Unilever Profit Declining Trend

JAKARTA — PT Unilever Indonesia Tbk’s profits have consistently fallen over the last five years. The road to changing this trend is full of challenges.

Mirae Asset Sekuritas analyst Nafan Aji Gusta said that the downward trend in profits cannot be separated from tight competition in the industry fast-moving consumer goods (FMCG). Each company sells similar goods and competes for the market amidst limited purchasing power. “Unilever must be required to increase innovation,” he said when contacted last weekend.

Unilever recorded net sales of IDR 30.50 trillion until the third quarter of this year. This performance fell 3.2 percent from the third quarter of 2022. Meanwhile, its competitors recorded growth. PT Mayora Indah Tbk, for example, recorded net sales of IDR 22.89 trillion, an increase of almost 3 percent compared to the same period last year. PT Indofood Sukses Makmur Tbk’s sales rose 3.7 percent to IDR 83.88 trillion.

The decline in sales, combined with an increase in operating expenses, caused Unilever’s profits to shrink by around 10 percent in the third quarter of this year compared to the same period last year. The value fell from IDR 4.61 trillion to IDR 4.18 trillion.

Product packaging at the Unilever factory, Jababeka, Cikarang, West Java. Dock. TEMPO/Vishnu Agung Prasetyo

Unilever Profit Decline

Unilever’s profits have fallen since 2018. Referring to the company’s annual report, profits that year reached IDR 9.08 trillion, the highest in the previous five year period, because the company made an irregular profit of IDR 2.8 trillion. The source comes from the sale of distribution rights for Spreads products and local trademarks to PT Upfield Consulting Indonesia. Profit in 2018 rose from IDR 7 trillion in 2017. The company’s profit in 2019 returned to around IDR 7 trillion, to be precise IDR 7.39 trillion.

In 2020, the decline in profits was triggered by an increase in operating expenses from IDR 11.9 trillion to IDR 13.0 trillion or around 9 percent. The company’s net sales only rose 0.4 percent in that period.

The company succeeded in reducing marketing and sales costs as well as other costs which became business expenses in the following year. However, net sales fell by around 12 percent. In its annual report, Unilever explained that there was a weakening of purchasing power in their market segment due to the Covid-19 pandemic. In addition, various commodity prices also have an impact on production costs.

After the pandemic subsided, their sales were hampered by rising inflation. In the second half of 2022, rising fuel prices will again weaken people’s purchasing power. On the other hand, competition in the FMCG sector is getting tougher. Unilever is increasing investment in advertising spending, especially to strengthen the position of the company’s major products.

In its financial report, Unilever recorded an increase in material prices in 2022 so that the cost of goods sold for that period rose 11 percent. Meanwhile, net sales growth was only 4.2 percent. As a result, the company’s profits fell 6.8 percent last year.

Momentum to Change Unilever Directors

Nafan said the change of directors could be a momentum to prepare a comeback strategy. Currently, investors continue to observe the latest changes in directors. “Because we must be required to innovate products in order to compete with competitors so that they can improve their fundamental performance.”

Recently four Unilever leaders resigned. From Supply Chain Director Alper Kulak who resigned on June 15, followed by President Director Ira Noviarti on October 24. Most recently, Beauty & Wellbeing Director Shiv Sahgal and Home Care Director Sandeep Kohli submitted their resignations on November 24.

Director and Corporate Secretary, Nurdiana Darus, stated that the four directors resigned for personal reasons. He ensured that there was no impact that would materially affect the company’s business activities.

Specifically for the position of president director, the company has appointed Benjie Yap as a replacement. “The functions, duties and responsibilities of the other three directors will be carried out by other directors in the Company,” said Nurdiana in her letter to the Indonesian Stock Exchange which was uploaded on the Information Disclosure page of the stock market organizer. Unilever will hold a general meeting of shareholders on December 19.

PT Unilever Indonesia Tbk (UNVR) shares fell on the Indonesian Stock Exchange screen in Jakarta, December 1 2023. TEMPO/Tony Hartawan

Boycott Effects

Another challenge for Unilever is the community movement to boycott products from companies supporting Israel as a form of solidarity with Palestine. Director of PT Laba Forexindo Berjangka Ibrahim Assuaibi estimates that the company’s sales will be affected in the fourth quarter by the massive boycott movement. According to him, the effect could continue into next year considering that conditions in Gaza, Palestine, are still heating up. “Hopefully the new directors can have a promotion strategy so they can maintain profits from existing products,” he said.

Ibrahim advised market players to wait for the performance in the first quarter of next year before deciding to release or increase ownership in the issuer coded UNVR. “Still can hold because UNVR has dividends that many investors are looking forward to,” he said. Apart from that, even though there is a decline in sales, this company still controls the market share in the FMCG sector.

Director of the Center of Economic and Law Studies Bhima Yudhistira said the FMCG industry was facing a number of negative sentiments. One of them is because business actors are late in anticipating changes in people’s consumption patterns. “Apart from purchasing power, there are more individualistic factors among consumers. Now there is a phenomenon downsize,” she said.

According to Bhima, small sized products are more sought after by consumers. But this trend could mean higher production costs and thinning margins. On the one hand, manufacturers must anticipate an excise tax on packaged sugary drinks that will be implemented in 2024.

Another challenge is the long supply chain. Digital marketing, according to Bhima, still cannot match conventional marketing. Logistics costs are currently expensive coupled with high promotional costs. This is because the life cycle of FMCG products is getting shorter. “About 10 years ago, one product could last 3-4 years, but now it might only last 6 months.” This means that companies must continue to innovate to replace products, repackage and create other strategies to compete to maintain the market.

However, there is still an opportunity for the FMCG industry to shine. Next year Indonesia will hold general elections. Bhima noted that money politics usually has an impact on the FMCG industry during the campaign period.

VINDRY FLORENTIN | MOH. KHORY ALFARIZI