Major Unilever investor says business has ‘lost the plot’ with brand purpose focus

Fund manager Terry Smith, founder of Fundsmith Equity Fund, has branded Unilever’s focus on sustainability and brand purpose as “ludicrous”, claiming the strategy led to the FMCG giant’s underwhelming performance last year.

Smith blamed the company for his fund’s underperformance in 2021, revealing that Unilever was its second lowest contributor last year, with only US beverage company Brown-Forman delivering worse returns.

In his annual letter to investors in the fund, Smith took aim at Ben & Jerry’s refusal to sell its ice cream in Israel’s settlements in occupied Palestinian territory, as well as Unilever’s decision to define a brand purpose for Hellmann’s mayonnaise.

“Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business,” he wrote.

“The most obvious manifestation of this is the public spat it has become embroiled in over the refusal to supply Ben & Jerry’s ice cream in the West Bank. However, we think there are far more ludicrous examples which illustrate the problem.

“A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913, so we would guess that by now consumers have figured out its purpose (spoiler alert — salads and sandwiches).”

However, Smith concluded that the fund would continue to hold its shares in the business because it believes its “strong brands” and distribution will “triumph in the end”. Fundsmith is reported to be Unilever’s ninth biggest shareholder, having held a 0.8% stake in the business since 2011.

A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot.

Terry Smith, Fundsmith Equity Fund

Shares in Unilever have dropped 9.4% over the last year, while pre-tax profits have been declining since 2018, from €12.4bn (£10.3bn) to €8bn in 2020.

Yet, turnover during the third quarter of 2021 was €13.5bn (£11.3bn), an increase of 4% compared to the same period in 2020. Sales for the year to date were up 1.7% to €39.3bn (£33.1bn).

Unilever has been on a mission to put purpose at the heart of all its brands since 2018, after finding that its purpose-driven brands were growing at a faster rate. The company’s 28 ‘Sustainable Living’ brands grew 69% faster than the rest of the business, up from 46% in 2017, and delivered 75% of Unilever’s overall growth that year.

Unilever doubles down on purpose: We know it drives short and long-term growth

As a result, CEO Alan Jope committed to furthering Unilever’s purpose credentials, saying at the time: “We believe the evidence is clear and compelling that brands with purpose grow. In fact, we believe this so strongly that we are prepared to commit that in the future, every Unilever brand will be a brand with purpose.”

In January 2020, Unilever confirmed that it would be continuing to double down on its investment in brand purpose. At the time, Jope said the company would be investing more of its marketing spend on communications that were “explicitly purposeful”, as the business had “extremely strong data” showing a link to short- and long-term growth.

More recently, in November last year Unilever’s vice-president of global ecommerce, Claire Hennah, told Econsultancy’s Future of Ecommerce conference that the business’ sustainability credentials have been a “real talent magnet”.

Research among Unilever employees found that in 54 of the 75 markets where it tracks staff engagement, 72% of people said sustainability was the main reason they joined the business.

Hennah said this was further proof that Unilever’s “growth equation” – with sustainability at its core – is working. Research with analyst firm Kantar confirmed that brands in Unilever’s portfolio with a strong purpose were growing sales more than two times faster than the rest.