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By
Reuters
Published
Jul 23, 2015
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Beauty buys to brighten Unilever as markets lack shine

By
Reuters
Published
Jul 23, 2015

Unilever expects a recent series of beauty deals to give its performance extra lustre while consumer demand remains weak for staple products from soup to soap.

The Anglo-Dutch maker of Knorr soup, Lipton tea and Ben & Jerry's ice cream has been on a quest for the last few years to move away from food toward personal care, where margins and growth prospects are better.

Murad, one of four beauty brand's Unilever acquired this year - Unilever


The wisdom of the transition was evident on Thursday when Unilever reported better-than-expected second-quarter sales, fueled by gains of 3.3 percent and 5.9 percent for its personal care and home care businesses, respectively.

That compares with flat sales for the foods business which has recently divested brands including Slim-Fast and Ragu pasta sauces.

Some analysts believe Unilever may also sell its margarines, after creating a stand-alone unit for the struggling business this month.

Unilever executives repeated their expectation that full-year sales growth would probably come in at the upper end of a previously stated goal of 2 to 4 percent. That reflects the current low-key nature of its main markets.

"Emerging markets continue to be subdued whilst in Europe and North America growth is negligible," Unilever said in a statement. Its shares were up 1.7 percent in London by 1430 GMT.

THING OF BEAUTY

This year's acquisitions of four beauty brands -- REN Skincare, Kate Somerville Skincare, Dermalogica and Murad, which together have some 400 million euros in turnover -- should add to sales, margins and profits immediately.

Even though they are small, they will give Unilever what Chief Executive Paul Polman called "critical mass" in a market for prestige beauty products, worth about $70 billion and growing amid increased interest in personal grooming and anti-aging.

He stressed that Unilever was not rushing into the business, which is highly competitive, concentrated in developed markets such as the United States and Japan, and somewhat subject to the whims of fashion.

"We are learning our way into this in a very mindful way," Polman said, adding that he would look at further acquisitions as they arise, but for now has "enough on our plate to integrate these brands and make them work for us".

Unilever is not the only food maker looking to plump its performance with skin creams and wrinkle treatments. Nestle last year set up a Skin Health division, after taking over a joint venture it had with L'Oreal.

In general, makers of packaged food and drinks have seen a sales slowdown, due largely to economic weakness, but also because of a growing health consciousness that doesn't hurt sales of other household goods.

"There's a limit to how much food, alcohol and tobacco smoke you can push inside a human body without having quite dire consequences, but there's no limit to the number of home and personal care products somebody can have," said Whitman Howard analyst Chris Wickham.

And whereas food must always be catered to local tastes, soaps, deodorants and creams can often be sold across markets.

On average, shares of personal and household products companies like Colgate-Palmolive and Beiersdorf are trading at around 22 times forward earnings, versus 20 times for food companies.

Unilever was recently reclassified as a personal care company instead of a food company by various stock market groupings, reflecting the fact that personal care is now its biggest business, accounting for 37 percent of turnover.

LEARNING FROM PAST MISTAKES

The new beauty business will be run in a separate "Prestige" division headed by Vasiliki Petrou, who joined Unilever in 2012 after more than 16 years at Procter & Gamble, where she most recently ran Max Factor cosmetics.

Max Factor is part of the business P&G is selling to Coty , conceding failure in its own move upmarket, selling designer perfumes and salon hair products alongside prosaic goods like detergent and diapers.

Whereas mass market products such as Unilever's Dove soap and Axe deodorant are sold at supermarkets and drugstores, prestige beauty brands are sold at salons, department stores, specialty shops like LVMH's Sephora and Ulta, duty free shops or online.

Analysts said Unilever would do a better job keeping up luxury brands' needed mystique, given that it already manages the high-end Maille mustard brand and T2 tea shops.

"I think it's great that they absolutely recognize that they need to deal with it slightly differently to the rest of their personal care business," said Bernstein analyst Helena Strettle. "We're quite confident in them."

Unilever's previous personal care acquisitions include TIGI hair care in 2009, Sara Lee's personal care brands in 2010 and its biggest, Alberto Culver, in 2011.

Since paying $3.7 billion for the haircare company, sales from its TRESemme brand have more than doubled to over 700 million euros.

 

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