The legacy that got left on the shelf

Monday, February 4, 2008

When a consumer-goods company casts around for the best growth prospects, rarely does anything look more promising than emerging economies. These markets are growing so rapidly that within just two years they will account for half of all the world’s consumer spending, estimates Harish Manwani, head of the Asian and African businesses of Unilever, a giant of the world’s consumer-goods industries. But even with more than a century of experience in some of these countries, Unilever tripped up.

Few companies have had the head start in places like Africa, China, India and Latin America that Unilever enjoyed. Yet despite the Anglo-Dutch giant’s formidable range of products and unprecedented depth of local knowledge, when rivals began to push harder its empire came under threat. Unilever was forced to re-examine its legacy and to act on what it found. Now the results are coming through.

Unilever’s low point came in September 2004, when its share price slumped after it shocked investors with a profits warning. Just four months later its prospects dimmed further when its arch-rival, Procter & Gamble (P&G), agreed to buy Gillette for $57 billion. The deal greatly bolstered the American company’s formidable arsenal of global brands. Unilever needed to change urgently.

That would involve removing unnecessary complexity and bureaucracy, much of it accumulated over decades of operating in almost every country in the world. But change had to begin at the top. Listed on both the London and Amsterdam stock exchanges, Unilever used to be run almost by committee, with two joint chairmen, one appointed from Britain and the other from the Netherlands. In February 2005 its management structure was altered: Patrick Cescau, the joint chairman from the British side, became the sole chief executive.

Mr Cescau, a soft-spoken Frenchman, is a Unilever veteran and may seem an unlikely revolutionary. Nevertheless, under him a more unified company has been taking shape. And it seems all the better for it. In 2006 sales grew by 3.2% to ?39.6 billion ($49.7 billion) with net profits of ?5 billion. The trend is continuing. Analysts estimate that sales rose by more than 5% last year (the company is due to report its annual results on February 7th), which would be Unilever’s best performance for years. The company’s improvement “shows that our business model has integrity”, says Mr Cescau in his unflorid way. So Unilever seems to have got itself back on course. But the battle for the emerging-market consumer remains far from straightforward. And it is far from over.
Setting sail for distant markets

Unilever was born in 1930 in one of the largest mergers of its time, between Margarine Unie, a Dutch producer of margarine, and Lever Brothers, a British soapmaker. There was industrial logic in this because both businesses shared a common ingredient, palm oil: growing it in overseas plantations and importing it would benefit from economies of scale. Yet the histories of both firms stretch back into the 19th century, to when they dispatched young men on ships from Liverpool and Rotterdam to faraway places. The young men were under instruction to build businesses. They set up plantations, built factories and established distribution and supply systems. With long lines of communication, these ventures invariably developed as and how they could, often with great independence.

The modern Unilever that eventually emerged carried with it strands of its ad hoc evolution. It is unique among big consumer-products companies in that it makes and sells food, household goods and personal-care products. Its rivals tend to do just one or two of these things: for instance, Switzerland’s Nestl?, the world’s biggest food firm, does not sell household goods or personal products. And P&G does not sell food, but sales of more than $75 billion put Unilever firmly into second place in the consumer-goods league table. There is also a difference in style: “P&G is simply sharper and more aggressive than Unilever,” says Charles Mills, a consumer-goods analyst at Credit Suisse, an investment bank. Unilever has also fewer “power” brands with annual sales of more than $1 billion than P&G does.

The first thing Unilever did to find out where it was going wrong in 2004 was to look carefully at its portfolio of brands, product categories and countries of operation. Among its biggest brands are Knorr (soup), Hellmann’s (mayonnaise), Lipton (tea), Rexona and Axe (deodorants), Omo (laundry detergent) and Sunsilk (shampoo). The company compared the market-weighted growth of its main products and concluded that its brands were doing as well as most of its rivals. So something else was wrong. “We were just not executing as well as we should have,” is how Richard Rivers, Unilever’s head of corporate strategy, explains it.

The reason was that Unilever’s great strength?its strong roots in local markets?had turned into its biggest weakness. In an age of globalisation, Unilever’s local bosses had become kings who took important strategic decisions autonomously. There was duplication and even triplication of corporate structures, creating unnecessary complications. All this weighed heavily on the company, so that it was not able to exploit its size and geographical reach as well as it should have done.

This had to be changed, but not by destroying the need to fine-tune products for local markets. This is a necessity for any multinational selling to the consumer. Even McDonald’s and Starbucks, which appear to sell the same stuff everywhere, in fact vary their offerings from place to place. In many instances, Unilever’s attention to detail has worked well. For instance, Indian women often oil their hair before washing it, so Western shampoos that do not remove the oil have not sold well. Unilever reformulated its shampoo for India and ditched the conditioner.

But Unilever sometimes went too far. It used different formulations for shampoo in Hong Kong and mainland China, even though the hair and washing habits of most people in both markets are almost identical. Unilever would also sometimes vary the packaging and marketing in similar markets of even its most commoditised products, such as deodorants. “We tended to exaggerate complexity,” says Simon Clift, the chief marketing officer.

This complexity continued at the operating level. In China, says Mr Cescau, Unilever had three companies. Each had its own chairman, who in turn reported to two regional presidents, who answered to two members of the executive committee. Today one person is in charge of China across all divisions. Unilever’s China business, with a turnover of around ?600m in 2006, is now growing by 20-30% annually, compared with 8-9% before the changes were made. There were similar examples throughout the company, with hundreds of different policies for things like company cars and human resources.

Making Unilever more united, slimmer and more efficient has been painful. The company now has 179,000 staff, down from 223,000 in 2004. There is still some way to go. By 2010 it aims to close some 50 of its 300 factories and reduce its regional centres from 100 to 25. These changes should save ?1.5 billion a year. In August 2007, the company revealed a plan to cut a further 20,000 jobs over the next four years. About 12,000 of those will go in Europe, where labour laws are especially stringent. Related restructuring charges will cost the company an estimated ?3 billion in the next three years. In Europe alone Unilever has cut its top two management tiers from 1,200 people to 700.

Unilever’s management has carried out the shake-up it promised, reckons Michael Steib, a consumer-goods analyst at Morgan Stanley, an investment bank. But he thinks a difficult year lies ahead. For one thing, recession in America (or something near to it) will have knock-on effects in the rest of the world. But prices for food commodities and energy will remain stubbornly high. And the dollar is unlikely to appreciate in the near future. Like most of its rivals, Unilever will have to increase its prices for food as well as household and personal-care products. This could hit sales, especially in emerging economies.

Unilever’s dominant market share in some countries will help?provided its streamlining efforts really have worked. More than 44% of the company’s sales now come from emerging economies, compared with 38% when Mr Cescau took over. But defending its strong position can cut into Unilever’s profit margins, says Mr Mills, the analyst at Credit Suisse. When P&G decided on a big push into India in 2003-04, margins at Hindustan Unilever, Unilever’s Indian subsidiary, fell from just over 20% to a little more than 13%. But it kept its big rival at bay. In the Indian market for laundry products, for instance, Unilever even managed to increase its share slightly, to just over 37%. Ralph Kugler, boss of Unilever’s home and personal-care division, is confident that the company can continue to face up to its competitors’ advances. “We are much better organised now to defend ourselves,” he adds.
Smell of success

The possibilities in some emerging markets are huge. For instance, the company is the biggest maker of deodorants in the world, with brands including Rexona, Shields, Dove, Lynx, Axe and Sure. But only about half the world uses deodorants. Three decades ago deodorants were almost impossible to find in Brazilian shops, but Unilever’s sales there are now worth ?400m a year. In 1999 Unilever had almost half of the Argentine market for deodorants; by 2006 its share had increased to more than 70%. Potentially, other markets could soon smell as sweet. Only seven out of every 100 Asians use deodorants, the company reckons, while many Russians and others use them only for special occasions, such as weddings.

The home and personal-care division of Unilever accounts for 45% of the group’s sales and does about two-thirds of its business in emerging economies. It also represents the bulk of the company’s business in India. Yet Doug Baillie, chairman of Hindustan Unilever, which is listed separately on the Mumbai stock exchange, is also looking at other opportunities. He intends to push particularly hard into food. The Indian market is worth $300 billion a year, but little of this is accounted for by processed food, Unilever’s speciality.

Hindustan Unilever is one of the jewels in the company’s emerging-market operations. It is India’s biggest consumer-goods company and biggest advertiser. One of its strengths is its ability to cater to all segments of the population by adapting products and prices. In laundry detergents, for instance, it makes Surf Excel for the affluent, Rin for the “aspiring” class and Wheel for poorer people, the vast majority of whom live in the countryside. It sells 70% of its shampoo in one-use sachets for the equivalent of a couple of cents. Though Western consumers might find big bottles better value, India’s poor simply cannot afford anything more than small quantities.

Social and political issues also matter more. And there is always more to learn. In South Africa, where Unilever has operated for more than 100 years, it recently worked with Ethan Kapstein, a professor of sustainable development at INSEAD, a French business school, to consider the impact that its operations are having on that country. The result has been a report designed to help Unilever think harder about things like training, medical care, pensions, skills transfer, black empowerment initiatives and environmental standards. Unilever has 20,000 employees and 3,000 suppliers in South Africa. Indirectly, it found that some 100,000 jobs depend on the company, making it responsible for the equivalent of 0.8% of total South African employment. The direct and indirect effects of its operations provide almost 0.9% of GDP.
Eating better

Even allowing for the progress under Mr Cescau, Unilever faces three big challenges: food, marketing and mergers. About 30% of Unilever’s ?22 billion food business is in emerging economies. The company has six food brands with global sales of more than ?1 billion each. But it needs to venture further into health and convenience foods, two of the industry’s main areas of growth. Unfortunately, Unilever’s foods tend to be at the more fattening end of the scale: it is the biggest producer of ice cream (its brands include Magnum, Cornetto and Carte d’Or, and it scooped up Ben & Jerry’s in 2000), margarine and mayonnaise. Only Knorr soups and Lipton tea qualify as healthier fare.

Vindi Banga, head of the food division, says Unilever has made its spreads and ice creams healthier without making them less tasty. ” We cut 4,000-5,000 tons of salt, 17,000 tons of sugar and 35,000 tons of saturated fat from our products,” he says. The group has also launched new products, such as Knorr Vie, a range of concentrated fruit and vegetable juices, as well as ice cream made from yoghurt. Historically, food has been one of the most locally run businesses, but that is changing. Knorr’s tomato soup, for example, is now the same everywhere except for the finishing touches, such as spices and salt. “Food is not local,” adds Mr Banga. “Taste is.”

Marketing can also make a big difference to a company’s performance. Yet the quality and effectiveness of Unilever’s campaigns has been decidedly mixed. “We had the good, the bad, the ugly and the outstanding,” says Mr Cescau.

At their best, Unilever’s ads have been more provocative and funny than those of its rivals. It won awards for Dove’s quirky “Campaign For Real Beauty”, which departed from convention by showing ordinary women in their underwear instead of slinky models. The Dove range now covers skin creams, shampoos and shower gels. But even that campaign had to be adjusted to local tastes: it was deemed better not to show the women touching each other in America, while in Latin America tactile women didn’t shock anybody. “We must constantly ask ourselves how much we tailor things to the local market,” says Mr Clift, the marketing chief.

The Dove campaign was followed by the launch of the Dove ” self-esteem fund”, a worldwide campaign to persuade girls and young women to embrace more positive images of themselves. Unilever made an online video called “Onslaught” as a sort of attack on the beauty industry, with slogans such as “Talk to your daughter before the beauty industry does.” But “Onslaught” backfired somewhat: the company, after all, is part of the industry it mocked. Unilever also makes laddish ads for Axe and Lynx, two deodorants for men with a message that (depending on your point of view) is either just a bit of fun or plain sexist.

Some in the industry think Unilever might attempt a big takeover, as P&G did with Gillette. Its last big swoop was in 2000, a $24.3 billion takeover of Bestfoods, an American company, maker of Hellmann’s, Knorr and Marmite. Unilever has paid back ?20 billion in debt and with an underleveraged balance sheet could go shopping again. But credit markets are in turmoil. Two of the most attractive potential targets in Europe are Reckitt Benckiser, a British maker of household and personal-care products, and Danone, a French food firm. But both would be expensive and they are fiercely independent.

Nor has Unilever forgotten its debacle with the takeover of SlimFast Foods, a maker of slimming drinks. Unilever paid $2.3 billion for SlimFast in 2000?only to see sales live up to the company name as low-carbohydrate diets, like the Atkins diet, rapidly gained in popularity. Although SlimFast’s sales have slowly put on weight again, analysts estimate that the business is still worth only half what Unilever paid for it.

Unilever is more likely to gobble up smaller companies across the globe. It is planning to rid itself of more of its tired brands or those that do not fit into its healthy-food plans.

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