View from City Road: Unilever hits a brands barrier

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The Independent Online
Acompany that makes its money from persuading people to buy products such as Persil and Sunsilk, Bird's Eye and Flora is hardly going to accept the brand is dead. But even Unilever has been forced to concede that selling them has become a lot harder.

The company's pounds 490m provision is an admission that in its key European and US markets it is having to run to stand still. Without exchange rate gains, operating profits in both areas would have been flat - or down in the case of the US - leaving the amorphous mass called the rest of the world, once again, to produce the company's growth.

Sir Michael Perry, chairman, is not holding out much hope of a speedy recovery in these markets, which means that pounds 240m of savings promised by the restructuring within three years will be needed. But judging by Unilever's last housekeeping exercise - a pounds 305m rationalisation of its European operations begun three years ago - the impact on the bottom line may be rather less.

Sir Michael estimates that the programme has produced about pounds 150m of annual savings, yet operating profits in Europe are just pounds 100m higher than they were in 1990, the year before the programme was launched. Much of the extra savings have been eaten up in higher advertising costs - up by a fifth to pounds 3.3bn, or 11.8 per cent of sales, in 1993 and a full pounds 1bn higher than they were in 1991.

This is partly because the group has sold many of its non-consumer interests, such as agribusiness, while expanding in promotion-intensive businesses. But as consumers have become increasingly doubtful that branded products are really better than supermarkets' own cheaper alternatives, the proportion of sales devoted to advertising has soared.

Unilever's enviable international spread and financial muscle give it the strength to protect its brands with aggressive marketing. Timely cost-cutting also means that strong cash flow, low gearing and solid dividend cover underpin prospects for reliable dividend growth and justify a below-average yield of 2.6 per cent.