After Unilever ice cream sale, what future for food & nutrition?

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Demergers are all the rage these days. Haleon and Kellanova (and before that Mondelez) were spun off into separate plcs (with ghastly names) to “unlock” value. And joining them soon will be Unilever’s £8bn-sales ice cream division.

It’s a peach of a business. Unlike Unilever’s Lipton tea and Upfield spreads businesses, it’s offered (and continues to offer) a real platform for innovation, premiumisation and growth. And in normal circumstances, with Magnum, Wall’s, Ben & Jerry’s and Cornetto among new CEO Hein Schumacher’s 30 ‘power brands’, it would be considered a jewel in the crown.

But it’s been frozen out. As well as an inherently expensive supply chain (all those freezers – three million of them!), and volatile seasonal sales (up just 2.3%), it’s also been a victim of the rampant cost price inflation in the market these past two years. What with soaring milk, cream, sugar, chocolate and energy prices, one can think of few food and drink categories where cost of goods inflation has been higher (inflation in Unilever’s other divisions pale in comparison). And Unilever has actually done a great job of recovering CPIs, with an inevitable (and far from untypical) loss of volume as a result.

As costs come down, the ice cream business is entering the next phase in the cycle, characterised by greater NPD and volume recovery, aided by lower costs and higher ad spend. No wonder Peter ter Kulve took the job. As a plc in its own right its prospects are still strong. It’s a great business, but with an intrinsically lower margin (10.8%) than the personal care, health & beauty and ambient food & nutrition divisions (17.5%). As such, the motivation for Schumacher is around Unilever’s share price valuation. Removing ice cream from the equation, Unilever’s margins suddenly compare more favourably against the likes of P&G, Reckitt and Haleon.

Which is next? Marmite, Colman’s, Pot Noodle…?

And let’s not be fooled by the proposed ice cream IPO. Schumacher will be hoping that private equity players (the likes of Bain, CVC, Cinven and BlackRock) will still see the value in Unilever’s ice cream division, and give him a cash pile to play with in higher-margin categories.

So why is he announcing a separate listing rather than putting the ice cream business up for sale? On the one hand it reflects a tougher market, with higher interest rates and a more bearish M&A market, as we saw with Newlat’s exit from the Princes sale, amid supermarket pressure to lower prices. It also faces competition, with ice cream rival Froneri understood to be exploring a sale in Q2 (Bloomberg reported).

On the other hand, one suspects the demerger is as much a negotiating tactic to establish a competitive benchmark and a decent alternative valuation.

The last time this tactic was used was by GSK in its Haleon demerger. Ironically, Schumacher’s predecessor, Alan Jope, was on the wrong end of that deal as GSK CEO Emma Walmsley rejected Unilever’s £50bn offer. So will the new boss play a better hand this time? It’s the first test of his tenure.

But it doesn’t end there. There’s already media speculation that the ’nutrition’ business (aka ambient food), will be reviewed, pruned, or sold off entirely. As a division it accounts for 22% of sales (vs 13% for ice cream), but the list of power brands here is far less compelling: it’s basically Hellmann’s and Knorr, and not only are they responsible for 60% of divisional sales, they have also been the primary driver of sales growth.

As such, the likes of Marmite and Colman’s are nothing more than quirky (but noisy) British footnotes in the division’s sales story. And there’s a long tail of other local brands that might get the chop. Where will it end? According to the Mail, even Pot Noodle isn’t safe. And they wouldn’t sell Horlicks, would they?