When the cash cows are no longer sacred

Businesses, especially the large, listed ones that exist under the constant arc-light of City scrutiny, are often (rightly) accused of pursuing short-term profit at the expense of strategic value. So it is interesting to see two behemoths going courageously against the grain in a risky gamble for future gain.

The first example is Unilever. Overall, the annual results cast a fairly flattering light on Patrick Cescau one year into his stewardship of streamlined “One Unilever”. Profits and sales were up, and if margins were depressed by increased marketing costs, he could point to steady growth over most categories. But it was the official decision to drop Captain Birds Eye (and the frozen food business outside Italy) that marked the real measure of change at the packaged goods giant.

It’s one thing to acknowledge that frozen food is a category with a cloudy future and quite another to finally offload a &£500m master brand, which earns an estimated &£50m a year in profits and is the biggest UK supermarket brand behind Walkers.

The &£1bn question is/ what gave Cescau the courage to do it? To be sure, frozen food may be on a hiding to nothing in the longer term, as it is gradually gobbled up by the chiller cabinet. But, like the proverbial slowly boiling frog, it is difficult to say when the coup de grace will actually happen. In the meantime, Birds Eye, though gradually diminishing in strength, could have provided a valuable cash cow as Unilever diversified into more profitable areas.

City analysts seem to be hoping that proceeds from the Birds Eye sale will be returned to shareholders – hardly a recipe for long-term growth. In fact, Cescau is sending out a more complex message to all Unilever stakeholders, not merely shareholders. He has indicated that keeping Birds Eye would have been a “drag” on Unilever’s overall growth rate, which surely implies reinvestment of some of the realised funds in faster-growing areas, such as personal care and ice cream. Indeed, after a long period of retrenchment under the so-called path-to-growth strategy, there are clear signs of innovation in these higher-margin areas coming to the fore. Last week, for example, it was disclosed that Unilever is developing a completely new health brand, which is likely to be launched with one of the most substantial marketing budgets in years.

Above all, however, Cescau seems to acknowledge that he does not have time on his side. In taking the Birds Eye gamble (as much with his own career as with Unilever’s future), he is signalling that there are no sacred cows at Unilever – not even when they are enormous cash cows.

Similarly bold in placing value before short-term profit is Daily Mail and General Trust, which is putting its own version of the family silver, Northcliffe Newspapers, up for a &£1.5bn auction. Arguably DMGT, being a closely held company, finds it easier to make such strategic decisions than the likes of Unilever. That does not diminish the enormous pressure to get the reinvestment in business publishing, exhibitions and new media assets right. Not easy when, in the case of the latter, present profit may be a tiny fraction of what could have been proportionately derived from the local newspaper business.

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