Unilever’s ice cream detachment – what does it mean?

Hein Schumacher is wasting no time in his attempt to kickstart Unilever’s sputtering growth as the CPG giant this morning revealed plans to spin off the ice cream business and shed 7,500 jobs in a cost-cutting drive.

It comes less than a year after Schumacher took the reins at the group and is a significant acceleration of the turnaround plan unveiled in October.

Shares – which remain stubbornly lower than they were five years ago – reacted positively to the news, rising almost 4% as markets opened this morning. 

Although the latest plans are eye-catching, slashing jobs and driving efficiencies doesn’t exactly stray far from page one of the corporate turnaround playbook. Hiving off underperforming divisions has a distinct feeling of déjà vu.

So, just how meaningful is a demerger of a business that contains five of the top 10 global ice cream brands in its portfolio?

A spin-off and separate stock market listing for the division behind Magnum, Ben & Jerry’s and Wall’s won’t surprise many in the industry. Analysts have for years been calling for Unilever to sell its food businesses and focus on the more lucrative home and personal care market (HPC) instead.

Bernstein’s Bruno Monteyne guesses uncharitably that Unilever has gone with the demerger option for ice cream because it couldn’t find a buyer for the asset at an acceptably high price. Unilever didn’t rule out other options to maximise shareholder returns should an acceptable bidder come knocking, though.

Unilever ice cream business separated 

Either way, Unilever isn’t messing around, with the move towards ice cream being standalone underway immediately and expected to be completed by the end of 2025.

Ice cream generated revenues of almost €8bn in 2023, but the division’s performance (with volumes melting by 6%) contributed to what Schumacher called a “disappointing” set of annual results for the group as a whole.

The hope is, with ice cream off the books, Unilever will transform into a higher-growth and higher-margin business, while the spun off division will be more focused and benefit from “operational and financial flexibility”.

The latter aspiration is the better bet of the two, as ice cream’s new boss Peter ter Kulve (who moved from home care president as part of Schumacher’s growth action plan) has a good track record of improving profitability, according to Barclays analyst Warren Ackerman. He adds there is “a very big opportunity” to improve the cost base under his leadership.

Monteyne sees possibility for ice cream to outperform the remaining Unilever business “very rapidly”, providing “potentially a new high-growth investment opportunity in our sector”.

Unilever upgraded its medium-term growth forecasts from the current range of 3%-5% to mid-single digits and reckoned on modest margin improvement thanks to the new plan.

The spin-off will also simplify group operations given the separate supply chain needed for dealing with frozen products, while also moving away from brands with big seasonal fluctuations in demand. Not to mention, it will cure the long-running headache of having to manage the political posturing of Ben & Jerry’s, which led to a court battle in 2022 over the sale of the brand’s business in Israel. Investors such as fund manager Terry Smith will have one less ‘woke’ brand to moan about.

The market has been waiting

While ice cream is a dilutive influence on the wider group margins, the separation will see lost synergies. To offset this, Unilever simultaneously launched another productivity programme to save €800m over the next three years, with 7,500 office-based jobs around the world at risk as a result.

Investors won’t be getting too carried away with all the fanfare of separating a low-growth division. Unilever has, after all, tried this before. Not just once, but twice. First with the spin-off of the spreads business in 2014, subsequently sold to KKR, and then with tea in 2020, ahead of a later sale to CVC Capital Partners.

Neither move shook Unilever out of its long-term funk.

For Monteyne, the demerger is a step in the right direction, but he is “still none the wiser” about why the previous two spin-offs made so little difference to the company’s performance. “Hope does spring eternal,” the Bernstein analyst says.

Ackerman at Barclays is more positive and declares the plan to be the firm action for which the market has been waiting. He adds the move will also inevitably raise questions about the future of the nutrition division, which is also diluting growth at the group.

Whether or not the ice cream spin-off proves to be the catalyst for improvement at Unilever, Schumacher has a huge job on his hands to improve competitiveness across the brand portfolio.

Schumacher will ultimately be judged on whether he can reinvigorate meaningful growth at the remaining business across beauty & wellbeing, personal care, home care and nutrition. Anything less and investors won’t see him as any different from his predecessor Alan Jope.