1 Stock to Feed the World, and Your Portfolio

In late March, Unilever (NYS: UL) launched a new online platform to engage people in identifying ways to double the size of its business while halving its environmental impact and increasing its social benefit. While this might sound like a great example of greenwashing from a company that can afford a great PR firm, Unilever has long demonstrated a genuine and meaningful commitment to sustainability. Let's assess the difficult landscape ahead of Unilever, and then we'll look at some of the company's innovative efforts to provide solutions, including this most recent initiative.

More people, less food?
As a global food company, Unilever operates at the leading edge of what could be an impending crisis. The world faces many challenges in the next 50 years:

  • Population growth: 9.2 billion by 2050, up from 6.8 billion today.

  • Resource constraints: To feed the world well, global food production needs to double by 2050 (some estimates say 2030), but agriculture already takes up half the habitable land on Earth and accounts for two-thirds of humans' fresh-water use.

  • Economic development and changing consumption patterns: As countries develop further and their citizens have more disposable income, people eat more meat, adding further pressure to the planet's production capacity. The Food and Agriculture Organization estimates the grain-to-meat caloric conversion ratio (i.e. how many calories of grain it takes to grow one calorie of meat) to be between 2:1 and 7:1, depending on the animal and production method.

  • Globalization and lengthening food supply chain: With every added link in the supply chain, additional risks are introduced, including food spoilage and contamination, labor violations, and environmental degradation.

  • Climate change: The projected minimum global temperature increase of 2°C has serious implications:

    • Spread of crop-eating insects to new areas.

    • Shifting or declining rain patterns.

    • Increasing frequency of extreme weather.

The food supply management challenge
Farm suppliers throughout the world are fragmented, which complicates companies' efforts to procure a steady stream of farm products with uniform quality. Companies like Unilever that are dependent on agricultural materials have traditionally used intermediaries to coordinate supply. On one hand, this can promote efficiency. On the other, the system is subject to abuse when unscrupulous middlemen have disproportionate power over small farmers.

Agricultural supply is generally unidirectional: Farmers supply goods to buyers, but nothing flows back except a little money. This can deepen farmers' isolation, especially if they lack access to information and technologies that support better practices.

As a remedy, some companies have tried programs designed to transfer knowledge to farmers, as well as new business models such as contract farming -- agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.

Some companies, including Unilever, are choosing a more radical approach called "disintermediation" -- put simply, it cuts out the middle man. While this can help address challenges, it also presents risk. History is full of examples of companies that underestimated the difficulty of replacing middlemen and paid dearly for the miscalculation.

Going to the source
It's hard to get disintermediation right, particularly in the food supply chain, but Unilever has risen to the challenge. The company has introduced programs to work directly with growers in many of its farming regions, especially in emerging markets.

Unilever launches these programs to address a particular problem, such as diminishing supply, uneven quality or yield, or environmental degradation. The company provides farmers with such benefits as training, technical assistance, supplies, financing, and guaranteed pricing. Results have been strong, and Unilever has benefited from improvements in raw material quality even as it sees declines in negative environmental impact. Meanwhile, its farmers are happy suppliers. Everybody wins.

How fares the competition?
Many companies' supply chains are so long and unwieldy that it would require a massive overhaul to bring them under control. Consider Kraft Foods (NYS: KFT) , with 40,000 products and 100,000 suppliers. Kraft CEO Irma Villarreal recently acknowledged that auditing the company's supply chain for specific minerals would be a Herculean task. Kraft has many laudable initiatives related to improving farm sustainability, but its efforts don't go to the very heart of its business the way Unilever's do.

Procter & Gamble (NYS: PG) continues to reduce the environmental impact of its products' entire lifecycle. The company's efforts relate more directly to its value chain. P&G operates in every country in the world where it is legally allowed to do so, and some countries had little or no recycling infrastructure in place before P&G's arrival. In such places, P&G has a heavy hand in creating a recycling industry from scratch. While these efforts are commendable and produce real results, they are again no match for the deftness of Unilever's approach.

Crowdsourcing for sustainability
Unilever's new Open Innovation initiative is another example of the company's willingness to go beyond conventional wisdom in search of solutions. Acknowledging that idea generation is not confined to R&D facilities, the program presents key challenges Unilever is trying to solve and solicits proposals from anyone interested in contributing. Coming back to food supply, one primary Open Innovation challenge relates to food preservation. Unilever is looking for new, more natural ways to keep food fresh from farm to final product. Only time will tell if this proves successful, but it is a bold gambit that could once again yield more control for Unilever over the journey its raw food inputs take.

Invest in the future
Unilever continues to demonstrate remarkable leadership in looking ahead and managing challenges that will arise down the road. If this type of thinking extends to the overall management of the company, I'd say that's a recipe for durable success. You can see more analysis of Unilever's business in our free video, "3 Incredible Stocks for Emerging-Market Growth."

At the time thisarticle was published

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