Unilever’s $16 billion move shows a shift is happening in consumer products

Unilever's plan to merge its food business with spice maker McCormick is the latest move in a sector that's fighting to stay relevant as the growth model that has powered big consumer products companies for decades is eroding.

As the post-pandemic pricing supercycle fades and growth in massive markets like China stalls, the industry's titans are moving away from the bigger-is-better conglomerate model, and towards what experts call "targeted scale."

The tie-up between Unilever and McCormick highlights a shift in strategy among consumer goods companies that prioritizes dominating specific categories rather than simply amassing a diverse portfolio of unrelated brands.

"The rules have changed — and many big [consumer products] companies are facing a relentless drift toward irrelevance," wrote Ernst & Young in its State of Consumer Products Report last year. Size now matters less, and success will be determined by relevance to consumers and capital markets, according to the consultancy firm.

Unilever said Tuesday it is selling most of its food business, which includes the Hellmann's mayo and Marmite brands, to Cholula hot sauce owner U.S.-based McCormick for $15.7 billion.

The logic behind recent industry moves is simple: companies are shedding lower-margin, high-complexity units to double down on "power categories." 

In Unilever's case, that means pivoting toward its high-growth health and beauty care, which includes major labels Dove, Dermalogica, and TRESemmé.

The British company also spun off its ice cream business last year, creating the world's largest standalone ice cream company Magnum. 

The world's biggest food and drinks maker Nestle has similarly said it plans to sell its ice cream business to focus on portfolios led by its strongest brands.

The consumer goods space has also seen mega deals such as between Kimberly-Clark and Kenvue to bring together brands like Huggies and Kleenex with Band-Aid and Tylenol. The move was a step to pivot to higher-growth, higher-margin businesses, Kimberly CEO Mike Hsu said. 

In December, European authorities cleared Mars' $36 billion deal to buy Kellanova to create a snack-focused giant. 

It's about the "right to win" in a specific category, Jens Weng, global consumer and health leader at EY-Parthenon, told CNBC.

For decades, investors flocked to consumer giants because they offered steady returns that outperformed bonds. But according to Weng, that "safe bet" status is being challenged by a lack of true volume growth.

The problem now is that the old growth drivers, such as the emerging market middle class and the China supercycle, have stopped, Weng said.

"Organic growth becomes more difficult, then inorganic growth options come on the table," Weng said. "That's why all my clients, and all major consumer package goods, FMCG companies… are looking big time into M&A."

In a shift which he calls "targeted scale," companies are no longer focusing on country combinations but instead targeting investment towards categories where their brands have a leading position on the market.

It comes against the backdrop of the growth of private-label retailer brands, such as Walmart's Great Value line and others, where products are manufactured by a third-party but sold exclusively under a retailer's own name. These items are typically cheaper to buy, while still generating higher profits for the retailer. 

The growth of private label retailer brands means the market for branded goods is shrinking, leaving less room for growth for consumer staples companies to seek growth in categories where they don't have a leading position. 

"That's why companies give up those non-strategic category positions," said Weng.

With a more focused portfolio, outperformance often becomes easier as a company can channel all its energy into that category, even if it does come with a concentration risk, he added.