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1 Reason Why I Wouldn’t Buy Unilever plc Today

Today I am looking at why a murky margarine market is crimping Unilever’s (LSE: ULVR) (NYSE: UL.US) sales outlook.

Margarine sales on the melt

Unilever is far and away the planet’s largest manufacturer of margarines, a position achieved through its suite of vegetable spreads including the likes of Flora and Bertolli. In recent times, however, this has proved to be a millstone around the company’s neck as the popularity of butter amongst shoppers has rocketed higher.

Indeed, the household goods leviathan commented in April’s interims that, during January-March,

despite the successful launches of great-tasting products like Rama with Butter in Germany, the decline of the margarine market remained a drag on our spreads growth.

Although the business noted that it had grabbed a larger market share in Europe and North America, the margarine space is providing a Unileversmaller and smaller pool of opportunity for the likes of Unilever in its critical Western markets.

In the United States alone, sales have been in a tailspin since the mid-1990s, and the US Department of Agriculture expects margarine sales to slump to their lowest since the Second World War in 2014. At the same time butter consumption per capita is expected to hit its highest level for more than 40 years.

Vegetable spreads have been pushed to the back of the fridge as customers have become increasingly concerned over the high levels of trans fat, not to mention the complexity of the manufacturing process. And egged on by the marketing campaigns of supermarkets, not to mention the new generation of television chefs, people are now flocking back to more natural and traditional foods such as butter.

Waning demand for its margarines contributed heavily to the poor performance of Unilever’s Foods arm, which saw like-for-like sales slump 1.7% during the first quarter and underlying volumes droop 2%. The business has been engaged in aggressive asset-shedding across the division in order to strip out a host of underperforming brands, from its Ragu and Bertolli pasta sauce labels in North America through to its Peperami meat snacks in Europe.

Given the state of the margarine market, many expect Unilever to follow these sales with the divestment of its spreads businesses in the near future. But until the company can rid itself of these underperforming assets, the company’s Food division is likely to continue to weigh on group earnings.

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Royston Wild has no position in any stocks mentioned. The Motley Fool owns shares of Unilever.