supply chain and facilities. Colgate-Palmolive expects to realize around $275-$325 million in after-tax savings annually by the fourth year, with the rate of return of more than 30% and the payback period of around three to four years. The Global Growth and Efficiency Program could allow Colgate-Palmolive to be more efficient and speed up the company's access to the market and its consumers. Ian Cook, the company's chief executive, has commented that the program would help to keep the company "on the ground out into the future."
My Foolish take
By consistently pursuing cost-saving opportunities and product innovations, those three companies will definitely increase their profitability and returns. Although their earnings valuations could be considered quite high, all of those three companies could serve investors well in the long run. This is especially true when you consider their well-established positions in the worldwide market.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.