There were three reasons why Unilever decided
to scrap guidance in early February 2009.
The first was that we genuinely did not know what was round the economic corner: it was the gloomiest and most uncertain of times. Second, our 15 per cent operating margin target for 2010 had been set five years previously, long before the unexpected rise in input costs in 2008 and the subsequent recession. Trying to hit this number might have required actions that were not in the long-term interest of the business. Finally, and perhaps most importantly, we believe that eschewing guidance is a good idea in principle (just as Coca-Cola and Berkshire Hathaway do). We should focus on communicating and executing our long-term strategy.
The most controversial aspect of our move, admittedly, was to drop targets for top-line revenue growth. Doing so certainly spooked the market – if Unilever cannot deliver three to five per cent, investors figured, the world must be coming apart! But lots of other companies told us that they would love to do the same: after all, it is a terrible mark of shame in the United Kingdom (less so in the United States) when you have to issue a profit warning. I’m delighted that we will no longer have to face this.
Many people say we should still give long-term guidance – an argument with which I have some sympathy. But you have to be careful that this does not become short-term guidance by the back door: analysts will inevitably seek to judge each set of results in the light of whether you are “on track” for the longer term. Everyone wants his share to be correctly priced, of course, but the best way to do this is to establish a track record over several quarters and allow investors to extrapolate the trend line. It is naturally tempting to give guidance if you think you are going to do better than trend, and you will certainly get a pop on your valuation – but the reverse is also true.
In Unilever’s case we may have abandoned guidance on top-line revenue and operating margins – but in 2009 we have actually provided more granular guidance on aspects of the business than we did in earlier years. We have openly discussed what we think is going to happen to commodity costs, for example, to the likely direction of operating margins quarter by quarter, and to Advertising and Promotion spending. We have also indicated in very general terms the extent to which a well-run company like Unilever ought to be able to outperform the consumer goods markets in the developed world, and what overall revenue trends are in emerging and developing markets.
Whatever the downside in the short term, our decision is costless from now on. Indeed, the market’s response to the 16 per cent fall in first-half
earnings for 2009 – to mark the shares up five per cent – was pretty encouraging. My guess is that the only time we might revert to guidance is if we were to make a big acquisition (and there are no plans to do so!). If a company issues a large chunk of new shares, or gears up its balance sheet, I think its owners are entitled to ask for an explanation. In that event you have to spell out the likely financial returns, whether in improved top-line growth or better operating margins.