Analysis-Unilever CEO Fernandez Returns to His Roots With Health and Beauty Makeover

Unilever CEO Fernandez Shifts Focus to Health, Beauty and Personal Care Brands

Unilever's Strategic Shift and Market Implications

By Richa Naidu, Yadarisa Shabong and Alexander Marrow

Fernandez’s Background and Bold Moves

LONDON, April 1 (Reuters) - As a senior Unilever executive in Brazil some 15 years ago, Fernando Fernandez made a bold gamble on hair care and beauty, rapidly expanding the then newly acquired TRESemmé brand into a major money-spinner in the giant South American market.

The 59-year-old Argentine is now CEO and going back to his roots, carving off the sprawling consumer goods firm's food brands, from Magnum ice creams to Hellmann's mayonnaise, with two huge deals since he took the reins last year.

Major Deals and Portfolio Restructuring

This week Unilever sealed a deal with U.S. spicemaker McCormick to hive off its food business to make a $65 billion sauces-to-spices food giant. Unilever will retain a near 10% stake, with its shareholders having another 55%.

The recent spin-offs leave the firm a far leaner beast focused on beauty, personal care and home care, areas where Fernandez spent most of his 38-year career at Unilever selling products from Dove soap to Surf laundry detergent.

Fernandez’s Vision for Unilever

"This is the right step at the right time to build a simpler, sharper, higher-growth Unilever," Fernandez told analysts on a call after sealing the McCormick deal.

"We are creating a 39-billion-euro household and personal care pure play with leading positions in highly attractive categories, a stronger exposure to fast-growing geographies like the U.S. and India."

Investor Reactions and Market Outlook

Short-Term Concerns and Long-Term Potential

THE PRIZE WILL BE WORTH IT IN THE END

Without food and ice cream, Fernandez is leaning in to the company's 23 biggest home, beauty and personal care "power brands" that account for the majority of Unilever's sales, including Dermalogica, Pond's, Sunsilk and Cif.

Most investors didn't take the news well, with Unilever shares closing at a two-year low on Tuesday and dipping further on Wednesday amid worries about the lengthy timeline to closing the deal in 2027 and the overhang from food.

However, some investors see a long-term benefit in faster-growing beauty, personal care and home care products.

"Perhaps the most overlooked benefit is the increased focus gained by simplifying Unilever's business model," David Samra, managing director of Unilever investor Artisan Partners and founding partner of the International Value Group, told Reuters.

"The company moves from operating in two distinct industries to concentrating on a narrower group of brands in faster-growing markets."

The food business is high-margin but sales growth has lagged other units, weighing on Unilever's goal to increase turnover by 4%-6% annually.

"The prize of a pure-play home and personal care company will be worth it in the end," Barclays analyst Warren Ackerman said.

Valuation and Industry Comparison

Potential for Higher Valuation

MOVE COULD HELP UNILEVER COMMAND A HIGHER VALUATION

Unilever investors and its board had pushed hard in recent years for change, including billionaire activist shareholder Nelson Peltz, a board member who has a $1.73 billion stake in the firm.

That pressured two Unilever CEOs, most recently Hein Schumacher who was ousted for not streamlining the company's portfolio fast enough. Fernandez, his finance chief at the time, was promoted to speed up the process.

Historical Context and Market Forces

The deals mark a sharp U-turn after Unilever spent most of the last ​century snapping up food and beverage brands ⁠from Marmite to Colman's and Horlick's.

But increasingly health-conscious consumers and the rise of GLP-1 weight-loss drugs in recent years have eroded demand and investors' faith in packaged food, and Unilever also faced stiff competition from cheaper private-label ​brands.

Unilever trades at a forward price-to-earnings ratio of 14.8 times, lower than L'Oreal, Procter & Gamble, Nestle and Danone, which trade at between 17.2 and 25.3 times, LSEG Workspace data shows.

"Unilever has historically traded at a discount to pure-play HPC peers like L'Oréal or Procter, partly because of the drag from lower-growth food categories," said Will Nott, portfolio manager at Unilever investor Ninety One.

"There is clearly re-rating potential, but it won't happen overnight. The market will want to see clean execution through the transition."

($1 = 0.8627 euros)

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(Reporting by Richa Naidu; Additional reporting by Alexander Marrow; Editing by Adam Jourdan and Kirsten Donovan)