In the last two years, Unilever ( UL ) has expanded its portfolio of premium skin care brands by way of acquisition of REN, Murad, Living Proof and Dermalogica. The primary reason for the premiumization of its brand portfolio has been the fact that Unilever's EBITDA margins of around 18% are considerably lower as compared to its peers P&G ( PG ) and Colgate Palmolive ( CL ), who operate at the margins of 25% and 24% respectively. The reasons for Unilever's low margins can be attributed to the following factors:
- High Marketing Costs - In 2014, Unilever's marketing costs stood at 15% ($8.7 billion) of the total revenues of the company. This percentage is higher as compared to its larger competitor P&G whose advertising spends are usually in low double digits.
- Reliance On Mass Products - 38% of Unilever's revenues come from low margin mass products in the categories of refreshment, home care and fabric care. Unilever's EBITDA margins from these segments as per Trefis calculations are 13%, 10% and 10% respectively. On the other hand, P&G exited from these segments earlier this decade.
- Increasing Raw Material Cost - After Brexit, Unilever has faced some heat from increased cost of imported raw materials, which forced the company to raise the prices of its products in order to protect its margins. However, this move was not welcomed by retailers in the UK and the company is struggling to increase its prices. The recent example was Unilever's tussle with Tesco on the issue of Marmite's price increase.
To overcome these issues, Unilever is driving its brand portfolio towards premiumization by acquiring companies operating in high margin personal care segment. This is in addition to the fact that premium skin care market is estimated to grow faster than the mass products market. Apart from this, Unilever is adopting a cost cutting strategy of 'Zero Based Budgeting' where all the expenses including advertising have to be justified on a quarterly or annual basis.
In the wake of these acquisitions and cost cutting measures, if Unilever were able to improve its average EBITDA margins from the current 18% to the level of P&G's average margins of 25% by early next decade, then our valuation for Unilever would increase by more than 20%. Our current price estimate of Unilever is around $41 per share.
See our complete analysis for Unilever here
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