E-commerce is a megatrend that has generated a lot of value, both for many investors and for customers. Over the years, the trend has helped fuel the rise of giants such as Amazon and Alibaba, as well as payment apps such as Paypal. It’s also helped companies like Unilever (LSE: ULVR) too.
Given its transformative potential, e-commerce doesn’t just benefit platforms and payment apps — it also benefits merchants and brands that correctly position themselves. In terms of brands, one savvy company taking advantage of the trend is leading consumer staple maker, Unilever.
Here’s how Unilever is growing in the critical category and how the growth is helping the company’s dividend.
How e-commerce is good for many companies
Although it represents a departure from Unilever’s tried and true physical retail way of doing business, e-commerce is in many ways more beneficial for the consumer staple.
With big data and AI, for example, it’s possible for e-commerce platforms (and by extension Unilever) to better dynamically price items in response to demand changes. If there is an economic boom in a certain region, platforms such as Amazon can increase the price of certain items faster in response to more robust demand. With more consumer data, e-commerce companies can also better target ads than physical retail stores and thus potentially help sell more merchant goods.
With e-commerce’s subscription option, there’s also potential for more stable demand.
Once a user has signed up for Amazon.com’s ‘subscribe and save’ option, for example, they will continue to order the same product until cancellation. For many brands, the subscription product is better than traditional stores where the customer has to make the choice every time in terms of buying a product. More stable demand could translate into a higher valuation in my view.
E-commerce is also a great way for Unilever to reach audiences in emerging and developing markets faster. Rather than having to do numerous deals with various individual local stores/chains to expand in a territory, Unilever just has to make one deal with a platform like Alibaba, and the consumer staple can reach many millions of people.
How Unilever’s e-commerce business is growing
As a result of management’s focus on the category and e-commerce’s overall growth, Unilever’s e-commerce business has grown rapidly over the past few years.
In 2019, for instance, Unilever’s e-commerce business grew 30%. For the first half of this year, the company’s business grew even faster, at 49% year-on-year to €2.2bn as the coronavirus outbreak catalyzed more online purchases. Due to the growth, e-commerce now accounts for over 8% of Unilever’s total sales.
A growing e-commerce business is good for the company’s dividend because it makes it more sustainable in my view. Given that e-commerce is growing faster than traditional physical commerce, I think companies will need to do well in the category if they want to keep or increase long-term market share.
Unilever’s growing e-commerce business is also good because I think it will help increase the company’s free cash flow in the long run, given increasing sales. If the company’s free cash flow increases consistently, I think there’s a decent probability that management raises the dividend.
The post How Unilever’s dividend benefits from this megatrend appeared first on The Motley Fool UK.
Jay Yao has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd., Amazon, and PayPal Holdings. The Motley Fool UK has recommended Unilever and recommends the following options: short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020