The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee Donnellan

LONDON, Jan 31 (Reuters Breakingviews) - Think of Unilever ULVR.L, and the first products that come to mind are likely to be ones you eat - Marmite, Ben & Jerry's ice cream and Hellmann’s mayonnaise. Yet the $143 billion company is increasingly investing in other parts of its business, like beauty and wellbeing, and not spending any of its M&A budget on growing its food empire. There’s a strong valuation case for doing so.

Food was once an exciting revenue stream for the likes of Nestlé NESN.S, Kraft Heinz KHC.O and Unilever. The latter spent decades splurging on deals and expanding into new territories like Indonesia and India to gain market share. Shoppers, seduced by big marketing campaigns, were happy to pay over the odds for branded cereals like Cheerios and Heinz tomato ketchup. Yet ever since inflation soared in 2022, consumers have shopped around for the lowest prices, complicating the delivery of consistent revenue and stable margins.

In November, Nestlé’s new CEO Laurent Freixe revealed how these forces have afflicted the world’s largest food manufacturer. Over the medium term, he is only aiming to deliver 4% revenue growth, excluding the effects of M&A and currency swings. That’s closer to the lower end of the $227 billion group’s previous target of mid-single-digit growth. Freixe is only aiming to keep operating margins steady at 17% over the coming years.

Consumer goods more generally are under pressure. In October, Kraft Heinz trimmed its sales and profit outlook for the year. The $36 billion maker of Jell-O also posted a larger than expected hit to its third-quarter sales.

Compare that to the business of selling luxury beauty products. Swiss skincare firm Galderma GALD.S expected to grow revenue between 8.8% and 9.5% in 2024, having delivered 9.2% in the first nine months of the year. And $204 billion French cosmetics giant L’Oréal OREP.PA is expected to boost sales by around 5% annually over the next three years, more than double the rate of food giants like Nestlé and Kraft Heinz during the same period, as per LSEG estimates.

Investors have noticed. Kraft Heinz and Nestlé’s enterprise values are roughly 10 times and 17 times the respective operating profit they’re forecast to deliver in 2025, using LSEG Datastream figures, which represents a sharp decline from their equivalent 12-month forward multiples of 14 times and 20 times at the start of 2023. Galderma and L’Oréal trade at an average of 28 times 2025 operating profit. Two other food-heavy players, Danone DANO.PA and Unilever, trade on multiples of 15 and 14 respectively.

These diverging fortunes are why Hein Schumacher is drawing a line in the sand. The Unilever boss has already committed to flogging the company’s ice cream business, leaving a slimmed-down nutrition unit that includes brands like Knorr stock cubes and Hellmann’s. He plans to spend a large share of the company’s $9 billion marketing budget, equivalent to 15% of revenue, bulking up the beauty and wellness business, which delivered nearly $14 billion of sales in 2023. According to a person with knowledge of his plans, only two food brands, Hellmann's mayonnaise and Knorr stock cubes, will get a decent slab of this budget. The rest of the food business will be gradually pruned and trimmed.

As it stands, beauty and wellness will make up just over a quarter of the operating profit Unilever will deliver in 2025, using analyst estimates gathered by Visible Alpha and excluding the ice cream unit. Meanwhile, nutrition will make up another quarter, home care almost a fifth and personal care close to 30%. Imagine a hypothetical world where Schumacher could in one stroke boost the percentage coming from beauty and wellness to, say, 40% - perhaps via buying up some small brands and luring in more customers with a bigger marketing spend on the division. If the other divisions stayed the same, the nutrition business’s contribution would shrink to 12%.

This could pay dividends in valuation terms. If Schumacher pulls it off, the enlarged beauty and wellness division would deliver 4.3 billion euros of operating profit. Value that at L’Oréal and Galderma’s average 28 times operating profit multiple for 2025, and the division would alone be worth 119 billion euros including debt.

If the slimmer nutrition unit is valued on the 16 times average multiple of Nestlé and Danone, it would fetch 21 billion euros. Also putting personal care on 16 times, like Sensodyne toothpaste maker Haleon HLN.L, would imply a valuation of 51 billion euros. Value Unilever’s home care arm like Reckitt Benckiser RKT.L, on 12 times, and it would be worth 24 billion euros. In total, Unilever would be worth 216 billion euros, before factoring in ice cream, a 25% uplift on the group’s current enterprise value.

The catch for Nestlé and Kraft Heinz is that their path to redemption is much fuzzier. After all, with the lion’s share of their sales stemming from edible brands, it’s much harder to pivot to something else. Without a plan B, consumer giants will increasingly split into the haves and the have-nots.

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(Editing by George Hay and Streisand Neto)

((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))