Just Mayo dispute is just one of Unilever's challenges

Unilever's lawsuit against a food startup and its mayonnaise substitute has pulled the consumer-products giant into a public-relations quagmire that highlights Chief Executive Officer Paul Polman's vulnerability to nimbler rivals as his business sputters around the globe.

Unilever accused Hampton Creek, backed by Microsoft Corp. co-founder Bill Gates, of misleading consumers because its Just Mayo implies the product is mayonnaise, even though it doesn't contain eggs. The ensuing debate created a backlash for the company after Unilever edited consumer comments about mayonnaise on its website.

The public fight with a far smaller competitor illustrates Unilever's struggle to win over a new breed of consumers with its own $16.8 billion food stable of classic brands like Knorr soups. The business has failed to grow as shoppers increasingly favor food perceived as healthy and less processed. Hampton Creek CEO Josh Tetrick told Bloomberg in an e-mail that his company "is on the right side of the law and where our world is going."

The spat comes on top of an emerging-market slowdown and amid a worsening situation in Europe. Polman is now forecast to deliver underlying sales growth in 2014 of 3.1 percent, according to Sanford C. Bernstein estimates, less than half the pace he delivered two years ago despite shedding a half-dozen underperforming brands since. For the first time in his six-year tenure, there are more analysts telling clients to sell Unilever shares than those recommending a buy.

"Management and Polman need to be challenged to do better," said Bernstein analyst Andrew Wood. "Unilever is not pushing itself enough."

Polman Challenge

While the company has sold laggard food brands including Ragu pasta sauce and Skippy peanut butter, Unilever lacks a high-growth food category -- like yogurt or coffee -- that its European peers have. Food sales fell 0.5 percent in the most recent quarter. Its beverage division has also been late on trends, like Taiwanese milky bubble tea, and only developed single-serve capsules of its Lipton tea in the U.S. last year, five years after Celestial Seasonings, made by Hain Celestial Group Inc.

Unilever Chief Financial Officer Jean-Marc Huet said a turnaround in food, which includes developing margarines blended with butter, "will take time," and has dismissed calls by analysts to sell part or all of a business that was recently deemed a "rusting hulk" by Jefferies' Martin Deboo.

"Unilever remains a pan-category player in a world where the zeitgeist is around focus," Deboo said.

Yellow Peas

Hampton Creek, whose backers also include billionaires Li Ka-Shing and Tom Steyer, uses yellow peas instead of eggs in its spread. Along with money damages, Unilever has asked the court to bar the company from claiming it's real mayonnaise.

"This is about misleading consumers," Unilever Foods North America vice president Michael Faherty said on Bloomberg TV. As for the editing of consumer comments on its website, Flaherty said that was a "mistake" and the remarks should have been taken down, not altered.

On top of the food turmoil, Unilever's main growth engine, personal care, has sputtered amid a sharp drop-off across emerging markets such as India and China, which account for 57 percent of revenue. Sales in China declined 20 percent last quarter, as decelerating economic growth prompted retailers to reduce stocks.

European Deflation

In Europe, region-wide deflation has crimped Unilever's ability to raise prices on its goods, resulting in a 4.3 percent sales drop last quarter, a decline not seen since the depths of the recession. In the U.S., Unilever has fared somewhat better of late, yet the market "remains challenging," Nomura analyst David Hayes said.

In response, Polman and Huet point to how Unilever is still growing faster than the categories it competes in and is gaining market share across 60 percent of its business. Its forecast of "profitable volume growth" for 2014 remains intact, and its shares have rebounded 7.5 percent since the third-quarter results.

"Unilever is in genuinely robust shape in what is clearly a frustratingly slow growth environment for its categories," said Harold Thompson of Deutsche Bank AG.

Yet peers like Nestle SA, Reckitt Benckiser Group Plc and Danone have proven more resilient, with third-quarter growth surpassing that of Unilever.

"If Unilever's markets and categories, like spreads, are terrible, beating terrible is hardly praiseworthy," said Bernstein's Wood.