Unilever's Purchase of Seventh Generation Makes Sense

The acquisition makes strategic sense for Unilever. Seventh Generation's household and personal care products contain fewer chemicals and use recycled packaging, which appeals to the environmentally conscious consumer. Although it is still a fairly niche category (at around 5% of the household detergent category), natural cleaning products are growing at a low-double-digit rate and offer one of the few premiumisation opportunities in a category that we believe will be susceptible to trading down in the long term. Store brand competition tends to be higher and pricing power weaker for products that are perceived to offer little consumption utility and are not consumed in social settings. Natural cleaning products, therefore, may add significant value to the environmentally conscious consumer.

This is evident in the sometimes hefty price premium achieved by natural household products at retail. We estimate that across the portfolio, Seventh Generation can sell at a premium of around 20% to competitive brands and a 60% premium to private label. U.S. sales of the brand are roughly equal to those of close competitors Mrs. Meyer's and Method in aggregate. While we do not believe this acquisition alone moves the needle on Unilever's valuation, we think the additional exposure to premium price points should drive a greater contribution from price/mix in the company's household and personal care portfolio (57% of 2015 sales).

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