Stocks in Focus: Unilever

This week Oliver Phillips of NW Brown focuses on Unilever, following the recent release of its half-yearly results.

 

In addition to an encouraging set of figures, the consumer goods company also announced the $1 billion purchase of Dollar Shave Club, a California-based internet subscription business that delivers cost-effective razors and other personal grooming products. Management have previously identified men’s grooming as a growing market trend and as such it is not surprising that they are increasing their exposure to this category, although their choice of acquisition target is somewhat unexpected.

At first glance, the price paid for Dollar Shave Club appears expensive. The four-year-old start up is barely profitable and revenues are forecast at a mere $200m for this year – so what do Unilever gain from such a high price tag?

Well, what this business does offer is a completely different business model to their competitors, with a modernised approach. The subscription-based service enables direct-to-customer e-commerce capabilities, as opposed to the historical approach of selling products in stores via a third party. This new offering to consumers has already proven a success and despite the short time scale, Dollar Shave Club already holds 5% of the men’s razor blade market and is growing at an extraordinary rate, with sales growth of 30% predicted for this year. In contrast, the personal care group Edgewell, which owns the well-known brand Wilkinson Sword razors expects a modest annual growth of 2-3% over the long term.

As market conditions continue to prove difficult and consumer demand remains fragile, we are likely to see an increase in unusual acquisition activity across the sector. Rather than looking at long-standing mature businesses, companies such as Unilever are progressively looking at smaller, younger companies and the passionate entrepreneurs that come with them in order to revive demand.

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