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Unilever's shares tumble on FY'19 sales growth warning, intensifying rivalry

The Unilever Group's shares fell more than 6% on Dec. 17 after the consumer goods company lowered its 2020 sales forecast and warned that it would miss its 2019 sales growth target, sparking worries that it was slipping behind rivals such as Nestlé SA and The Procter & Gamble Co.

Unilever, maker of Lipton tea, Hellmann's mayonnaise and Knorr soup, warned that it expected fiscal 2019 underlying sales growth, which excludes the impact of acquisitions and currency moves, to be slightly below its guidance of the lower half of a 3% to 5% multiyear range and that sales growth in the fiscal first half of 2020 would be less than 3%. It blamed the lower projections on weaker growth prospects in South Asia and West Africa as well as increased competitiveness in the U.S. market and flat growth in Europe.

"We expect fourth-quarter underlying sales growth to land in the 1%-to-1.5% range, which takes the full-year growth just outside the low end" of the previous 3%-5% projection, CEO Alan Jope said during a conference call with analysts.

Following the unscheduled trading update, in lunchtime trading in Amsterdam, investors pushed down Unilever's shares by €3.42, or 6.2%, to €51.57. In London, shares of Unilever PLC, the U.K.-listed entity of the Anglo-Dutch company, traded down 282.50 pence, or 6.1%, at 4,348 pence.

The sales warning poses a big test for Jope, who took the helm of the company less than a year ago. Like other consumer goods companies, Unilever is battling low growth, margin pressure and challenges to its traditional profit model. For example, Unilever has long enjoyed a strong presence in brick-and-mortar supermarkets. Still, that advantage is now being undercut by online sales, which allow consumers to purchase household products through different channels. "For consumer product companies, the traditional levers for building loyalty are becoming less and less effective," concluded a report by Deloitte on consumer trends in 2020.

Unilever also faces fierce competition, especially in its biggest market, the U.S. In October, P&G, of Cincinnati, whose Ivory soap and Head & Shoulders shampoo compete with Unilever's Dove soap and Sunsilk shampoo, raised its 2020 sales growth expectation to between 3% and 5%, up from a previous forecast of between 3% and 4%. That same month, Switzerland-based Nestlé, also a big U.S. player, reaffirmed its full-year guidance for 2019 and projected a 3.5% increase in organic sales growth for the year. Nestlé and U.S.-based P&G have reported stronger performances in North America.

On Dec. 11, Nestlé said it would put its ice cream business, including brands such as Haagen-Dazs and Dreyer's, into a joint venture — potentially giving that business more scale and a competitive edge against Unilever brands such as Magnum, Ben & Jerry's and Carte d'Or.

"Competitiveness issues in North America are coming back," Jope said.

Unilever based its projections on a model where developed markets, such as the U.S. and Europe, contribute between zero percent and 2% growth and where developing markets contribute mid- to high single-digit growth. But recent problems in South Asia and West Africa have undercut those assumptions.

The company faces especially strong challenges in South Asia, which includes India, Pakistan, Bangladesh, Sri Lanka and Nepal. Just a year ago, Unilever's growth in those markets was more than 10% per year but now has slipped to below 5%. "There's been a strong deceleration in 2019," said Jope. "The slowdown is particularly coming in rural India, which [for the first time] is growing slower than urban India."

In Nigeria and Ghana, consumer demand is down and liquidity crunches are disrupting Unilever's distributor buying patterns. Trading conditions have also been difficult in central and Western Europe. "Europe has been flat for us for a long time. In North America and Europe, we continue to run below what we think the potential growth rate is," Jope said.