Unilever to exit European frozen foods, while sales stagnate

The Western European frozen foods business has annual sales of about €2 billion, but has been underperforming in recent years as European consumers opt for fresher alternatives such as chilled foods.

Unilever, Heinz, Kraft and other food manufacturers have been eking low or negative returns from their frozen food divisions in a generally stagnant European market. The companies have either been reorganising or selling off the underperformers in a bid to boost their overall returns on the continent.

Separately Unilever also released its financial report for 2005 today, saying that its European segment faced continued weak consumer demand, with underlying sales turnover declining by one per cent and volumes increase by 0.2 per cent. In 2004 turnover fell by two per cent. Margins rose to 5.3 per cent, compared to 4.6 per cent in 2004.

Meanwhile the company's total food business worldwide registered a real turnover growth of 1.9 per cent, after accounting for exchange rates, acquisitions and disposals. Operating margins rebounded from negative territory to 9.2 per cent, a gain of 18.4 percentage points.

The proposed sale of the company's frozen foods businesses in Europe will include four processing plants in the UK and Germany, which employ about 3,500 people. Unilever said it intends to sell the business if the price is right, in whole or in part, as going concerns.

The intended sale also includes the total frozen food portfolio under the Iglo and Birds Eye brands. Unilever has a frozen foods units in 11 European countries: Austria, Belgium, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain and the UK.

The company will keep its frozen food business in Italy, including a production plant, where returns have been much more promising. Patrick Cescau, Unilever's chief executive, said the business in Italy has a good track record, strong leadership and is strategically important to the company.

"It is our biggest single business in Italy and its retention plays an important role in future trade relations in that country,"​ he stated. "It is also an important source of innovation and technology in the attractive frozen meals segment that is proving so successful in the US."​

Cescau noted that while the company has made progress in increasing profitability in recent years, underlying sales growth has been harder to come by.

"Deciding to put the majority of our European frozen food business up for sale has been a tough call,"​ he stated.

Europe accounted for about 41 per cent of the company's turnover in 2005 compared to 43 per cent in 2004. The Americas accounts for another 33 per cent and the Asia and African regions another 26 per cent.

Overall sales in the company's European food businesses grew in the Netherlands and Spain, but declined by around two per cent in France and Germany and by nearly four per cent in the UK.

"In foods, we have held overall market share through the course of the year, with growth across all key categories apart from frozen foods,"​ the company stated about the European operations.

Central and Eastern Europe performed well, notably in Russia which was ahead by nearly 20 per cent, the company reported.

Overall operating margin for the company's businesses in Europe, which includes foods, home and personal care divisions, was 14.2 per cent, a 0.4 percentage point higher than in 2004.

"Increased advertising and promotions and pricing investment together with higher input costs were partly offset by productivity gains,"​ the company stated.

By comparison US operations registered sales turnover growth of 0.2 per cent for the year, and a four per cent volume growth. Operating margins grew by 5.7 percentage points to 13 per cent.

The company reported consumer demand in the US showed a sustained recovery throughout 2005, with sales accelerating through the year. The company gained market share in aggregate.

In the food sector the company's sales were driven by further share gains in the ice cream segment, continued good results from the extension of the Country Crock and Bertolli brands into new categories, and from Lipton ready-to-drink and speciality teas.

Slim·Fast continued to regain market share, but in a much contracted weight management market and sales were well below the previous year, the company reported.

Asian and African regions had underlying sales turnover growth of 1.5 per cent, and volume growth of 7.1 per cent. Margins rose 1.8 per cent to 12.6 per cent.

In total the company's global operations overall turnover remained stagnant, with no growth in real terms, while volumes rose by 3.1 per cent. In the fourth quarter turnover rose by 0.3 per cent while volume declined by 0.4 per cent.

Operating margin for the full year was 13.4 per cent compared with an operating margin of 11 per cent in 2004.

Before the impact of net costs of restructuring, business disposals and impairments, the operating margin for 2005 would have been 0.8 percentage points lower than the previous year. Advertising and promotions were 1.1 percentage points higher than last year.

Cost savings and an improved mix more than offset the effect of an increase of nearly €600 million in input costs, the company stated.

For 2006, the company priorities are to sustain growth and improve margins.

"We expect a sustained flow of savings from our current programmes, and a progressively more favourable pricing and commodity cost environment,"​ the company stated.

Unilever's packaged foods business is the world's third largest after Nestlé and Kraft.

The move by Unilever represents a continuation of the increased merger and acquisition activity in Europe and worldwide, as companies shuffle their portfolios within the global food industry.

Chilled and frozen foods divisions provide the best options for companies looking to consolidate their reach, said PricewaterhouseCoopers (PwC) food sector leader Neil Sutton.

He told FoodProductionDaily.com's sister publication FoodandDrinkEurope.com yesterday that he expected the global food sector is still in the midst of ongoing merger and acquisition activity.

There's still a lot happening in the sector. It's a very unconsolidated market relative to the retail sector it supplies. Manufacturers are constantly getting beaten up by retailers,"​ he said.

"So I think there will be lots of movement in frozen and chilled foods in the coming months,"​ he added.

Sutton sees investment in the frozen foods industry as a fairly solid venture for companies looking to consolidate their interests in this area.

"In Europe there is a general trend towards chilled foods, and this is most prominent in the UK. But a frozen foods brand can move to chilled, much like the Marie brand in France,"​ he said.