China Syndrome: Plummeting Sales in Country Hurt Unilever

World's Second Biggest Ad Spender Hits Goal for Cutting Creative and Production Costs

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Unilever CEO Paul Polman
Unilever CEO Paul Polman Credit: Fabrice Coffrini

Unilever's 2.1% organic sales growth last quarter missed analyst expectations by almost two percentage points due mostly to a surprising 20% sales drop in China and a 4% decline in Europe.

North America was a bright spot, along with personal care. The world's second-largest advertiser also pointed out that it is meeting targets to spend less on advertising creative and production.

Unilever Chief Financial Officer Jean-Marc Huet said in a quarterly sales update call that spending on those "non-working" media costs declined four percentage points from a year ago to 20% of what Unilever spends on paid media. That's in line with the long-term goal Chief Marketing and Communications Officer Keith Weed noted in December.

Unilever reported around $8.7 billion in global advertising and production spending overall last year based on current exchange rates. At a constant exchange rates of $1.35 per euro and assuming similar media spending this year and last, the company's spending on creative and production costs would be around $1.5 billion this year, down from an estimated $2.4 billion in 2012.

Mr. Huet also said Unilever is seeing greater efficiency in media spending thanks to digital media, which he said now amounts to nearly 20% of the company's global outlay.

None of that helped in China, where Mr. Huet blamed the 20% sales decline on retailer "de-stocking" in the face of a slowing economy. China is a roughly $2.5 billion business for Unilever, mainly in personal cleansing, hair care and laundry, representing around 4% of sales globally, so last quarter's decline was enough to carve nearly a percentage point off global sales growth..

China reported a 7.3% increase in gross domestic product last quarter, which was the lowest since 2009. Other packaged-goods marketers have reported mixed results in China. Nestle also cited a slowdown in China and some retailer de-stocking. While it also disappointed analysts on the top line with organic sales growth of 4.1%, it only missed from a consensus forecast of 4.7%, according to Bernstein Research analyst Andrew Wood. RB (Reckitt Benckiser) also missed analyst sales forecasts by around a percentage point with growth of 3%, without citing China. Unilever's 2.1% growth compared to a 3.7% consensus forecast.

By contrast, Kimberly-Clark Corp., which reported a 4% organic sales increase for last quarter, in line with expectations, saw a 25% increase in diaper sales both in China and in recessionary Russia, as it continues to expand distribution.

Unilever's results also were pulled down by price declines and poor weather for ice cream in a struggling European market, Mr. Huet said. Brazil, which is now Unilever's biggest developing market, is in recession, though still growing at double digits for the company, and growth is also sluggish in India, he said.

North America and personal care (sales up 4%) were among the brightest spots for Unilever. North American market growth improved to 1.5% last quarter, Mr. Huet said, and Unilever sales grew faster than that.

In a research note, Mr. Wood said poor performance of Unilever's margarine and spreads business in particular "begs the question of how much longer CEO [Paul] Polman will stand to be forced to continually explain the weakness."

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