Why Kraft Heinz’s Focus Might Have Been On Unilever’s Personal Care Business Rather Than The Food Segment

The owner of leading brands like Heinz Ketchup and Kraft Macaroni, Kraft Heinz (NASDAQ:KHC), made a failed attempt to buy Unilever (NYSE:UL) for $143 billion on February 17th. This would have resulted in a $50 per share offer to Unilever’s shareholders, of which $30 was to be paid in cash, and the rest in the form of shares. The deal would have been backed by Brazilian private equity fund 3G Capital and Warren Buffet’s Berkshire Hathaway. Unilever, however declined the offer terming it as undervalued, and in recent updates Kraft Heinz has dropped the plans to acquire Unilever.

The fact that instead of buying out just the food division of Unilever Kraft Heinz bid for the entire company sends out a strong signal that the latter might be looking to enter the fast growing markets like personal care and home care, in light of the recent stagnation in the food industry.

See our complete analysis for Unilever here

Kraft Heinz is primarily involved in the food business, and Unilever claims $22.5 billion revenue from food and refreshment business comprising brands like Hellman’s, Lipton, Marmite, and Magnum to name a few. It is interesting to note that Kraft Heinz made an offer to buy Unilever as a whole entity rather than just bidding for their food business. Here are some possible reasons why :

1. Stagnation of Packaged Food Industry : Among all the awareness about healthy eating on social media, the packaged food market is one of the few consumer market segments which is struggling to grow. The global packaged food sales shrunk slightly in 2015 to $2,339 billion, according to Statista. Therefore, global preference of ‘natural food from trees and plants, rather than packaged food from industrial plants’ is making it difficult for Kraft Heinz to register a meaningful top-line growth in its income statement. This was visible from KHC’s net revenues which were stagnant at around $18 billion since the start of this decade, before the merger with Heinz in 2015.
2. Unilever’s Food Business Is Not Growing Either: Sales of Unilever’s food business excluding refreshments have gone down by 2% annually since 2010. This was primarily because of its struggling Margarine business as consumers are preferring more natural products like butter over margarine. In the wake of the slump in food sales growth, Kraft Heinz wouldn’t have preferred Unilever’s food business alone despite the high margins of 23% in that business, even if it provided cost synergies to some extent.

On the other hand, Unilever’s biggest division of ‘Personal Care’ was a more attractive segment for Kraft Heinz when it comes to expanding business beyond the food industry.

1. Strong Growth In Global Skin Care Market: According to a report by GCI Magazine, the skin care market is expected to grow by over 5% in the next few years and its size is estimated to have crossed $120 billion in 2016. The primary reason for this is the rising middle class in emerging markets which is spending higher on themselves than ever before. Unlike its competitor P&G (NYSE:PG), Unilever derives over 55% of its revenues from emerging markets, which makes it a primary beneficiary of this market. This is an attractive segment in terms of growth for any company looking to expand its domain into the consumer goods industry.
2. Unilever Personal Care Division Is Taking off: The personal care sales of Unilever have grown by over 6% since 2010 when compounded annually. This was supported by the massive acquisition spree by Unilever under which it has acquired around 10 brands in the personal care segment over the last 2 years. This would have provided a good option for Kraft Heinz to ignite a spark in its stagnant top line.
3. Strong Margins In Personal Care: Due to the roll out of premium products in the personal care segment, the EBITDA margins of this division stands at over 20% which is higher than the company average of 17.5% (2015 data). Given the fact that Kraft Heinz believes in increasing margins through cost cutting, which was evident when Kraft shut down Cadbury’s Somerdale factory in the UK after its takeover in 2010, it seems this fast growing, highly profitable business of Unilever might have been a catchy option for KHC to boost its bottom line.

As it is quite likely that Kraft Heinz is looking to expand its presence in the other divisions of the consumer industry, it will be worth watching in the near future if Kraft Heinz bids for any other businesses falling in the personal care domain. Colgate Palmolive (NYSE:CL), Kimberly Clark (NYSE:KMB), Estee Lauder (NYSE:EL), and Clorox  are a few companies which primarily operate in the personal care segment, and have experienced a significant price rise since the development of this news.

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