Case A: Unilever
Background
The Manchester Method uses ‘live cases’. Our Full-time MBA students have to put the strategic information data set together to then carry out analysis and take management decisions. This approach is not realistic on a Global blended MBA. Hence we have provided lengthy cases on: Unilever (Case A) and Unilever and Ice Cream (Case B) to give you comprehensive background to reference as you construct your Pre-Workshop Individual Assignment and your Workshop Group presentations.
The cover sheets to Cases A and B suggest an approach to reviewing the Cases. In the Workshop, depending on which assessed Assignment your Group selects, only parts of the Cases will be relevant – other material is there for background. The same applies for your Pre-Workshop Individual Assignment.
Overview of how to read/use Case A: Unilever
⦁ Skim read pages 3-9. ‘Historical origins 1885-1999’.
⦁ ‘Path to Growth’/restructuring, pages 9-31: become familiar with the approach the company took between1999-2012 (in the Workshop you will be the senior management building on historical momentum/decisions – but you can decide to steer a different course).
⦁ Unilever Performance 2012-2017 and key actions taken, pages 31-55.
Case A: Unilever Appendices
Appendix I provides detail on quarterly/annual performance
Appendix 2 provides detail on major acquisitions, investments, alliances and disposals between 2012-2017
Appendices III – VIII a ‘Functional Review’
⦁ Workshop Group 2 will probably have 1-3 slides on Unilever’s performance in the functions/Unilever’s Sustainable Living Plan before a review of financial performance and a competitive benchmark.
⦁ Workshop Group 3 has to leverage/build a Unilever capability (i.e.: R&D/Innovation; Marketing/Branding; Supply Chain etc. – the ‘Functional Review’ provides background for the capability selected.
⦁ Workshop Group 5 looks at implementation issues/challenges/opportunities at Company/Category or Regional level. Depending on the topic selected the ‘Functional Review’ may be relevant.
Appendix IX Competitor Profiles. In the Workshop Group 2 has to benchmark performance versus a competitor like P&G and Group 3 has to assess Resource and Capability strength versus a competitor like P&G. The Appendix provides background on P&G, Colgate, RB and Nestle.
Overview
Unilever Case A provides background for your Individual Pre-Workshop Assignment and Workshop Group Assessment. Use the Case as a familiarisation/background source and focus in on the parts that are particularly relevant to your Individual Assignment and Workshop Group Assessment. As you read the Case, have the mind-set of a CEO/Senior Executive.
Workshop Analysis of Unilever
Case A: Unilever gives you comprehensive background to Unilever. For the Workshop you should also refer to at least the:
⦁ Unilever’s latest annual report and latest interims (reference: Unilever.com Investor Relations)
For the Workshop, as with any ‘live’ project, you should use the most up-to-date information for your analysis.
You will also find the Unilever Charts beneficial. (When the annual report is released the Unilever Charts are also updated.) These trace Unilever’s performance over the last ten years in key metrics: sales and margin overall and by category/region, R&D/Brand and Marketing investment, acquisition/disposal history, CAPEX, staff numbers etc. Investor Relations also has several presentations from the CEO and senior executives.
Euromonitor International has various Passport Reports such as:
⦁ Unilever Group Health and Wellness (World)
⦁ Unilever Group in Packaged Food – (World)
⦁ Unilever Group in Beauty and Personal Care (World)
⦁ Unilever Group in Home Care (World)
⦁ Unilever in Hot Drinks
⦁ Tea Global Corporate Strategy: Adding Value and Creating Demand
To assist you in thinking how to lead and manage Unilever and its category of ice cream we provide you with:
⦁ Case B: Unilever and Ice Cream
Case A: Unilever
Note: Case last updated May, 2017
⦁ Links provided in Case current at that date
⦁ You should naturally work with the most current data available to support your analysis of Unilever for Workshop Presentations.
Historical Origins
Lever Brothers
Formed in 1885, the British firm Lever Brothers was a pioneer of branded soap and paternalistic policies. William Lever built a company village, Port Sunlight, with a factory, school and 28 cottages offering worker housing at reasonable rents. Lever introduced an eight hour work day with sickness benefits, holiday pay and pensions for all employees. He saw the need to meet unmet social needs and launched Lifebuoy – the world’s first health soap which played an important role in promoting hygiene in Victorian Britain. Initially the soap was derived from edible oils (as was subsequently margarine and other detergents). The company was vertically integrated including a milling operation to crush seeds into vegetable oil, packing and transporting. In the 1890’s Lever started to build factories overseas. By 1914 it had spread geographically to North and South America, Europe, Africa and Asia.
In 1914 Lever started margarine production at the request of the British government. The move into margarine put the company into competition with Jergens and Van den Bergh, two Dutch margarine companies. To secure raw material supply the company moved into West African plantations. After the First World War the company continued to diversify organically and by acquisition into areas such as sausage manufacture, ice cream, trawling fleets, tinned salmon and fish shops.
Margarine/Unie/Union
In 1872 two Dutch firms, Jurgens and Van den Bergh began margarine production. In 1908 they pooled their interests. With sales in England Van den Bergh avoided double taxation problems by incorporating two parent companies, one in Holland and one in England. In 1920 the two companies were joined by another margarine producer, Schicht with strengths in central Europe. In 1927 the three companies merged to form Margarine Unie N.V. in Holland and Margarine Union Limited in England. The companies were focused on margarine but also had some soap interests in Europe.
Unilever
After two years of discussions Lever Brothers merged with Margarine/Unie/Union in 1929, the year of the stock market crash. The combined company processed more than a third of the world’s commercial oils and fats and had a greater geographic footprint than any other company in the world. The two holding companies were retained. Unilever Limited (PLC after 1981) with a head office in London capitalised in pounds sterling and Unilever N.V. with a head office in Rotterdam capitalised in guilders. The new organisation included an ‘equalisation agreement’ to provide equal dividends to each company’s shareholders. The dual listing and equalisation agreement remain in force to this day.
1930-1960
With the onset of the Great Depression in 1930 a Special Committee of three executives was set up to operate as the board of directors over the two boards of the holding companies to ensure control and a balancing of British and Dutch interests.
Unilever’s oils and fats business progressed smoothly during the Depression – low cost necessities remained in demand. Unilever then diversified again acquiring T.J. Lipton in 1937, the leading US tea maker.
With the Nazi occupation of continental Europe during the Second World War, Unilever’s European operations were cut off from the rest of the group to be brought back together on its conclusion. Even during the war Unilever continued to expand acquiring the US toothpaste brand Pepsodent and one of Britain’s largest vegetable canners Batchelors Peas. Unilever also acquired from General Foods the rights to produce Birds Eye frozen foods (after 15 years of shared ownership Unilever acquired Birds Eye U.K. in 1957).
The decade following the Second World War was a period of recovery, with good economic growth in the western world. As demand continued to rise, competition was not a major issue until the mid 1950’s.
Unilever continued to seek growth organically and by acquisition. The pursuit of a diversified product portfolio was the aim of most large European and US companies at the time. Economic growth spurred expansion with the belief that large firms could turn their hands to almost anything. By the late 1950’s as competition intensified Unilever’s profit margins started to slip.
1960’s
By the mid 1960’s the Unilever portfolio was extremely diverse both from a geographical and product perspective. Two thirds of sales came from Europe, 10% from the US and the remainder from the rest of the world. Three product areas each accounted for over a fifth of sales: ‘Edibles’ (margarine and other edible oils), soap and detergents, foods (frozen, ice cream, meat etc.). 15% of sales came from UAC (plantations and trading). The remainder of Unilever’s sales were made up of personal products (toothpaste, shampoos, deodorants, cosmetics), animal feeds, chemical manufacturing, fishing fleets, fish restaurants, road and river transport, packaging, printing, advertising and market research agencies. A high degree of vertical integration was present but it was difficult to identify any clear corporate strategy. The chairman, George Cole, observed in 1963:
“Firms are often compared to ships. Well, Unilever is not a ship; it is a fleet – several different fleets – several hundred subsidiary companies – and the ships of many different sizes, doing all kinds of different things, all over the place”.
A key issue for Unilever was whether it could, or should, manage the fleets in a co-ordinated fashion. Unilever’s organisation was based around national rather than regional or category boundaries and was very decentralised. Acquired firms (the prime means of growth) usually retained their names, brands and management – selling their products for the most part only in one country. The Unilever corporate name was not promoted – a ‘holding’ company made up of many units.
The strong belief in local initiative, entrepreneurship and decentralised control was supported by the need to customise offers to national cultures, tastes, regulations and government relationships. Moreover, different languages, currencies, tariff barriers, and transportation issues argued for a decentralised national approach – even if a very diverse, fragmented organisation was the end result.
Developments in Unilever’s core geographic region of Europe, with the formation of the European Economic Community or Common Market, started to alter Unilever’s view. A 1958 study of the future of Unilever’s food business concluded rising living standards meant that consumers were willing to pay for branded goods which were convenient and guaranteed quality – ice cream was identified as one such product. Unilever held several conferences throughout the 1960’s to discuss European factory location, marketing, transport issues and tariffs. The removal of many tariff restrictions gave Unilever the opportunity to consolidate operations and concentrate production in lower cost locations.
1970-1983
Unilever was not performing well financially. Cashflow had moved sharply down to be negative between 1968 and 1970. Margins were considerably lower than those of key competitors. Performance varied considerably between regions/countries and product areas. In Europe and North America performance was below average and drifting down. Unilever was becoming increasingly dependent on developing countries to hold up overall performance.
The external environment then turned hostile. The 1973 oil price shock led to a world recession, high inflation, interest rates and unemployment. Unilever’s historic legacy of national companies with too many factories, brands and duplication made them high cost. Vertical integration had benefits in security of supply, but again in many cases Unilever was high cost. Inflation pressures on input costs, energy and wage bills (Unilever wages and benefits tended to be higher than competitors) added to the cost problem. At the same time lower demand, increased competitive intensity, growing power of retailers, private label growth all contributed to eroding Unilever’s margins.
Unilever started to centralise. Co-ordinators’ were appointed for areas like detergents and edible fats. Their role was however largely consultative, decision making power was still largely nationally based – but a more international view by product category was starting to be developed. A ‘Long Term Planning Unit’ was set up in London initially to collate the financial plans of individual business areas; over time it developed more of a strategic role.
Unilever started to rationalise and substantial cost cutting took place over the decade. In continental Europe social, legal, political and union constraints severely hampered the process. In countries like Britain rationalisation was more easily achieved (47% of the workforce being cut between 1975 and 1984).
The world economy started to recover from the recession only for a second oil price shock in 1979 to lead to another world recession. As the world moved out of recession Unilever’s 1983 sales and profits in constant prices were the same as they had been in1971. Unilever’s share price over the same period had under-performed the market and all of its major competitors – market capitalisation had shrunk.
1984 – 1990
By the early 1980’s, with influential books like ‘In Search of Excellence’, urging companies to ‘stick to their knitting’ diversification was falling out of fashion in the Western world. Between 1984 and 1985 Unilever identified its core areas as: “businesses that we properly understand, in which we have critical mass, and where we believe we have a strong competitive future” - foods, detergents, personal products, speciality chemicals, and some parts of UAC. These areas were to be strengthened whilst non-core areas would be divested. Decisions would be made on activity fit rather than current levels of performance. A top priority was North America where the broad objective to double size within five years was set.
Between 1983 and 1987 Unilever sold over 70 companies with associated sales of £3.4 billion for a total of £2.1 billion. Key sales were in the lower margin areas of transport, shipping, packaging, oil mills and animal feeds. Over the same time period over 70 companies were acquired with associated sales of £4.5 billion at a total cost of £4 billion.
The key acquisitions were:
⦁ In 1984 the leading European tea company Brooke Bond was acquired for £376m making Unilever the world leader in tea with over a 20% global share (Unilever’s first hostile takeover for over 15 years).
⦁ Chesebrough-Pond’s in the US with well known skin care brands such as Pond’s and Vaseline. Unilever had moved up to number four globally in skin care.
In 1988 a McKinsey study into ‘Defining New Sources of Profitable Growth’ confirmed existing views that Unilever should grow its core businesses by expanding in high value added convenience products in the areas of processed foods and skin care.
In 1989 Unilever became a major player in perfume and cosmetics by acquiring Faberge of the US for $1.55 billion (Chloe, Fendi, Lagerfeld brands); the Calvin Klein business from Minnetonka and Schering – Plough’s perfume business in Europe.
By 1990 foods, detergents, personal products and chemicals accounted for over 90% of sales. Whilst the legacy of a large number of brands remained profit margins were starting to approach those of the peer group. Unilever clarified its strategic intent by announcing:
“Unilever aims to be the foremost company meeting daily needs across the world in food, cleaning and personal care”
In 1990 a ‘Food Executive’ was set up in Rotterdam to oversee Unilever’s world foods strategy. Five product groupings of: spreads, oils, dressings, meals, meal components were to be managed in a regional matrix. In detergents Unilever went further setting up Lever Europe in Brussels to develop European strategy – the national companies became divisions of the new entity. In ‘Overseas Markets’ Unilever continued with a country rather than a product structure.
1990’s
Unilever continued its strategy of acquiring to strengthen the core and exiting non-core areas. Between 1992 and 1996 over a 100 acquisitions were made, more than half in the food area (22 in ice cream).
In foods the strategic thrust was to consolidate position in margarine, tea and ice cream. Major ice cream acquisitions during the period were:
⦁ The US based Empire of Carolina Inc. with its key brands of Klondike and Popsicle in 1992 for $155million
⦁ The US based Breyers and Sealtest brands from Philip Morris in 1993 for $215million. As a result Unilever became the market leader in ice cream in the US
⦁ The Brazilian market leader Kibon S.A. for $930 million in 1997
Indian liberalisation finally made it possible to merge Unilever’s two main subsidiaries there – Hindustan Lever and Brooke Bond Lipton India to create India’s largest private sector company. During the 1990’s Hindustan Lever was one of the ‘stars’ of the Unilever portfolio, doubling turnover every four years and profits every three years.
In 1991 a global detergents strategy was put in place including Overseas Markets for the first time. In 1994 Unilever attacked P&G’s leading brand in Europe, Ariel, with a new soap marketed under the names: Persil Power, Omo Power, and Skip Power. Unilever had spent $175 million developing the product and another $292 million marketing it during 1994. The product claim was that “Power cleaned clothes better at lower temperatures”. P&G tests however revealed that the detergent resulted in abnormal wear after as few as 15 washings – and publicised its findings. The claim proved correct and even though Unilever reformulated the product the episode was a public relations disaster. Eventually Unilever withdrew the Power formula and took a £57 million write-off in its 1994 accounts. The historic aim of achieving co-leadership with P&G in world detergents gave way to more of a focus on profitability.
In Personal Products Unilever acquired the Chicago-based Helen Curtis Industries Inc., in 1996, a manufacturer and marketer of primarily shampoo and conditioners, lotions, deodorants and anti-perspirants for $770 million. Key brands included Suave, Finesse and Salon Selectives.
Disposals over the period were in line with the core business philosophy and included: the German 4P printing business; most of the remaining agribusiness (including fish farming); John West canned fish; coffee in Australia and New Zealand; restaurants and wholesalers in Austria, Canada and Germany; distribution in South Africa and the UK dealership for Caterpillar; stakes in the brewery operations in Ghana and Nigeria. In 1996 Unilever sold its mass market cosmetics business.
The main disposal during the period was the speciality chemicals division, one of the original core businesses, which although it was performing well seemed out of place with the rest of the fast moving consumer goods portfolio. The business was sold to ICI for £4.9 billion ($8 billion). Some £1.7 billion cleared Unilever’s debts and a war chest of some £6 billion was in place. The Brazilian ice cream company Kibon S.A. was acquired for $930 million and some mid-sized food acquisitions like Amora Maille (Dijon mustard, sauces, salad dressings) took place. The major portion of the war chest however was returned to shareholders with a $5 billion Special Dividend in 1999.
During the 1990’s Unilever also started to address its under-performance in the commercialisation of innovation. It had the world class Port Sunlight UK corporate research centre coupled with numerous decentralised national R&D centres. In 1992 ten regional ‘Innovation Centres’ were set up in Personal Care around the world, each with its own specialisation co-ordinated by the corporate centre. In 1993 the ‘Innovation Funnel’ first developed at Chesebrough-Ponds was adopted to filter new ideas and projects more effectively. In 1997 the approach provided the basis of a Unilever wide approach to ‘Innovation Process Management’. The links between R&D and Commercialisation, Marketing were being strengthened.
Path to Growth In 1999 Unilever had a portfolio of 1600 brands. Only four brands had global sales of more than €1 billion whilst over a 1,000 brands generated only 8% of company sales. In September 1999 Unilever announced plans to reduce its brand portfolio from 1600 to 400 regionally or globally powerful brands by 2004. Rationalisation of the brand portfolio had the promise of major operational efficiency gains and allowed Unilever to concentrate its marketing support behind its key brands. Moreover, in many developed markets retailer shelf space was becoming constrained with major retailers increasingly stocking only the larger brands. The stock market viewed the announcement unfavourably, Unilever was judged as an ex-growth stock. Market capitalisation which had been over £50 billion in the summer of 1999 fell back to £31 billion by January 2000.
In February 2000 Unilever formally announced the Path to Growth 5 year strategy to focus on 400 brands by 2004. Additional sales revenue of €5 billion and a 5-6% growth rate by 2004 was being targeted. Operating margins were targeted to be significantly higher at 16% by 2004. A key assumption behind the sales growth target was that brands would evolve to becoming category and cross-category brands and consumers of minor brands could be persuaded to migrate to these ‘power brands’. The Path to Growth strategy had several components:
⦁ Unilever would reorganise into two global divisions, Foods and Home & Personal Care, which were to be divided into five regions: North America, Latin America, Europe, Africa/Middle East/Turkey and Asia.
⦁ An additional £1 billion of marketing spend would support core brands over the period.
⦁ Until 2000 Unilever had a decentralised IT infrastructure and systems – which worked in country silos. A global IT infrastructure and systems would be put in place at an estimated cost of €2 billion. At the core of the ‘Unilever Information Programme’ would be a global data warehouse. £130 million would be invested in eCommerce to improve and simplify B2B transactions and more effectively carry out brand communication and marketing on-line. Several major deals and joint ventures took place with firms such as IBM, SAP, Microsoft, iVillage (an American portal targeting women who are the key purchasers of personal care products), Syntegra (web hosting to Unilever’s 2,700 websites), the Ariba B2B eCommerce platform etc. to make the transition. The global IT infrastructure was expected to drastically reduce overhead and allow Unilever to capitalise on many latent opportunities such as wide scale global procurement – but it would take years to implement.
⦁ Restructuring the supply chain was a major component of the Path to Growth strategy. As the brand portfolio was rationalised economies and efficiencies were expected to amount to annual cost savings of €1.6 billion by 2004. Initially a global supply chain division was set up led by two Vice Presidents, one from each division. In addition a global division was formed for non-production items that would act on behalf of both divisions. Unilever’s manufacturing and distribution infrastructure was to be radically restructured. At least a 100 of Unilever’s 388 plants were to close by 2004 with a focus on 150 plants. Home and Personal Care distribution would be combined with one warehouse in each region consolidating products. In 2002 Unilever announced that it would build five regional distribution centres each of 1 million square feet. The aim was to cut freight and warehouse costs by 10-20% and be able to transport to customers within 24 hours significantly improving service and the out of stock position. The cost of restructuring the supply chain was put at €2.3 billion.
In total 25,000 employees (10% of the workforce) were expected to be laid off.
The Path to Growth strategy took on additional dimensions as Unilever made major acquisitions in 2000:
⦁ In April Slim-Fast was acquired for $2.3 billion. Initially Slim-Fast would retain its own worldwide organisation
⦁ In April Ben & Jerry’s was acquired for $326 million. Ben & Jerry’s would operate as an independent subsidiary for the next two years
⦁ The US based Bestfoods was acquired for $24 billion in June 2000. At the time this was the second largest acquisition in business history. Bestfoods with 60% of its sales outside of the US and international brands such as Knorr, Hellmann’s Mayonnaise, Mazola Oil, Pot Noodle, Bovril significantly strengthened Unilever’s food division. However, with 33k employees, 120 plants in 63 countries Bestfoods also heightened the restructuring challenge. Unilever estimated cost savings from the Bestfoods integration would be €0.8 billion by 2004.
In 2000 Unilever started the process of pruning its brand portfolio, mainly in the food division: 27 businesses were sold for $642 million and the Bestfoods Oxo, Batchelors and Ryco brands divested for $900 million (required by regulators to get approval for the Bestfoods acquisition). Major disposals in 2001 included the Elizabeth Arden and women’s diagnostics business for €244m and the Bestfoods Baking Company for €1.9 billion. In 2002 19 Bestfood brands were sold for €383 million. In 2003 over twenty smaller subsidiaries were sold. Unilever had slimmed down to 635 brands with major cost savings resulting: 122 plants had been shut/sold, 30,000 employees had been laid off, and the supply chain target savings of €1.6 billion had been exceeded as had the anticipated cost savings of €0.8 billion from the Bestfoods integration. In total annual operating costs had been reduced by $7 billion. Unilever had however fallen well short of the Path to Growth 2004 targets: after restructuring and disposal costs operating margin was 10.7% versus the target of 16%, and sales growth, despite strong performance in the Africa/Middle East/Turkey and Asia regions, was only 0.4% versus the target of 5-6%.
The process of extending core brands into adjacencies was progressing, i.e:
⦁ Dove soap had been extended to shampoo and deodorants in 80 countries.
⦁ Lipton Tea had moved into ready to drink tea with Pepsi
⦁ Sunsilk had moved into hair colourants
⦁ Cornetto had moved into soft ice cream.
But sales of leading brands only grew by 2.5% in 2004, significantly below target. Between 2002 to 2004 sales had declined from €48.7b to €40.4b and operating profit had declined from €5.1b to €3.6b. The assumption that consumers of minor brands would migrate to power brands seemed to have been over-optimistic. In rapidly developing countries retailers tended to be weaker and private label less marked; here minor brands often were separate in the consumers mind and a house of brands (brand architecture) rather than a single power brand approach may have been more appropriate.
Unilever reduced its guidance for growth in earnings per share for the next five years to single digits from the previous low double digit guidance. With the disappointing outlook Unilever’s share price weakened.
Key Section Sources:
www.unilever.com
- Introduction to Unilever
- annual reports
- investor presentations
⦁ G. Jones, ‘Renewing Unilever’
Oxford University Press, 2005
⦁ FUNDINGUNIVERSE, Unilever Company History
⦁ Encyclopedia.com, Unilever
⦁ N. Radhika, ‘Restructuring Unilever: The ‘Path to Growth’ Strategy’
ICMR, case 304-099-1, 2004
⦁ A.S. Mishra and R. Mathukumar, ‘Unilever’ Power Brands’ Strategy
IBS Center of Management Research Case 511-015-1,2011
Patrick Cescau
In 2005 Patrick Cescau was appointed the first single CEO of Unilever. Cescau had been the director of the Foods division, Finance Director, and in 2004 the Chairman of Unilever PLC and Deputy Chairman of Unilever N.V. Cescau judged that the Path to Growth strategy of pruning brands and moving to a more regional organisation was correct.
⦁ But whilst the strategy was correct it had not been executed well enough.
Notwithstanding moves to centralisation country heads still focused on national issues rather than the global view. The non-standardised approach led to duplication and fragmentation (for example 64 different variants of tomato soup were being sold in Europe). There was a lack of alignment/line of sight; inconsistent terminology; little commonality in deploying strategy. Moreover Unilever was too internally focused. Unilever employed bright, articulate, confident people who worked in a collegial manner. The end result was a focus on intellectual discussion, analysis and reports, multiple presentations and under-actioned management.
Vitality
To promote the focus on growth and give direction for innovation Cescau revised Unilever’s mission statement to stress ‘Vitality’. Brands should ‘ride the wellness trend’ by delivering health, hygiene and nutritional benefit:
“Unilever’s mission is to add Vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.”
The Vitality mission was initially centred around brands. Over time however it evolved to also stand for vitality in the organisation and its people.
To reinforce the new mission a new corporate logo was introduced in 2005 stressing the theme of ‘Vitality’. The logo is made up of the ‘U’ for Unilever and 24 icons which represent something important to Unilever.
Cescau also announced the ‘One Unilever’ Transformation programme in 2005.The two global divisions of Foods and Home & Personal Care and five regions created in 2000 had led to much duplication. There would now be a One Unilever organisation in three regions with each region (Europe, Americas, Asia/Africa) reporting directly to the CEO. The aim was to manage categories better across countries and regions with one management team to scale the organisation. To provide the infrastructure ERP, CRM and Artwork systems were to be standardised between countries, but the transition would take some years to complete.
Reduced headcount savings by 2007 were estimated at €1 billion – but the greater benefit of the reorganisation was seen as the globalisation of Unilever. The new organisation’s priorities were: ‘Vitality’, ‘Developing & Emerging’ markets and ‘Personal Care’ (which was seen as having more growth and globalisation potential). To sharpen focus on the new priorities the remaining prestige fragrances of Calvin Klein, Cerruti and Vera Wang were divested for $800 million in 2005. The brand value of Slim-Fast, which had been badly hit by low carbohydrate diets, was written down by €591 million.
The USIA Initiative
In the late 1990’s Unilever’s Personal Care category successfully used the Quest Worldwide consultancies Strategies into Action (SIA) package of methodologies to improve alignment and execution. Europe Home & Personal Care and several other parts of Unilever later successfully implemented the approach. With a proven approach to execution Cescau launched the SIA methodologies as a global programme in 2006 – the approach became known as the USIA.
Initially the Unilever Executive (UEx) decided the company’s goals and strategy in July of 2006. Much work and debate was summarised on one page which outlined 5 ‘Pillars of Strategic Goals’:
Win Key Markets: The portfolio and market choices to compete
(Must Win Battles)
Grow Superior Brands: Attracting consumers through compelling brands
Win with Customers: Innovations to enhance service and profitability for customers
Fit to Compete: Productivity and simplification for a lean, agile company
Deliver Vitality: Critical organisational developments for success
Each Pillar was then translated into Strategic Goals (some 16 in total). Goals were then translated into Key Performance Indicators (some 25 in all). These would be set by ‘leadership teams’ and translated into actions to achieve Strategic Goals.
USIA Framework
Unilever Mission on every plan(*1) Local role to deliver the Mission & Commitments (*2) Sub-units Role
MUST WIN BATTLE (*3) Win in Key Markets Grow Superior Brands Win with Customers Fit to Compete Deliver Vitality
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KPI Target
(*6) KPI Target (*6) KPI Target (*6) KPI Target (*6) KPI Target (*6)
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Strategic Actions (*7)
*Notes:
⦁ Unilever Mission and standards of leadership on every plan
⦁ Space for local role definition, i.e. function or category
⦁ Must Win Battles are the same on every plan
⦁ Strategic Goals are SMART (Specific, Measured, Actionable, Realistic, Time bound)
⦁ KPI’s set for each Strategic Goal to track progress
⦁ Leadership teams to set targets for each KPI
⦁ Leadership teams define strategic actions to drive towards Strategic Goals
Once the UEx had set the USIA initiatives a comprehensive alignment stage followed where Category and Regional teams supported by Functional teams would ‘flesh-out’ the detail.
To ensure ‘buy-in’ numerous Workshops where run before the launch of the initiative and USIA ‘champions’ were appointed to each business supported by documentation/presentations. Finance and HR supported the initiative but ownership of content and application remained with the line.
Categories/Regions/Functions came back to UEx for ‘sign-off’ in September (UEx launched in July). With sign-off the finer cascade got under way. Once in place monthly reporting upwards to UEx took place on the KPI’s supported by ‘Traffic Lights’ variance reports.
As the 2006 USIA cycle moved on to the next year gradually other key business processes like financial planning, budgeting, target setting, risk assessment, performance management etc. were added. Executive remuneration was increasingly linked to plan attainment.
The initial annual roll out of USIA was evolved into an eight quarter rolling plan.
Authors Note: We have many management processes to cascade strategy, the Balanced Scorecard process from Kaplan & Norton (and variants) being the most popular. Cescau’s approach at Unilever was ‘top-down’ to progress the globalisation/alignment agenda.
As the USIA initiative was being rolled out Cescau simultaneously drew up a list of capabilities needed for success in the business and the behaviours he wanted managers to exhibit. Working with McKinsey targets were set country by country for organisational change and behaviour processes. Five key leadership behaviours were promoted:
⦁ Global mind-set
⦁ Teamwork
⦁ Debate
⦁ Action
⦁ Accountability
2006-2008 saw a continuation of the One Unilever Transformation programme: taking cost out, streamlining, disposing of low growth non-‘Vitality’ areas:
⦁ In 2006 HR operations were outsourced as a cost cutting measure; 18 sites were closed or sold
⦁ In 2007 the major divestments were the Birds Eye frozen foods business for €1.725 billion and Boursin cheese for €400 million
⦁ 17 sites were closed or sold and a new four year restructuring initiative was set: 50-60 sites, mainly in Europe, were to close or be sold off by 2010 with 20,000 employees laid off
⦁ In 2008 the major divestments were the North American laundry business (Wisk, All, Snuggle brands for $1.45 billion), Lawry’s Seasonings (€410 million) and several edible oil businesses were sold, the largest of which was the sale of Bertolli olive oil for €630 million. 14 sites were closed or sold and the site closure agenda accelerated. Plans to build 30 new plants in the next 5 years were announced.
Growth was starting to improve as was 2008 operating margin.
2004 2005 2006 2007 2008
Sales Growth (%)
Operating Margin (%) 0.4
10.7 3.4
13.2 3.8
13.6 5.5
13.1 7.4
17.7
One Unilever had become a reality in most markets – all global categories for nutrition, hygiene and personal care had been combined. To better focus on Developing and Emerging country growth Central and Eastern Europe was joined to the Asia/Africa region (previously with Western Europe). Unilever’s leading position in ice cream was strengthened by acquiring Inmarko, the leader in Russia. However, whilst One Unilever had become a reality, the company had lost global share in every year between 2002 to 2008 (Source: S. Bernstein, analyst at A. Wood).
The global financial crisis and recession in many parts of the world then struck.
Key Section Sources:
Interview with Patrick Cescau, Focus Vol. XII/I
Various Quest Worldwide publications; especially: W. Smith, ‘Vitality in business: executing a new strategy at Unilever.’ Journal of Business Strategy, 2009
Paul Polman
Paul Polman was announced Unilever’s new CEO in December 2008, with his appointment effective 1.1.2009. (Cescau was approaching the age of 60.) Polman was Unilever’s first ‘outsider’ appointed CEO; he had been the CFO of Nestle between 2006-08 and then in 2008 Head of Nestle’s Americas zone playing an important role in converting Nestle to a leading Nutrition, Health and Wellness company. Polman was with P&G between 1979-2005 with his last position as President of Western Europe. As Polman outlined: “Unilever had made enormous progress under Cescau” – but it was now his responsibility to press forward. James Amorso observed: “With hindsight, he was probably the only logical choice. He has a deep knowledge of Nestle and the food industry as well as decades of P&G and Home and Personal Care experience. Moreover he is a strong operational and financial operator with excellent communication skills. He is also an extremely open, honest and likeable personality.”
In the McKinsey series of ‘Conversations with Global Leaders’ in September 2009, Polman comments on the downturn, the importance of execution, being purpose driven, the importance of people and business responsibility in society.
http://www.mckinseyquarterly.com/McKinsey_conversations_with_global_leaders_Paul_Polman_of_Unilever_2456
On the day he started the job Polman “announced that the company would no longer publish quarterly profit updates, as this encouraged short-term thinking” (F.T.). Unilever’s share price, which had already fallen in the previous year by 35% in the midst of the global financial crisis, fell another 8%. Polman observed, “I figured I couldn’t be fired on my first day”. His motto was, “never waste a crisis” to make change and he attributed the decline to hedge funds who “would sell their own grandmother’s if they thought they could make money”. Avoiding profit updates not only saved a great deal of work but also allowed him “to focus instead on a mature discussion with the market about our long-term strategy” and was a step towards linking “payouts to long-term performance”.
(Source: ‘Captain Planet’, An Interview with Unilever CEO, Paul Polman. Harvard Business Review, June 2012.)
Polman explained his philosophy with the following observations:
⦁ “I don’t think our fiduciary duty is to put shareholders first. I say the opposite. What we firmly believe is that if we focus our company on improving the lives of the world’s citizens and come up with genuine sustainable solutions we are more in sync with consumers and society and ultimately this will result in good shareholder returns” (The Guardian).
⦁ The business must have a purpose beyond delivery to shareholders. “If a business cannot explain what their purpose is beyond shareholders, for me I have a hard time understanding what their reason for being is and society will have a hard time understanding as well and increasingly they will be rejected” (Sunday Times). “Unilever has been around for 100 plus years. We want to be around for several hundred more years. So if you buy into this long term value-creation model, which is equitable, which is shared, which is sustainable, then come invest with us. If you don’t buy into this, I respect you as a human being but don’t put your money in our company”.
To shake the culture Polman froze executive salaries across the group and curtailed business travel by 30%. He then initiated a management shake-up replacing the CFO, CMO, global heads of Foods, Home and Personal Care categories. Within a year he had changed a third of his top 100 executives.
Polman then set Unilever a new mission:
The Mission had the aim to become a €80billion sales company (no time limit was set – Unilever analysts indicated that this was a very long term aspiration).
“With confidence in our ability to grow we launched a renewed, bold vision for the company – to double our size while improving our environmental footprint.”
‘Growth’ and ‘Winning’ were the priorities. With strong brands and an outstanding presence in Developing and Emerging Markets Unilever seemed well positioned to win where the growth will be. “Yet we are also determined to grow in the developed world, which represents around half of our business and where the bulk of the world’s wealth will remain for many years to come.”
Polman created the CEO Forum, made up of leaders of all categories and key markets. In 2009 the Forum developed the principles to guide Unilever’s strategy going forward which were summarised on a page into the Compass Strategy. “The Compass is an energising vision and strategy to bring the company back to sustainable growth. It puts growth, based on passion for the consumer and customer, firmly back on the agenda. The vision we set ourselves is to double the business and outperform market growth, whilst at the same time reducing our overall environmental impact.”
THE COMPASS STRATEGY*
WE ARE UNILEVER
Vision
We are a successful, growing sustainable business WE WORK TO CREATE A BETTER FUTURE EVERY DAY
We help people feel good, look good and get more out of life with brands and services that are good for them and good for others
We will inspire people to take small everyday actions that can add up to a big difference for the world
We will develop new ways of doing business with the aim of doubling the size of our company while reducing our environmental impact
Behaviours
We focus on consumers and customers with a bias for action Our first priority is to our consumers, then customers, employees and communities. When we fulfil our responsibilities to them, our shareholders will be rewarded
We will win through a growth mentality and a positive approach to all our stakeholders, based on clear accountability and bias for action
WHERE WE WILL WIN
Priorities
Win share and grow volume in every category and county
HOW WE WILL WIN
Non-negotiables Winning with brands and innovation 1 Deliver superior products, design, branding and marketing
2 Bigger, better, faster innovations
3 Appeal to more consumers across needs and price points
Winning in the marketplace 4 Lead market development
5 Win with winning customers
6 Be an execution powerhouse
Winning through continuous improvement 7 Lean, responsive and consumer led value chain
8 Drive return on brand support
9 Agile, cost competitive organisation
Winning with people 10 Organisation and diverse talent pipeline ready to match our growth ambitions
11 Performance culture which respects our values
12 Leverage our operating framework for competitive advantage
⦁ The Compass Strategy was first developed in 2009, it was refined in 2012 – but the core elements remained the same
Polman held annual Compass Awards to recognise those that best deliver Compass. “We have kept the drumbeat on increasing the pace of the organisation and of becoming more customer centric. On every initiative we ‘found the hero’ who got results from that initiative and improved the lives of the consumer or customer. The stories of those heroes have become legends and are spread around the company. We cascaded communications endlessly from the Executive Team to the CEO Forum, to the Change Leaders conference, to our global team at the front line.”
In 2012 Unilever stressed four Winning Pillars of the Compass Strategy:
⦁ Winning with brands and innovation
(please refer to Appendix III: Discover, Design, Deploy: R&D/ Innovation and Appendix IV: Branding & Marketing Investment and for initiatives taken)
⦁ Winning in the market place
(please refer to Appendix IV: Branding and Marketing Investment)
⦁ Winning through continuous improvement
(please refer to Appendix VI: Supply Chain, Procurement, Manufacturing: Smart Complexity, Project Half for Growth and Zero Based Budgeting and Appendix VII: Enterprise and Technology for Initiatives taken)
⦁ Winning with people
(please refer to Appendix VIII: Leadership Development in Unilever)
To help ‘grow’ and ‘win’ Unilever was to focus more of its resources on faster growing Personal Care products and Emerging Markets. In Personal Care Unilever acquired Tigi, the professional hair care brand for $411.5 million in 2009. Sara Lee personal care and the European laundry business brands (including Badedas, Duschdas, Radox, Sanex) was acquired in 2010 for €1.2 billion (Sanex was subsequently sold to Colgate for €672 million a regulatory condition for the purchase).
In 2011 Unilever further strengthened its Personal Care and Home Care position by acquiring Alberto-Culver (Alberto-Culver’s annual sales exceeded €1.2 billion with brands such as TRESemme, Simple, Nexxus, Mrs. Dash, VO5) for $3.7 billion (the US/Puerto Rico VO5 position was sold in 2011 as well as the Culver Speciality Brands division for $325 million). With the acquisition Unilever became the world’s leading company in hair conditioning, the second largest in shampoo and the third largest in styling. In 2011 Unilever acquired 82% of the leading beauty company in Russia, Kalina for €500m giving it leading positions in skin care and hair care.
To help ‘Grow’ and ‘Win’ in Ice Cream Unilever acquired Diplom-Is in Denmark and EVGA in Greece in 2010 and Ingman in Finland in 2011 (with production facilities in Finland, Sweden, Lithuania and Belarus).
To continue to sharpen the focus on the core growth platforms the frozen food operation in Italy was sold for €805 million in 2010. (In the January 2013 results earnings call Polman observed: “We, for a long time held onto our frozen foods business in Italy under the excuse we couldn’t sell ice cream otherwise. That turned out to be a fallacy”). At a subsequent investor conference Polman outlined: “You have seen us do divestitures, but there is still a little bit more to be done” especially in Food. In March 2011 Unilever sold the Brazilian tomato products business with Polman outlining that it was a commodity business that had no potential for global expansion. In 2011 Food was Unilever’s only category to decline by volume. Some 60% of food sales came from developed markets hurt by declining consumer confidence, lower prices and encroachment by private label ... “too much is dragging us down”. Whilst Unilever had “worked hard” to generate more food sales in Emerging Markets they were sticking to their local culinary habits only taking slowly to certain Developed Market staples.
The Unilever Sustainable Living Plan (USLP)
Since its formation Unilever had a strong reputation for ‘responsible business’ practices. The company motto of: “doing well by doing good” was frequently referred to. In 2000 Unilever first published two annual Reviews on Social and Environmental performance. In 2006 the two Reviews were combined into one report: The Sustainable Development Report. Then, after a year of planning, The Unilever Sustainable Living Plan (USLP) was launched in November 2010 outlining a quantum leap forward in Unilever’s commitment (some Unilever insiders referred to the initiative as ‘Polman’s Plan’). The Plan complemented the Compass Strategy and committed Unilever to three significant pillars/outcomes:
⦁ To help more than one billion people take action to improve their health and well being
⦁ To halve the environmental footprint in the making and use of Unilever’s products by 2030
⦁ To enhance livelihoods for millions (Fairness in the workplace, Opportunities for women, Inclusive business)
As “two billion times a day somebody, somewhere uses a Unilever brand”, Unilever aimed to make a small but important difference to the quality of people’s everyday lives:
Unilever
Brands X
Small
Everyday X
Actions Billions
of =
Consumers BIG
DIFFERENCE
USLP was ambitious in that it applied to all parts of Unilever and extended to the whole of Unilever’s activity chain over the entire product lifecycle. More specifically the plan committed Unilever in 3 areas where it had scale, influence and resources to create transformational change:
⦁ Health and Well-being: deliver good nutrition and improved hygiene
⦁ By 2020 to help more than a billion people to improve their hygiene habits (sanitation)
⦁ Bring safe drinking water to 500 million people (water)
⦁ By 2020 double the proportion of products that meet the highest nutritional standards based on recognised dietary guidelines (nutrition)
⦁ Reducing Environmental Impact: Here Unilever’s goal was to halve the environmental footprint of their products across the entire lifecycle by 2020. The focus on the entire lifecycle is a major challenge as 61% of Unilever’s carbon footprint results from the consumer use and disposal process. Innovation and technology will be key if Unilever is to reach its targets. Four areas were targeted:
⦁ Greenhouse gases: many Unilever products (soap, shampoo, laundry detergent) are used with heated water and are thus energy intensive.
⦁ Water: is required in large quantities in the agricultural supply chain and in the manufacture and use of many products
⦁ Waste: Unilever purchases over 2 million tonnes of packaging a year. The target was to halve the waste associated with product disposal by 2020
⦁ Sustainable agricultural sourcing: about half of Unilever’s raw materials come from agriculture and forestry. By 2020 Unilever aimed to source 100% of its agricultural raw materials sustainably with deforestation a main focus. In addition Unilever aimed to create better livelihoods by linking with more than 500,000 smallholder farmers and small-scale distributors/retailers into its supply chain
Unilever supported these ‘macro’ targets with more specific targets in each area – in total having 58 measurable goals throughout the supply chain.
(For further detail, reference The Unilever Sustainable Living Plan)
Each of the main elements of the Plan is led by a senior executive who is accountable for achieving the goals by their target dates. The Unilever Leadership Executive Committee for Corporate Responsibility and Reputation, led by the CEO, reviews progress against the Plan each quarter. The Leadership Executive are supported by the USLP Steering Team comprised of 65 ‘sustainability champions’ drawn from every function, category and region. The CEO and an increasing number of managers have a part of their compensation linked to Plan progress targets.
Polman outlined that: “The Unilever Sustainable Living Plan is our response to the need for real and radical change ... In essence we are building a new business model for sustainable, equitable, long term growth... that is hard-wired into the top-line and bottom line of our business...
⦁ Firstly, it accelerates growth (a small but growing number of consumers want the reassurance that the products they buy are ethically and responsibly sourced (Note: in 2016 Unilever research indicated 54% of consumers want to buy more sustainably)
⦁ Secondly, it accelerates innovation and sets the bar higher for R&D
⦁ Thirdly, the Sustainable Living Plan energises our employees (the best people want to work for a company which is not just delivering a great economic performance but is also doing the right things socially and environmentally)
⦁ Fourthly, retailers want it
⦁ Finally, the Sustainable Living Plan is helping to drive down our costs. Managing our business sustainably reduces energy bills, minimises packaging and drives out waste”
Source: Paul Polman, Sustainable Growth–building new, long term business models. Geneva Forum for Sustainable Investment, 8 June 2012
Unilever had a simple purpose: “to make sustainable living commonplace”. The USLP is the key differentiator.
With good progress being made on most targets Unilever broadened the scope of the USLP with an ‘Enhancing Livelihoods’ programme. The three new commitments to be achieved by Unilever and its suppliers by 2020 were:
⦁ Only source from suppliers who adopt the Responsible Sourcing Policy
⦁ Opportunities for women – gender balance – empower 5 million women
⦁ Inclusive Business – improve the livelihoods of 5.5 million smallholder farmers and small distributors/retailers
In addition Unilever deepened its efforts in three areas:
⦁ Champion sustainable agriculture (51% of agricultural raw materials were being sustainably sourced in 2016)
⦁ Work to achieve zero net deforestation in the supply chain for four commodities (palm oil, soy, paper & board and beef) and tea by 2020
⦁ Improve hygiene through hand washing, safe drinking water and sanitation.
Unilever Foundation
To further support the USLP the Unilever Foundation was launched in 2012 with a mission “To improve the quality of life through the provision of hygiene, sanitation, access to clean drinking water, basic nutrition and enhancing self-esteem.”
The Foundations approach is based on six pillars:
⦁ Global Partnerships: support the programmes of Oxfam, psi, Save the Children, Unicef, WFP
⦁ Local Programme Support – partner with local agencies
⦁ Connecting with Consumers: Unilever’s brands run campaigns to raise awareness and funds for partners
⦁ Advocacy – participate in stakeholder dialogues to promote change
⦁ Disaster and Emergency Relief: provide basic nutrition, health & hygiene, clean drinking water and sanitation
⦁ Employee Engagement: creating opportunities for Unilever’s 173,000 staff to give back to society. The Unilever ‘Heroes Programme’ recognises those that go the extra mile.
Human Rights Report
Polman had joined the board of the UN Global Compact (an initiative designed to commit global business to the environment, human rights and anti-corruption) and was also one of the UN’s 27 global leaders (the only corporate representative) to advise on the post 2015 Development Agenda. Polman decided that the USLP needed to strengthen its social agenda. He appointed Marcella Manubens in a new position VP of Social Impact with the brief to implement the UN Guiding Principles on Business and Human Rights (2011). The Enhancing Livelihoods pillar of USLP was strengthened with three new commitments: ‘Fairness in the Workplace’, to ‘Advance Opportunities for Women’ and to ‘Develop Inclusive Business’. USLP had been expanded from the original three pillars to nine. A Human Rights Report was published in 2015. Unilever was the first company to adopt the guidelines reporting in eight areas: discrimination, forced labour, working hours, fair wages, harassment, health and safety, freedom of association and land rights.
USLP Valuation Methodology
Unilever finance created a new valuation methodology toolkit and KPI’s to assess the impact of the USLP in 2014. The methodology enables managers of categories, products and brands to assess their performance on six key USLP commitments: health and hygiene, nutrition, greenhouse gases, water, waste and sustainable sourcing. Sabina Nealon, Unilever’s Group Finance Director of Sustainability outlined: “Don’t under-estimate the problems in identifying and developing the data sources needed to monitor and manage sustainability projects”... but once established they are applied with “the same rigour as for financial information”. The 2016 USLP Report also outlined a new framework which outlines how sustainability contributes to success in four areas: More Growth, Lower Costs, Less Risk and More Trust . The Growth component of the framework showed that “Sustainable Living brands” accounted for nearly half our growth in 2015 and grew faster than the rest of the business”.
Progress Against The Unilever Sustainable Living Plan
Unilever report on progress against the USLP annually, most recently for 2016.
A key sustainability target of sending zero non-hazardous waste to landfill from its global network of 242 factories in 67 countries had been achieved in 2014. In February 2016 nearly 400 sites (such as distribution centres, warehouses) had also achieved zero non-hazardous waste to landfill. Eliminating waste by the Four R approach (Reduce waste at source; Reuse, Recover, Recycle) had resulted in more than €250m of cost avoidance since 2008. In October 2015 Unilever announced that nine months after achieving zero hazardous waste to landfill across its global network of 242 factories (a global first) it had become a zero landfill company in Europe (63 facilities) and is working towards becoming a zero waste company globally by year end and is also continuing to work towards a zero waste value chain. Once the milestone had been reached Unilever held an event in London to outline how they had achieved this with competitors present “... companies can both learn from and challenge each other. Ultimately we can’t have a healthy business in an unhealthy world, so we need to work together” (CSO P.L. Sigismodi). Other USLP progress included:
⦁ 51% of agricultural raw materials were being sustainably sourced
⦁ A 96% reduction in total waste per tonne in production since 2008
⦁ A 43% reduction in CO2 from energy and a 37% reduction in water per tonne in production since 2008
Whilst Unilever had made good progress on CO2 and water reduction in what it controlled the USLP was significantly off target in these areas – Unilever was not making inroads into how consumers used their products. Consumers accounted for 85% of water use and consumption had only reduced by 7% since 2010. Whilst in greenhouse gases consumers accounted for 61% of use and emissions had increased by 8% since 2010.
% of Greenhouse Gas Footprint in 2015
29% 2% 2% 5% 61% 1%
Raw Materials Manufacturing Transport Retail Consumer Disposal
Unilever would need to find a way to connect to and influence consumer behaviour. With ‘large scale transformation’ needed in areas outside of Unilever’s direct control the time frame to reduce greenhouse impact was extended from 2020 to 2030 and Unilever “set a bold new target to be carbon-positive in our operations by 2030. Our aim is that 100% of our energy will come from renewable sources and produce more renewable energy than we consume”.
Project Sunlight
Project Sunlight’s aims were:
⦁ “To motivate millions of people to adopt more sustainable lifestyles ... to galvanise and build momentum behind a movement which is already happening” (the Project builds on the USLP by targeting change in consumer behaviour).
The first stage of the Project “invites people to take three simple actions:
⦁ SEE a brighter future
(watch the video: ⦁ www.youtube.com/ulprojectsunlight. The video shows expectant parents from around the world share their fears of what the future holds for their unborn children).
⦁ ACT by doing small things which when added together contribute to a better society and environment.
⦁ Ultimately, JOIN the movement to play their part in building a brighter future”.
Project Sunlight’s online hub – www.projectsunlight.com “brings together the social mission stories of Unilever’s brands across the world, and invites consumers to get involved in doing small things that help their families.” The hub is supported by a London “command centre” of 40 staff drawn from digital, creative, PR teams and media agencies. The “mission control room will also be used for other major product marketing campaigns ... to help achieve Unilever’s ambitions of “getting to the future first”. The next “future first” area Unilever is exploring is the idea of the “internet of things” ... how it can make its products more connected with devices such as fridges and washing machines”.
⦁ Source: Marketing Week 22.11.2013
The second phase of Project Sunlight was launched on May 15th 2014 to coincide with International Families Day. The theme moved onto the changes children want to see to boost sustainability. The launch film begins with: “kids all over the world are dreaming of a brighter future” and finishes with: “with small actions together we can make their dreams come true”.
The third phase of Project Sunlight: ‘Bright Future Speeches’ was launched on U.S. T.V. in November 2014. The campaign, Unilever’s first in corporate branding, starts with speeches from Martin Luther King, “I had a dream” and Gandhi, “Be the change you want to see in the world today” before outlining that today we have new challenges and need new speeches. The series of ads then shows eight young people’s stories and visions for a brighter future.
Unilever’s initiatives were being widely recognised:
⦁ Sector leadership in the Dow Jones Sustainability Index for Food, Beverages & Tobacco for 15 years. In 2016 Unilever was switched to the ‘Personal Products Dow Jones Sustainability Index’ where it was named the sector leader overall with a score of 92 out of a 100, with leadership in 14 of the 22 evaluation criteria
⦁ Oxfam’s Behind the Brands Scorecard most sustainable food and beverage company
⦁ Number one company in the Globescan Sustainability Index compiled by leading experts around the world in the sector for the fifth year running
⦁ RobecoSAM 2015 Gold Class distinction for excellent sustainability performance
⦁ Top sustainability leader in Tomorrow’s Value Ratings
⦁ FTSE4 Good Index highest environmental score of 5
⦁ Ranking joint first in the sector for corporate action on tackling deforestation by CDP
⦁ For several years Fortune magazine listed Unilever among the World’s Most Admired Consumer Food Products companies giving it a perfect score of 100 in its ranking of workplace equality each year
Moreover Unilever had become the FMCG Employer of Choice in 34 countries in 2016 (versus just 3 in 2009). Internally 75% of employees felt that they could contribute to the USLP in their roles, and in 2016 engagement in the employee population moved up to 91%.
Blueprint
Unilever was a member of Blueprint (with a link on Unilever.com). Blueprint has two core beliefs:
⦁ “That business has the ability to do tremendous good and mitigate harm to society”
⦁ “That the values of society should shape the values of business and those within business”
Blueprint outlines the principles of a ‘Purpose driven business’ in a framework ‘to guide decision-making’. It promotes its ‘movement’ and ‘call to action’ with conferences, publications etc.
Key Section Sources:
⦁ The Sustainable Living Plan – Unilever.com (Annual Progress Reports)
⦁ J. Mees-Buss and C.Welch, ‘Taming a Wicked Problem? Unilever’s Interpretations of Corporate Social Responsibility, 2000-2012’
⦁ International Business and Sustainable Development Progress in International Business Research, Volume 8, 265-291, 2014
⦁ P. Mirvis, ‘Unilever’s Drive for Sustainability and CSR – Changing the Game’
⦁ Organising for Sustainable Effectiveness, Volume 1, 4-72, 2011
www.blueprintforbusiness.org
⦁ C. Bartlett, Unilever’s New Global Strategy: Competing through Sustainability, Case 9-916-414, 2015
⦁ A. Hoffman and N. Gold, Unilever: Making Sustainable Living Commonplace, Case 316-0325-1,2016
Virtuous Circle of Growth
The Compass Strategy and Unilever’s Sustainable Living Plan were the cornerstones of transforming Unilever to a sustainable growth company. Together they represented a ‘Virtuous Circle of Growth’:
The Unilever 2012 annual report outlined that:
⦁ Profitable Volume Growth: stronger brands and innovation drive brand equity and customer reach
⦁ Cost Leverage + Efficiency: reduces cost per unit improving profitability and allows investment in the business
⦁ Innovation + Marketing Investment: new and improved products are the result of investment in R&D and, together with effective marketing, brand equity is strengthened and this results in profitable volume growth, self perpetuating the ‘Virtuous Circle of Growth’
Unilever’s market development initiatives to drive growth included:
⦁ ‘Reaching-up’: By 2025 the world population was projected to be 8 billion with 4 billion part of the consuming class. McKinsey described this shift as “possibly the biggest opportunity in the history of capitalism”. Unilever’s aim was to have more premium products in faster growing, higher margin segments and channels. Personal Care had 30% of its sales from products at a 120% price premium to the market; the core range was being moved up-market (i.e.: Dove Visible body washes) and recent acquisitions had formed a Prestige Portfolio in skincare (stake in IOMA, acquisition of REN, Kate Somerville, Dermalogica, Murad; in haircare Living Proof and direct to customer channels Dollar Share Club initially in male grooming). Refreshments moved into the premium segments with the acquisitions of T2 in tea, Talenti and GROM in ice cream to have 30% of turnover from premium brands. Home Care moved into the premium segments by taking a stake in Qinyan Group (water purification), acquiring Blueair (air purification) and Seventh Generation (plant based cleaning products). Foods moved into the premium segment by acquiring Sir Kensington’s (organic condiments).
⦁ ‘Reaching-down’: India, then Africa and other Emerging Markets had adopted the ‘low unit price/small-unit-pack’ concept (LUP/SUP). Products like shampoo, toothpaste, washing detergent, margarine, cooking fat etc. were sold in small packs to reach lower income groups, the ‘Base of the Pyramid’. To reach consumers in rural India HUL started the direct to consumer scheme known as ‘Shakti’ in 2000. Initially the scheme employed only women who were referred to as ‘ammas’ to directly sell Unilever products to rural areas. With the scheme’s success it was rolled out to other countries such as Pakistan, Kenya and Nigeria. Unilever also developed ‘value products’ to appeal to the more price sensitive consumer. In Greece for example Unilever introduced eight value for money Elais (the goddess of olive oil) food products with great success.
⦁ ‘Reaching-wide’: taking brands into ‘White Spaces’: emerging segments (i.e.: male grooming), new channels like e-commerce and new geographies. (Whilst Unilever had made great strides in globalising core brands there remained great potential to broaden the footprint: Dove and Axe were sold in more than 70 countries; Cif in more than 60; Clear and Magnum in more than 40 and Knorr Jelly Bouillon in almost 40.) Unilever’s Operating Companies (OpCos) focused on core brands, geographies, consumer segments and channels. Marginal non-core areas hence were not focused on and lacked support and resource. To better handle these ‘White Space’ opportunities Unilever International (UI) was set up in Singapore in 2012 by merging the OpCos export units. As an alternative go-to-market organisation UL was set up to build “a big business of smalls” (Umesh Shah head of UI). UI had a lean staff, its own operating systems and outsourced supply chain.
By 2015 UI had doubled the turnover it inherited in 2012, and in 2016 reached nearly a €1 billion turnover, handling over a hundred brands, thousands of SKU’s to over a hundred countries through hundreds of distributors – OpCos were not designed for this type of complexity.
UL set the target to double turnover again by 2020 focusing on four White Space areas:
Geographies: enter geographies where Unilever does not have a presence, grow presence in smaller markets (i.e. the Pacific Islands)
Consumers: target new consumer groups (i.e.: immigrants, religious, ethnic groups)
Channels: establish presence in untapped channels (i.e.: airports)
Brands: currently not available in market
Once UI had seeded a brand and brought it to scale an OpCo could take it back to the main organisation – but only if it was willing to support the brand with more resource than UI could.
Key Section Sources:
‘Unilever in Africa: Targeting the Bottom of the Pyramid’, IBS Case 516-0243-1, 2016
‘Unilever: Opportunities in the White Spaces’, IMD Case 7-1804, 2016
Product Category Re-organisation
In June 2011 Unilever announced a reorganisation which would be operational before year end: Unilever was to move from 11 product categories to 4:
⦁ Personal Care
⦁ Home Care
⦁ Food
⦁ Refreshment (Ice Cream and Beverages – mainly tea)
The key decision had been made to aim to grow all of the 4 categories ahead of the market whilst simultaneously improving margin – top line and bottom line consistent improvement.
The categories were seen as having different dynamics:
⦁ Personal and Home Care had big global markets with common habits. Many products started early in the income spectrum. Both categories had strong positions in the developing and emerging countries which had significant growth potential (in BRIC washing machines were expected to grow by 230% between 2011 and 2020). In Personal Care innovation and marketing were seen as key drivers of success.
⦁ Food: here Unilever’s footprint was primarily in the mature developed world. Whilst Unilever had key power brands like Knorr and Hellmann’s, most food categories were smaller and were not as transferable to Emerging Markets.
⦁ Refreshment: Ice Cream has a large global market for both in-home and out-of-home impulse. Growth would come primarily from emerging countries (in the BRIC fridge freezer ownership was forecast to increase by 190% between 2011 and 2020). Ice Cream had a unique distribution system which was not fully developed in many countries. The global tea market had high growth in areas such as Ready to Drink tea.
Categories are responsible for brand development, R&D and innovation and accountable for medium – long term share, brand health, innovation. A 20-page booklet defined the powers of the categories and detailed how decisions which had previously been the responsibility of the business would be taken. Unilever saw that consolidation had the potential to speed decision-making; share best practice more effectively and create greater scale for initiatives in areas such as innovation and sustainability.
Unilever also consolidated from 22 geographic clusters to eight (North America; Latin America; Europe (Central and Eastern Europe); North Africa, Middle East and Turkey; Russia, Ukraine, Belarus; Africa (Central and South Africa); North Asia – China and North-East Asia; S.E. Asia/Australasia; South Asia) helping to unlock regional economies of scale and reducing communications complexity between the categories and regions (4 categories, 8 regions, 32 links; versus 11 product categories and 22 regions, 242 links). Regions were responsible for managing the business, customer management, brand deployment and accountable for short-term share, growth, profit and cashflow. (Regions hence had lost much autonomy and had moved from being like business units to regional sales and merchandising teams.)
Harish Manwani was appointed to the new post of Chief Operating Officer in June 2011 with responsibility over all markets. Manwani’s brief was to continue to simplify, improve efficiency and accelerate the speed with which Unilever introduced innovations globally. Categories and Regions were supported by global functions in Finance, HR, IT and Supply Chain.
Unilever Performance 2012-2017
When Polman became CEO in 2009 Unilever’s turnover was €39.8billion. The target to double turnover to €80billion seemed to be a very long term aim. However, by 2012 Unilever’s turnover had grown to €51.3billion (+ €11.5billion, + 29%). With good progress being made some argued that the target was realistic by 2020, especially if Unilever returned to its historic acquisition growth route. However, as Polman outlines: it’s a ‘Volatile, Uncertain, Complex, Ambiguous’ (VUCA) world. Severe currency headwinds, depressed Developed Markets and weakening in Emerging Markets stalled progress. Emerging Market turnover had risen by double digits for nine quarters until the third quarter of 2013 which had a marked slow down to 3-3.5%. Many Developed Markets were in negative territory. The Finance Director Jean-Marc Huet said: “We expected a slow down but, I must admit, not to this extent”.
Unilever Performance 2012-2016
(Detailed quarterly results for 2012–2015 & commentary are provided in Appendix I)
€billion
2012 2013 2014 2015 2016
Turnover 51,324 49,797 48,436 53,272 52, 713
Operating Profit 6,977 7,517 7,980 7,515 7,801
Operating Profit (%) 13.6 15.1 16.5 14.1 14.8
Free Cashflow 4,333 3,856 3,100 4,796 4,802
Dividend Paid 2,699 2,993 3,189 3,331 3,609
Capital Expenditure (%) 4.2 4.1 4.2 3.9 3.6
R&D/Turnover (%) 2.0 2.1 2.0 1.9 1.7
Marketing/Turnover (%) 14.2 14.8 14.8 15.0 14.5
Staff numbers (‘000) 172 174 173 171 169
Sales per employee (€’000) 298 286 280 312 312
Acquisitions 133 142 313 1,897 1,731
Disposals 246 1,053 1,741 199 30
Note: Unilever Charts provide a 10 year financial history
https://www.unilever.com/Images/charts_2005-2015_ar14_tcm244-416973_en.pdf
Whilst turnover had fallen between 2012-2014 core operating margin (excludes impact of acquisitions and disposals) continued to edge upwards from 13.8% in 2012 to 14.5% in 2014. Unilever held capital expenditure above €2billion over the period, ahead of the depreciation charge and significantly ahead of historical levels (2.1% - 2.7% of turnover between 2005-2008). R&D was held at around a €1billion and Marketing & Brand Investment at over €7billion had been steadily increasing.
In the December 2014 Investor presentations Polman outlined that the environment was as challenging as he had seen. Unilever was however much stronger than it had been five years previously to face the challenges: Unilever had stronger brands; a stronger mind-set of growth; had made sharper choices on what is core; had focused on fewer ‘big bets’; had a stronger performance culture.
On the opportunity upside Polman reminded the audience of Unilever’s Emerging Markets footprint; the opportunity to move into new geographies (especially Africa); leverage core brands into new geographies and adjacencies (‘White Spaces’); Premiumisation; and Unilever still had significant opportunity to take out cost and become more agile. Top and bottom line growth remained the priority. Unilever’s long term priorities remained unchanged: “Profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow”. Despite a downturn in turnover, Unilever had grown market share in every year between 2009 - 2015.
Commenting on full year 2014 results, Polman outlined: “In today’s low growth environment we are driving efficiency and simplification initiatives to make the organisation more agile and more capable of responding to the unexpected”. (Appendix VI outlines four key initiatives taken by Unilever to drive efficiency, simplification and make the organisation more agile over 2014/15: ‘Smart Complexity’ (to reduce stock keeping units); ‘Project Half for Growth’ (Half the time, Half the spend, Half the hassle) was launched in 2013 and achieved €500 million cost savings by 2015; ‘Low Cost Business Models’ launched in 2013 were a ‘Deep Dive’ to identify opportunities to enhance margins. ‘Agile Workplaces’ was an initiative to let people get on and do what adds value to the business.
In the December 2015 results event three new initiatives were outlined: a Zero-Based Budgeting (ZBB) initiative was announced in the cost categories of overhead and marketing (excluding salaries); savings were expected to start to materialise in the second half of 2016 to eventually take out €1 billion of cost by 2018. Related to ZBB was a ‘Functional Models’ initiative to make the organisation more agile, resilient and customer and consumer focused . Led by an ‘Organisational Transformational Office’ the aims of the ‘Functional Models’ initiative were to be ‘more global’ (faster scaling and roll-out of programmes); ‘more local’ (less resource and layers in regional hubs – leading to lower cost) and increased accountability and responsibility locally (leading to faster decision making). ‘Functional Models’ was subsequently renamed ‘Connected 4 Growth’. Also in 2015 Unilever were working with the Boston Consultancy Group to introduce ‘Net Revenue Management’ (NRM) which built on the earlier Unilever initiative of ‘Max the Mix’ (Appendix IV). In December 2015 Polman outlined that the programme was taking Unilever back to basics: right pack, right channel, right price (i.e. drug stores, mass market grocery retailers, discounters all needed a different approach). NRM carried out detailed analysis into consumer perceptions of value and price points that trigger purchase to be better able to align price, pack size, placement and availability. By the end of 2016 NRM had been applied to 50% of Unilever’s turnover.
“The Unilever Sustainable Living Plan continues to underpin all aspects of our business model from the way we source materials through to our product innovations. Our activities enhance our reputation and corporate brand. They are well recognised and an important way of reducing cost and risk in increasingly well-informed and challenging societies.”
2015 Quarterly and Full Year Results
First Second Third Fourth Full Year
Turnover €b
⦁ Sales growth (%)
⦁ Volume growth (%)
⦁ Pricing ( %) 12.8
2.8
0.9
1.9 14.2
2.9
1.3
1.5 13.4
5.7
4.1
1.5 12.9
4.9
1.9
2.9 53.3
4.1
2.1
1.9
Sales Growth (%)
Category
Personal Care
Home Care
Refreshment
Food
2.7
3.1
2.5
2.9
3.3
5.9
2.9
0.0
6.2
6.6
8.5
1.6
4.1
8.0
8.8
1.7
4.1
5.9
5.4
1.5
Region
Asia/AMET/RUB
The Americas
Europe
3.3
4.9
(0.4)
3.4
5.7
0.9)
5.3
9.4
2.0
6.3
6.4
0.7
4.6
6.6
0.3
In 2015 Unilever’s sales turnover increased by 10% to €53.3 billion (+4.1% sales, +5.9% currency impact). Free cashflow had moved forward strongly from €3.1 billion in 2014 to €4.8 billion in 2015 (€0.7 billion improvement in working capital management and no negative impact of previous years €0.8 billion tax arising on business disposals).
On the finance side Unilever issued a 7 year €750million 0.5% fixed rate bond (closed February 2015) for ‘general corporate purposes’. (Money for almost nothing!) Then in May and June further bonds of €1.25billion, €750million and €500million were issued at a fixed rate of 1%. In July 2015 a U.S.$500million July 2020 bond at 2.1% and a U.S. 2025 bond at 3.1% were issued. In April 2016 bonds with 4,8,12 years maturities were issued (0.06%, 0.67% and 1.17% yields). Unilever’s interest rate on debt had fallen from 3.5% in 2014 to 3% in 2015.
During 2013-2015 Unilever increased its share of overseas subsidiaries and trusts (refer to Appendix II for detail). In 2013 Unilever acquired 24.92% of the issued shares in its Pakistan subsidiary it did not already own for €400 million; in 2013 Unilever increased its holding in Hindustan Unilever from 52.48% to 67.26% at a cost of €2.515 billion; in 2014 William Lever trust rights were purchased for £715 million; in 2015 Unilever increased its equity stake in Unilever Nigeria from 50.04% to 58.3%.
2016 Quarterly and Full Year Results
First Second Third Fourth Full Year
Turnover €b
⦁ Sales growth (%)
⦁ Volume growth (%)
⦁ Pricing ( %) 12.5
4.7
2.6
2.0 13.7
4.7
1.8
2.8 13.4
3.2
(0.4)
3.6 13.0
2.2
(0.4)
2.6 52.7
3.7
0.9
2.8
Sales Growth (%)
Category
Personal Care
Home Care
Refreshment
Food
5.8
7.8
3.8
1.9
5.6
6.0
4.2
2.7
5.2
2.5
2.8
2.9
5.2
2.5
1.9
3.4
4.2
4.9
3.5
2.1
Region
Asia/AMET/RUB
The Americas
Europe
5.0
8.5
(0.6)
5.9
6.4
0.8
3.9
5.8
(1.1)
3.5
3.7
(2.3)
4.6
6.0
(0.7)
2016 First Quarter Results
Underlying sales growth was 4.7% in the first quarter of 2016 (2.6% volume and 2.0% pricing – Note: when LATAM is taken out pricing was negative overall. Commodity price deflation, retail price competition, the rise of discounters were pushing down prices in most Developed Markets); all four categories gained market share; but sales turnover declined by (2.0%) to €12.5 billion due to a (7.1%) currency impact. Emerging Market sales growth of 8.3% compensated for Developed Markets growth of 0.3% (European volume growth being offset by price deflation). As Polman outlined, we live in a ‘VUCA’ world. Currency impact had hit Unilever (both positive and negative) and its key competitors (P&G, Nestle, Colgate, RB – detail in Appendix IX) in a major way. If current exchange rates held as they are the full year impact on Unilever would be (5-6%) – (Pitkethly).
2016 Second Quarter and Half Year Results
Underlying sales growth was again 4.7% in the second quarter of 2016 (1.8% volume, 2.8% price). Geographically sales growth remained modest in Developed Markets at 0.7% (1.4% volume, (0.7%) price) versus 7.7% in Emerging Markets (2.2% volume, 5.4% price); all four categories gained market share but sales turnover declined by (3.2%) to €13.7 billion due to a (8.1%) currency impact.
For the half year underlying sales growth of 4.7% after a negative currency impact of (7.6%) resulted in (2.6%) decline in sales turnover to €26.3 billion. Polman outlined that Unilever is facing “slowing consumer demand with global growth “downgraded again” by the IMF. “It will be tougher over the second half than the first half.”
The European Central bank announced that it would expand its quantitative easing programme by including corporate bonds. In April Unilever issued €1.5 billion of bonds (€300m 4 year maturity at 0.08% €500m 8 year maturity at 0.67%, €700m 12 year maturity at 1.17%).
2016 Third Quarter Results
Underlying sales growth was 3.2% in the third quarter ((0.4%) volume, 3.6% price). Developed Markets at 0% (0.4% volume, (0.4%) price) and Emerging Markets 5.6% ((0.9%) volume, 6.6% price). Adverse exchange rate movements of (3.4%) meant that sales turnover of €13.4 billion was down by (0.1%) versus a strong comparator in 2015. For the nine months sales turnover was €39.7 billion, (1.8%) lower than 2015, held back by a (6.2%) exchange rate impact. Polman observed: “With markets soft and volatile we have continued to transform our business at an accelerated pace. We are progressing well with fast implementation of our change programmes: Net Revenue Management, Zero Based Budgeting and ‘Connected 4 Growth’, making our organisation more agile and responsive to market needs. (see Appendix VI for detail). These actions keep us on track for another year of volume growth ahead of our markets, steady improvement in core operating margin and strong cash flow”.
On the 28th July Unilever issued bonds for US$1.25 billion ($550m at 1.375% with 5 year maturity, $700m at 2% with 10 year maturity) followed by a €300m bond with 0% coupon in November.
2016 Fourth Quarter
In the fourth quarter sales growth was 2.2%, but this was due to price increases of 2.6%, volume was down by (0.4%). In Europe price deflation, retailer power and competitive intensity resulted in an overall decline of (2.3%) ((2.5%) volume, 0.2% price). North America was flat at 0.0% with Volume growth of 2.5% being offset by price reductions of (2.4%) reflecting an intense promotional/competitive environment. Overall Emerging Markets were up 4.6% due to price increases of 5.1%, volume was down by (0.5%). Whilst several countries, like the Philippines had performed well with double digit growth, others experienced major headwinds (i.e.: Brazil, India etc.) with currency devaluations, high inflation, reduced consumer confidence. Performance was also held back by a negative exchange rate impact of (1.5%) for the quarter, (5.1%) for the full year.
Emerging Markets had been Unilever’s ‘growth engine’ for many years, with volumes down and adverse exchange rate movements Unilever’s momentum stalled.
2016 Full Year Results
After volume gains of 2.2% in the first half year volume had declined in both of the following quarters by (0.4%). Polman warned of “challenging’ conditions for the first half of 2017. Unilever shares reacted by falling 5%; under-performance versus the FTSE 100 had been 11% over the past 12 months.
Unilever’s exposure to Emerging Markets helped growth in good times but India and Brazil, Unilever’s second and third largest markets, accounting for 14% of group turnover, were declining in volume by high single digits (Unilever was beating the market but still declining by mid-single digits).
Authors Note: In India the governments demonetisation drive to clamp down on the black market had withdrawn the Rs. 500 and Rs. 1,000 bank notes (86% of the total) which had held back Personal Care especially. In Brazil unemployment increased to 12% and the economy continued to contract reducing spending, especially on ice cream, and encouraging consumers to trade down.
With most of Europe suffering from price deflation, increasingly price-conscious consumers and North America (15% of Unilever’s turnover) seeing price reductions of (2.4%) in the fourth quarter Unilever did face as Polman outlined “challenging” conditions.
Unilever had grown ahead of its markets in every year since 2009, 60% of brands were winning share, core operating margin had increased 50 bps from 14.8% to 15.3%, free cash flow had marginally increased to €4.8 billion, but overall growth of 3.7% for the year (2.8% price, 0.9% volume) were more than off-set by an adverse currency movements of (5.1%) and the outlook was “challenging”. The 4G Growth Model seemed stalled.
First Quarter 2017
First quarter turnover was up 6.1% at €13.3 billion. Growth was driven by pricing 3.0% whilst volume declined (0.1%) – the third consecutive quarter of volume decline, currency tailwinds added 2.4% and acquisitions 0.7%. The markets in which Unilever operates in grew in value terms around 2% but had negative volumes of (0-1%), hence Unilever had once more grown ahead of the market. Unilever maintained its annual aim to grow ahead of the markets in the 3-5% range.
Sales of Spreads had declined by (5.1%) resulting in a volume decline of (2.1%) in the Foods category, excluding Spreads the Food category had grown by 1.7%. The other categories had moved forward more strongly in turnover: Refreshments 5.4%, Home Care 4.1% and Personal Care 3.1%.
On a regional basis Developed Markets with turnover of €5.4 billion declined by (1.5%) with both price (0.3%) and volume (1.2%) down. Europe and North America had weak consumer demand in a challenging retail environment. Emerging Markets with turnover of €7.9 billion grew by 6.1% with volume up 0.8% and price up 5.3%. Latin America was held back by volume declines of (5-6%) in Unilever’s largest market Brazil, most of the rest of Latin America saw double digit sales growth driven by price increases. Asia/AMET/RUB with turnover of €5.9 billion was the only area of volume growth with strong performance in Australia and Turkey, modest growth in China and growth in Africa and Russia entirely due to price increases.
First Quarter 2017 Regional Performance
Turnover
€ Billion Sales
Growth (%) Volume
Growth (%) Price
Growth (%)
Asia/AMET/RUB
Latin America
North America
Europe 5.9
2.1
2.3
3.0 6.9
3.5
(0.9)
(2.0) 2.2
(3.3)
(1.1)
(1.5) 4.6
7.1
0.2
(0.5)
Unilever Total 13.3 2.9 (0.1) 3.0
On the finance side Unilever issued €1.2 billion bonds (€600m 0.375% Feb 2023, €600m 1.0% Feb 2027) and US$3.15 billion bonds ($800m 1.8% May 2020, $850m 2.2% May 2022, $500m 2.6% May 2024, $1 billion 2.9% May 2027). As outlined after the Review quarterly dividend was raised 12% to €0.3585.
Exchange Rates, Inflation, Deflation
Exchange rate headwinds were holding back Unilever’s in most of the recent results. The strong US$ had pushed up the price of many commodities and high inflation, especially in Latin American countries, and weakened currencies (i.e. Sterling after the vote to ‘Brexit’) all pointed to price increases. The Net Revenue Management and ZBB initiatives were key in maintaining the price and cost side of the equation to move ratios forward in this volatile environment.
In ‘Pricing’ Unilever were seen to adopt a ‘Rocket and Feather approach’ – when costs of inputs climb, the price charged goes up like a ‘rocket’; when input costs fall Unilever does it’s best to avoid reducing prices, and they only fall like a ‘feather’. But securing price increases in Developed Markets, against concentrated retailers, was becoming more challenging; perhaps the October 2016 case of Unilever vs. Tesco in the U.K. best illustrates the difficulty – ‘stand-off’.
With European price deflation since 2014 and the advance of discounters like ALDI large grocers had reduced price to protect share. TESCO, the UK market leader, with almost 30% share, was achieving profit margins of less than 2% in this hostile environment. Tesco had recruited Dave Lewis, head of Unilever’s Personal Care category to seek to turnaround Tesco’s fortunes in 2014 (known as ‘Drastic Dave’ because of his reputation for ‘cost cutting, being fast paced, knocking people over’).
Polman and Unilever were staunch supporters of the UK ‘Remain’ campaign warning that Brexit would lead to price increases for its products – but Brexit it was, and Sterling fell by 15% introducing commodity input cost inflation priced in USA $. Moreover certain commodities, like palm oil had increased in cost by 70% since the start of the year (and Unilever was the world’s largest user of palm oil).
To respond to Sterling’s exchange rate weakening, commodity cost inflation pressures in some commodities Unilever reportedly asked Tesco, and the ‘Big 4’ UK supermarkets (Tesco, Sainsbury, Asda, Morrisons) for a 10% across the board price increase. Unilever was in a good position to pass on such increases in the UK, it was a clear market leader in ice cream, margarine, mayonnaise etc. and had iconic local brands like Marmite (85% share) and Pot Noodle. It was the ‘800lb gorilla’. Moreover Unilever worked closely with retailers like Tesco sharing data to improve the shopper experience in an attempt to move the market away from the price-based competition of the discounters like ALDI.
The Big 4 asked to go through Unilever’s portfolio of brands, to see the actual cost increases. Unilever declined the request. When Tesco did not accept the price increase Unilever de-listed 200 products to Tesco; in return Tesco delisted the whole of Unilever’s range from its on-line site Tesco.com. Twitter picked up on the ‘stand-off’. A campaign for people to stop buying Unilever products (hashtag Boycott Unilever) gained momentum – Tesco was becoming ‘the People’s Champion’.
Even though the U.K. was only 5% of Unilever’s sales revenue, Unilever’s share price weakened and market capitalisation declined by £3 billion. Similar price negotiation problems were being publicised with Musgrove Group of Ireland (SuperValue and Centra store chains) and there was a wider concern, would Unilever be able to push cost increases through in a historically deflationary European environment and inflationary environment elsewhere (especially Latin America)?
The Tesco ‘stand-off’ was resolved with a new supply agreement within 48 hours, the terms of the ‘settlement’ were not disclosed. Notwithstanding its brand power in the portfolio it was clear Unilever could not dictate to major retailers in the Developed Markets.
Strategic Role for the Categories
The 2014/15/16 Annual Reports outlined the following strategic roles for the four categories:
⦁ Personal Care: focus on accessing the faster growing premium segments, e-commerce and specialist drug stores. (In subsequent presentations: ‘Continue growth of the core whilst building premium, prestige’)
⦁ Home Care: with 80% of sales in Emerging Markets to grow ahead of the market and increase operating margin: “a clear target to double core operating margin over the coming years” (no target date indicated). (In subsequent presentations: ‘margin to be double digit’, step up profitability and scale household care’)
⦁ Foods: accelerate growth whilst maintaining above average cash and profit (in subsequent presentations: ‘Drive volume growth, maintain strong cash flow, stabilise Spreads’)
⦁ Refreshments: to contribute to growth and improve profitability (in subsequent presentations: for tea: ‘grow faster in tea’, ‘growth into herbal, green, fruit teas and expand T2 stores’. For ice cream: ‘grow cashflow’, ‘stress premium: Magnum, Ben & Jerry’s, Talenti and Grom’, ‘grow return on capital investment’)
Portfolio Performance by Category
(Note: Refer to Unilever Charts for a 10 year history)
https://www.unilever.com/Images/charts_2005-2015_ar14_tcm244-416973_en.pdf
2005 2010 2012 2014 2015 2016
Turnover €b
38.4 44.3 51.3 48.4 53.3 52.7
Category % of Turnover
Personal Care
Foods
Refreshment
Home Care
27
35
20
18
31
32
19
18
35
28
19
18
37
25
19
19
38
24
19
19
38
24
19
19
Total 100 100 100 100 100 100
Operating Margin %
Personal Care
Foods
Refreshment
Home Care
17.1
14.9
8.2
9.1
16.7
20.1
8.4
6.1
16.2
18.0
9.3
6.0
18.4
18.6*
8.8*
6.3
18.1
17.8
8.3
7.3
18.4
17.4
9.7
9.5
Total (%) 13.2 14.3 13.6 14.5 14.1 14.8
⦁ * Based on core operating profit (excludes acquisitions and disposals)
In the December 2015 Investor Event, Chairman’s and CEO statement and in the 2015 annual report and subsequent presentations Unilever have stressed Unilever’s future aims through the 4G Model:
⦁ Consistent Growth, steady year on year improvement
⦁ Competitive Growth, ahead of markets
⦁ Profitable Growth, steady year on year improvement
⦁ Responsible Growth, the ‘bedrock’ USLP with brands with ‘More Growth’, ‘Less Risk’, ‘More Trust’, ‘Lower Costs’ (USLP framework)
Polman and Pitkethly (CFO) summarised the approach in a Value Creation Model. As Polman outlines a “good strategy stands the test of time, USLP, Compass, the Pillars (the ‘Winning’ buckets) are still valid”.
Authors Note: These are ‘strategic imperatives’ to guide a detailed development of a strategy.
Personal Care
With 2016 turnover of €20.2 billion, Personal Care is the second largest competitor in the category globally behind L’Oreal and Unilever’s largest category with 38% of group turnover and 47.5% of group core operating profit. 62% of turnover comes from Emerging Markets.
In 2008 Personal Care was 28% of group turnover and 25% of group profit when Unilever decided to focus more of its resources on the faster growth personal care arena. In 2009 Tigi was acquired for $411.5 million; in 2010 Sara Lee Personal Care was acquired for $1.2 billion; in 2011 Albert-Culver (TRESemme, Simple etc. brands) were acquired for $3.7 billion; in 2011 an 82% stake in Kalina of Russia was taken for €500 million. Personal Care became Unilever’s largest category in 2011 with 33% of group turnover and 39% of group operating profit. Between 2008-2015 Personal Care had grown turnover by 6.4% CAGR, faster than the market and leading international competitors.
The Category has 5 of Unilever’s 13 €1 billion brands: Dove (Unilever’s second largest brand), Rexona, Axe, Lux and Sunsilk. A further 5 brands are poised to join the €1 billion club: Lifebuoy, Clear, Ponds, Sunlight, TRESemme.
In Personal Care’s core categories globally it is well placed: Hair Care joint leader with P&G, Deodorants 40% share four times the size of the number two, Skin Cleansing 25% three times the size of the number two. In Oral Care Unilever ranks fourth globally, but number two in the countries it competes in. In Skin Care Unilever is a ‘challenger’ but has been strengthening it’s position with acquisitions.
Unilever had ambitions to build a stronger premium portfolio of Personal Care brands (Reach-up) with premium segments growing faster and having more attractive margins. To this end it acquired a stake in the premium skincare company IOMA in 2013 and four further skincare brands in 2015: REN, Kate Somerville Skincare, Dermalogica and Murad (details in Appendix II). The key distribution channels were department stores, pharmacies, spa’s and salons – areas where Unilever had limited distribution capabilities. As a result a new ‘Prestige Division’ was set up as a separate business unit. The Prestige Division improved “presence in distribution channels where we are under-represented. Our current focus is e-commerce (detail in Appendix V) and specialist drug stores”. Polman outlined that the “group had acquired critical mass. We will be a major player right away ... we are rapidly approaching €500 million in sales”. In the year to September 2016 the ‘build premium’ approach seemed to be bearing fruit; in Personal Care products with a price index of 120 or over (20% above the market average) had grown by 8% - ahead of the market. The 120+ brands now accounted for 30% of Personal Care’s turnover. In February 2017 Unilever completed the acquisition of Living Proof Inc, the innovative premium hair care business renowned for solving hair problems through the use of breakthrough science. Living Proof will be part of the Prestige portfolio.
To strengthen Unilever’s e-commerce offer in July 2016 Unilever announced the acquisition of the loss making Dollar Shave Club in the USA for an undisclosed amount (believed to be US$ 1billion). The company was set up in 2012 by Michael Dublin as a direct to consumer e-commerce channel selling razors and cartridges on a subscription model. Success came quickly as Dublin made a two minute video making fun of the gimmicks used by the market leader Gillette (owned by Procter & Gamble) (Appendix II gives additional detail). Sales revenue exploded from $4 million in 2012 to $65 million in 2014 and $152 million in 2015. 2016 sales revenue is expected to reach $200 million. Dollar Shave Club widened its personal care offer with products like an $8 shaving cream, a 2oz $12 Miracle Repair Serum, hair care products and even toilet wipes. During the half year results Polman outlined that Unilever was “buying an innovative and disruptive brand”. “This is much more than just a razor company … Male grooming is a $40billion market that is growing faster than personal care so we see this as a huge opportunity” (and is expected to grow faster). The acquisition strengthens Unilever’s e-commerce offering which Polman believed would work well for 30% of the product range and China where the shift to online sales was growing at a “frightening” pace.
Going forward, Alan Jope the President of Personal Care, outlined five growth drivers for the core business:
⦁ Focus on high growth consumer segments like male grooming (Dove for Men had been launched in 2010 and was already a €0.5 billion brand, Dollar Shave Club had been acquired) and the ‘Muslim Opportunity’ (the segment of young consumers would grow from 300 million currently to 900 million by 2030)
⦁ Focus on ‘trend benefits’: naturals, like TRESemme Botanics, were growing twice as fast as the category as were therapeutics (zendium toothpaste had been introduced into 17 markets)
⦁ Focus on winning channels: e-commerce sales had increased by 80% in the first half of 2016
⦁ Premiumisation: 30% of the categories turnover was already at a price index of 120+ above the market, the aim was to premiumise further
⦁ Focus on market development: spend per head on personal care products was still very low in many Emerging Markets where 62% of the categories turnover came from.
Outside of the core expansion of the Prestige portfolio of ‘purpose led brands’ was a priority.
Home Care
With 2016 turnover of €10.0 billion Home Care accounts for 19% of group turnover and 12% of group operating profit. Home Care “has a significant role in opening up markets and giving scale in the trade”. Home Care had delivered against this role. Between 2004-2007 underlying sales growth had been 2.6%. Between 2008-2015 this had risen to 7.3% with strong growth and 80% of turnover coming from Emerging Markets.
Globally Home Care was ranked number two to P&G with a share of some 10%, but in the countries it competed in it had a much higher share of 31%. In Home Care’s top ten markets it was the clear leader in seven (Argentina 64% share, Brazil 40%, India 40%, South Africa 61%, Thailand 52%, Turkey 38%, Vietnam 60% and a strong number two in Indonesia 35% and the UK 32%, and number four in Russia with a 12% share).
Home Care’s core is Fabric Cleaning with €7 billion turnover. €1 billion brands of Dirt is Good, Omo and Surf are supported by brands like Radiant and Skip. Household Care with €2 billion turnover has leading brands with Cif, Domestos and Sunlight. Fabric Conditioners with €1 billion turnover have the core brands Comfort and Snuggle.
Growth however had been achieved with modest core operating margins in the 5-6% range. In 2014 Unilever announced that it now sought a better balance between top line and bottom line growth in Home Care outlining the role to grow ahead of the market and increase operating margin: “a clear target to double core operating margin over the coming years” was set (no target date indicated). 2015 operating profit increased from 6.3% in 2014 to 7.3% with revenue growth of 4.5%. In 2016 operating profit increased to 9.5% with revenue growth of 4.9%. The improved performance was due to margin accretive innovations, especially in the premium end of the range (such as Comfort Intense, Omo wash boosters, Omo Pre-Treaters (stain removers) and Cif Power & Shine (in spray form). On the cost side of the equation a ‘Low Cost Business Model’ project was undertaken (detail in Appendix VI) and the introduction of the 5S SMART simplification programme. 5S looked at end to end value creation versus cost in five areas:
⦁ Simplify formulation and packaging
⦁ Simplify specification
⦁ Simplify sourcing
⦁ Simplify portfolio and pricing
⦁ Simplify partnering
With the success of the 5S initiative it was going to be rolled out to other categories within the C4G, ZBB and Net Revenue Management Initiatives.
Going forward Home Care’s aim was to ‘Win today, Win tomorrow’, the duel task of managing the short-term and building the portfolio for the future. Three pillares underpinned Home Care’s strategy going forward:
⦁ Brilliant Basics: 70% of products won in blind tests, performance and technical advantage were key differentiators
⦁ Portfolio Reshaping: had three core imperatives: expand the geographic footprint; focus on higher margin, higher growth segments playing to megatrends; enter related segments (i.e.: pre-treated, wash boosters etc.)
⦁ 5S Smart Simplification to create end to end value.
Home Care’s recent acquisitions were to expand geographically and move into adjacencies. In 2013 Central and East European presence was strengthened with the acquisition of Biochemie (detail Appendix II). The Latin American position was strengthened with the acquisition of Quala personal and home care brands in 2017 (detail Appendix II). In adjacencies in 2014 Home Care acquired a 55% stake in Qinguan Group, a leading Chinese water purification company approaching €140 million turnover in 2013. The acquisition more than doubled the size of the Pureit/water purification business (detail in Appendix II). In 2016 Blueair, the world’s leading supplier of mobile indoor air purification technology and solutions was acquired (detail in Appendix II).
Then in September Unilever announced the acquisition of Seventh Generation the U.S. market leader of plant-based cleaning products. Founded in 1989 Seventh Generation had turnover in excess of $200m in 2015; the company had grown by double-digits over the past decade. Unilever was strengthening it’s ‘naturals’, ‘organics’ offer which appealed to many ‘new’ generation consumers. Seventh Generation also produced children’s nappies, a new market for Unilever and one dominated by Procter & Gamble. Robert Waldschmidt, an analyst at Liberum observed, “Unilever is increasingly going into P&G’s categories. However, they have not gone after mainstream brands but one’s with unique selling propositions that resonate with current consumer trends in e-commerce and sustainability”. (F.T. 19th September). Unilever did not disclose the price paid for Seventh Generation but analysts speculated it was between $800m - $1 billion. In 2017 Seventh Generation products were introduced into the U.K.
Food
In 2005 the Food Category with turnover of €13.5 billion accounted for 35% of group turnover. With 2016 turnover of €12.5 billion the category had fallen to 24% of group turnover – and 28% of group operating profit. Over the period 2009-2016 Unilever had made nine key divestments from the category (detail in Appendix II for recent divestments); since 2010 €3 billion of turnover had been divested to have a more focused portfolio on growth segments with global brands – the exception being Spreads.
Polman often talked about “Weeding and Feeding” in the Food Category; offloading some brands and investing in others as a way of driving growth. “What we have done with our Food division is gotten rid of all the non-strategic brands that are only in one country.” The category was a “significant cash contributor. For some years now the cash generated in Foods has been used to develop the Personal Care and Home Care side of the business.”
Despite the brand portfolio restructuring more than 50% of the Food categories turnover came from staple low growth areas like spreads, oils & fats and soups. Over 40% of the categories turnover came from low growth Western Europe. Knorr, sold in 68 countries (Emerging Markets 50% of sales) was Unilever’s leading brand. Knorr was the leading soup brand in 25 countries and was extending its range in sauces, stocks, meal-makers, baking bags, ready meals etc. Hellmann’s was the global leader in mayonnaise and was expanding into new countries and introducing additional varieties and packaging (i.e.: the squeeze bottle). The Food Solutions business, which focussed on serving the professional out-of-home channels, had grown to €2 billion turnover (details in Appendix V). Polman outlined: “we are investing in areas where there is more opportunity for growth, like expansion in Emerging Markets with our cooking ingredients and the move to more natural products.” “Our priority now is to get the business growing whilst sustaining the strong levels of profitability and cashflow.” In 2016 Foods turnover grew by 2.1% (2.6% price, (0.5%) volume), held back by declines in the Spreads business and deflationary conditions in Europe. Growth in the Emerging Markets was however buoyant at 8%; from being 30% of the categories turnover in 2008 Emerging Markets accounted for 43% of turnover in 2015.
With the tag-line ‘Tastes Good, Does Good, Doesn’t Cost the Earth’ (a sustainability link to USLP) the Food category’s strategy going forward had three key pillars:
⦁ Accelerate Emerging Markets
⦁ Modernise the Portfolio, playing to five themes:
⦁ ‘Trusted Choices’: natural, organic, authentic, sustainable sourcing
⦁ ‘Super-Me’: health & wellness, vegan
⦁ ‘Flexi-Flow’: more flexible, convenient ways to consume
⦁ ‘Brave New World’s’: more exciting flavours
⦁ ‘Greater Expectations’: for food quality
In May 2017 Unilever acquired Sir Kensington’s, a pioneer and leader in condiments sold in the organic market in the U.S.A. The product range includes mustard, ketchup, mayonnaise and a vegan mayo.
⦁ Preserve the value of Spreads, The Baking, Cooking & Spreads Co.
Spreads – The Baking, Cooking & Spreads Co
Unilever is the world’s largest producer of spreads with brands including Becel, Rama and Flora. With a global share of 16% Unilever’s nearest challenger is private label with 12%. The closest branded competitor is the Brazilian firm BRF with a share of 4% with sales mainly in Latin America. Unilever’s geographic core for spreads is Europe and North America.
Spreads accounted for nearly 7% of Unilever’s sales in 2015 and over a quarter of the Food categories sales. Spreads were highly cash generative and delivered attractive margins in the order of 20%. However, Spreads had been a drag on the Food categories and Unilever’s growth for several years and turnover had fallen by (3.1%) in 2013, (3.2%) in 2014, in 2015 Unilever indicated that the decline had continued (but gave no quantification), in the first quarter of 2016 the decline was “mid-single digits” despite Unilever gaining market share and in the first quarter of 2017 the decline was 5.1%. Consumers in the developed world were eating less bread (hence less spreading), and when they were, they were increasingly choosing butter instead of margarine (trend to natural products and currently lower prices), or switching to lower priced private label products.
Polman outlined: “We haven’t put money behind Spreads because we had bigger opportunities somewhere else.” Then in August 2013 Unilever announced the investment of US$153 million in a manufacturing facility in Kansas, U.S.A. Unilever also became active on the new product front launching ‘melanges’ (a mixture of butter and vegetable oil); developing ‘cool blending technology’ (which had up to 80% less saturated fat than butter).
In the December 2014 Investor presentations Jean-Marc Huet (Finance Director) announced that the European and North American Spreads business (made up of 20 countries (5% of Unilever sales and over a fifth of the Food Categories sales). Would be run as a stand-alone unit with dedicated management, its own strategy, decisions, investment and have a separate profit and loss and balance sheet by mid-2015. The new unit would be called: ‘Baking, Cooking & Spreading Co.’ Sean Gogarty, a highly respected marketer, would be in charge of the new unit. The unit would still report into the Food Category. Martin Deboo, analyst at Jefferies said: “It may not be a precursor to a sale, but it will keep their option open”. Other analysts viewed an eventual sale as inevitable with a valuation of €5.0 billion being mentioned. A sale possibly to private equity, would help the Food Category return to growth and raise cash to invest behind growth opportunities – but the high cash generation of Spreads helps fund Unilever’s dividend and a disposal would reduce EBIT.
Refreshments
With 2016 turnover of €10.0 billion Refreshments accounts for 19% of group turnover and 12.4% of group operating profit. The category is made up of drinks, mainly tea (with Lipton being a €1 billion brand) and Ice Cream (with Magnum and the Heartbrand being €1 billion brands). Case B: Unilever and Ice Cream gives comprehensive background on ice cream and Unilever’s position.
Tea remains the world’s favourite hot beverage in terms of cups consumed, however it significantly lags coffee by value. In a fragmented competitive arena Lipton, which is sold in over 70 countries, is the clear global leader. Overall, Unilever holds 12% global industry share (other brands include Brooke Bond and P.G. Tips) with the next ranked competitors Tata Global Beverage and ABF (Twinings core brand) distant with some 3% industry share. Black tea is Lipton’s core category, an area of low growth. In recent years Unilever has been expanding into higher growth areas like green, fruit and herbal teas and is expanding formats (i.e. Lipton/Pepsi iced tea; Lipton K-cup tea capsules launched in 2013). To address a relative weakness in premium teas Unilever acquired T2 an Australian premium tea business in 2013 (details in Appendix II). With a range of over 200 teas and 40 stores T2 is Australia’s leading tea retailer. Kevin Havelock, President of Refreshment, outlined that he saw: “scope for hundreds of stores around the World”. T2 had doubled sales by 2016.
In ice cream Unilever is the clear global leader in retail with a 19.3% industry share in 2016. Unilever has been strengthening share whilst the number two competitor, Nestle, has been consistently losing share to now hold 9.4% globally (Euromonitor data). To close the gap Nestle merges large parts of its global ice cream operations with R&R in the joint venture Froneri in 2016 (detail in Case B: Unilever and Ice Cream). In the November 2016 Investor Seminar Havelock outlined that Unilever still held a 5.8% share advantage.
To continue ‘to grow and improve profitability’, ice cream is stressing its premium brands of Magnum and Ben & Jerry’s. In 2014 Unilever launched its first dedicated frozen yoghurt brand SNOG to capitalise on the health and wellness trend (which did not continue in 2016). In 2014 the premium U.S.A. gelato brand Talenti Gelato and Sorbetto was acquired (whose sales had increased by 60% in two years) and in 2015 Grom the premium Italian gelato brand that operates in 60 stores was acquired with sales of €25 million (details in Appendix II and Case B).
Havelock outlined Unilever’s approach to improving ice cream margins:
⦁ “Number one is selling more of our premium brands – Ben & Jerry’s, Talenti and Magnum” (and now Grom as well)
⦁ “Number two, expanding and growing the impulse markets, the out of home markets across the world”
⦁ “Number three, building our retail offering across the world”
Good weather in the European season in both 2015 and 2016, brand globalisation and gains in market share (especially in premium categories) helped to move ice cream revenue forward and ROIC had improved from 12% in 2014 to 15%.
In the November 2016 Investor Seminar Havelock outlined that Refreshments strategy had four imperatives going forward playing to megatrends:
⦁ Protect and revitalise the core
⦁ ‘Super Sensations’: i.e.: Ben & Jerry’s Cores and new platforms such as Magnum tubs
⦁ Premiumise
⦁ ‘Pure, Real and Authentic’: i.e.: Lipton’s Pure Leaf Tea, GROM Italian gelato
⦁ ‘Health and Wellness’: i.e.: Lipton Green Tea, Swedish Glace non-dairy ice cream
⦁ Occasions
⦁ ‘Fluid Lives’: i.e. Lipton iced tea, Ben & Jerry’s ‘Wich ice creams
⦁ Channels
⦁ ‘Experience’: i.e. T2 tea shops, Magnum Café’s
Portfolio Performance by Region
(Note: Refer to Unilever Charts for a 10 year history)
https://www.unilever.com/Images/charts_2005-2015_ar14_tcm244-416973_en.pdf
2005 2010 2012 2014 2015 2016
Turnover €b
38.4 44.3 51.3 48.4 53.3 52.7
Category % of Turnover
Asia/AMET/RUB*
The Americas
Europe
28
34
38
37
33
30
40
33
27
41
32
27
42
32.5
25.5
43
32
25
Total 100 100 100 100 100 100
Operating Margin %
Asia/AMET/RUB*
The Americas
Europe
12.1
13.2
13.9
13.0
14.9
15.2
13.0
14.2
13.7
13.3
20.8
16.0
13.5
13.1
16.4
14.6
14.6
15.4
Total (%) 13.2 14.3 13.6 16.5 14.1 14.8
* Asia, Africa, Middle East, Turkey, Russia, Ukraine and Belarus
Regional Performance
Emerging Markets accounted for 70% of Unilever’s volume by case, but with a less premium mix and lower unit prices 57% of turnover and 55% EBIT. Whilst Emerging Markets were volatile volume had grown in each of the last 25 years with average growth of 5% per annum, when average price growth of 4% per annum is added Emerging Markets had grown by an average of 9% per annum. Megatrends and demographics were also supporting future growth. Oxford Economics predicted that by 2030 800 million people would enter mid-income, 400 million would migrate to Emerging Market cities and 300 million more women would join the workforce. All of the Unilever categories performed well in Emerging Markets in 2015, the €30 billion of sales revenue was split: Personal Care €12b (+7%), €8b Home Care (+6%), Foods €5b (+7%), Refreshment €5b (+9%). In the second, third and fourth quarters of 2016 volume growth slowed to 2.2%, (0.95) and (0.5) as certain countries experienced harsh economic conditions (i.e. Brazil volume down (5%) for Unilever and (7%) for the country). Given megatrends and demographics the expectation was that Emerging Markets would return to their long term growth trajectory. Since the ‘financial meltdown’ the Developed Markets of Europe and North America have been challenging. Volume growth had been flat at best and inability to push through price increases, food deflation and the continued decline of Baking, Cooking & Spreading Co (Spreads) held back progress. Unilever depended on ‘growing ahead of the market’, innovation and premiumisation to do little more than ‘stand still’. In 2016 North American performance was starting to improve (but the Trump presidential victory introduces some uncertainty going forward) whilst Europe remained challenging.
The geographical reporting of results is highly aggregated (Note: Unilever reports for the Americas, whilst North America has been challenging Latin America has been buoyant until recently). ‘Emerging Markets’ are far from homogenous. What is happening in Brazil is very different to China. Even within a country granularity is needed – especially in large countries like China and India. In China growth in tier 1 cities has recently been flat where Unilever has good distribution coverage. Growth in tier 2/3/4 cities, where Unilever distribution is less well developed, has been much more buoyant. In 2015 Unilever signed an agreement with the e-commerce provider Alibaba to extend geographic reach (details in Appendix V). In India many urban markets are buoyant whilst much of rural India is depressed.
Portfolio Overview
Andrew Wood, A Bernstein analyst outlined: “Polman has had an informal target of Unilever becoming 70% Personal Care and Home Care (by turnover) company by 2020 ... the strategic evolution makes sense given that the Personal Care business is high growth and high margin.” “As Unilever becomes more of a Personal Care company it should see improved operating performance and valuation from investors, particularly given its recent reclassification to a Personal Products (from Food) on the S&P and MSCI indices.” With Emerging Markets approaching 60% of turnover, with higher growth (on average) than Developed Markets they could also account for 70% of turnover by 2020. “Eighty percent of the world’s population is going to live in Emerging Markets. We do not run this company for two minutes, we run it for the long term” (– Polman). Hence there is talk about ‘Destination 70:70 by 2020’ (Personal Care & Home Care and Emerging Markets). In the December 2015 Investor Event the aim to have 70:20:10 in brands was also outlined: 70% global brands, 20% global customised locally and 10% truly local.
P&G, the global leader in FCMG (details in Appendix IX for leading competitor profiles) has aggressively pruned its portfolio in recent years to focus solely on Personal and Home Care core brands. Does it still make sense for Unilever to have four categories and 400 brands? Do Food and Refreshment Categories respond as well to the global category approach? Nestle (details in Appendix IX) adopts a centralised ‘global’ approach for some of its categories and a much more decentralised ‘local’ approach for other categories.
The Kraft-Heinz Take Over Bid
On Friday 17th February the F.T’s Alphaville blog revealed details of a potential offer to acquire Unilever by Kraft Heinz. Within half an hour Kraft Heinz confirmed that it had made a “comprehensive proposal to Unilever about combining the two groups”. It added that the offer had been rejected but suggested that the door was still open. Unilever’s shares rose by 11%.
The Kraft Heinz proposal offered common shareholders $50.00 per share in a mix of $30.23 cash and 0.222 new entity shares per Unilever share valuing Unilever at $143 billion (potentially the second largest acquisition in history). An hour after the Kraft Heinz confirmation Unilever responded that the offer “represents a premium of 18% to Unilever’s share price as at the close of business on 16th February 2017. This fundamentally undervalues Unilever. Unilever rejected the proposal, as it sees no merit, either financial or strategic, for Unilever’s shareholders. Unilever does not see the bases for any further discussions”.
The modest 18% premium valued Unilever at a 22.5 x Price Earnings multiple versus, as Graeme Pirketly (CFO) outlined an average of 23.2 x for Home and Personal Care competitors and 19.9x for Food competitors (a blended average of 21.9x) - and Unilever was not an average company; Kraft Heinz had identified an undervalued company.
Authors Note: ‘Polar Opposite Business Models’
Unilever’s 4G Growth model aimed to achieve consistent long term growth in revenue and profitability based on sustainable business practices and reinvesting in the business. The F.T. outlined the approach as ‘Responsible Capitalism’.
The Kraft Heinz approach was seen as the polar opposite. 3G Capital, a private equity group is the biggest shareholder in Kraft Heinz, along with Warren Buffet head of Berkshire Hathaway investment group. 3G Capital had acquired Burger King, Anheuser – Busch InBev and together with Berkshire Hathaway Heinz and then Kraft. In each case a similar approach had been taken the FT observed: “3G typically secures largest amounts of debt to finance its deals by raising borrowings against a target company’s balance sheet”. Once the acquisition is made 3G seeks to improve short term performance with a focus on cost cutting and margin maximisation. Zero-based budgeting is a core process applied to reduce cost and senior management are incentivised with shares to deliver the results – 3G’s track record has been impressive. When Kraft and Heinz were separate companies their combined revenue was $30 billion with an operating profit margin of 15%, employing 55k people. In 2013 3G and Berkshire acquired Heinz and then Kraft in 2015. After six months sales were down marginally but profit margins had risen to 21% with 13k fewer staff employed (a 24% reduction). 2016 annual results showed profit margins at 23% and a further reduction of 1k staff and slight slippage in sales revenue.
So the polar opposite: “long term shareholder value, doing good by doing well, rather than the short-term logic/numbers to extract value”- extract from F.T. Lex ‘Most Recommended’ post by K.Jagiello
Polman had observed in the F.T. in April 2010 “It is very easy for me to get tremendous results very short term, get that translated into compensation and be off sailing in the Bahamas. But the goal of this company – and its very difficult to do – is to follow a four or five year process.
Kraft Heinz were surprised by the forceful rejection by Unilever. The UK Prime Minister Theresa May directed aides to assess the need for government intervention.
Authors Note: Kraft had previously acquired UK based Cadbury’s promising to keep open Cadbury’s Somerdale factory - which after acquisition it closed. Kraft’s CEO Irene Rosenfeld turned down repeated requests to appear before a House of Commons Committee to answer questions on the issue – not even via video link.
On Sunday 19th February, two days after the ‘story broke’, Unilever and Kraft Heinz issued a joint statement:
“Unilever and Kraft Heinz hereby announce that Kraft Heinz has amicably agreed to withdraw its proposal for a combination of the two companies”.
“Unilever and Kraft Heinz hold each other in high regard. Kraft Heinz has the utmost respect for the culture, strategy and leadership of Unilever”. A week after dropping the bid Warren Buffet told CNBC that he had received calls “indicating the offer was unwelcome…And if its unwelcome, there’s no offer”.
Authors Note: Neither Berkshire Hathway or 3G Capital have participated in a hostile acquisition.
Andrew Wood of Bernstein surveyed 96 investors (76 if who were Unilever shareholders). There was a 50:50 split of whether Unilever should have entered into negotiations with Kraft Heinz. “Of those in favour of engagement the majority wanted a 40% premium to Unilever’s share price instead of the 18% offered”. In turn Unilever had spoken to their top 50 shareholders and found “the vast majority” were supportive of the rejection noting that “Around 70% of our shareholders have held a position in the company for more than seven years”.
A Wake Up Call
On the 22nd February Unilever announced that it “ is conducting a comprehensive review of options available to accelerate delivery of value for the benefit of shareholders. The events of last week have highlighted the need to capture more quickly the value we see in Unilever”.
Grame Pitkethly (CFO) outlined at CAGNY that this had been a “trigger for Unilever and we will not waste it… Challenge to unlock value quicker… Be sharper on driving down costs. It’s clear we can go harder and deeper”.
Accelerating Sustainable Shareholder Value Creation
On 6th April 2017 Unilever announced the findings from its comprehensive review:
“Our recent review concluded once more that our strategy for long-term value creation through growth and compounding returns on investment is the right one for Unilever and for our shareholders… Our growth model is simple, but powerful: growth that is consistent, competitive, profitable and responsible. This is fuelled by sustained investment in our business. We have many of the best known brands in the world and continue to build them with global and local innovations that add value with technology driven benefits. Our geographic presence is very strong with both global scale and 57% of our sales in emerging markets where the future growth opportunities are the greatest. As a result, we have consistently grown ahead of our markets, steadily improved profitability and cash flow, and delivered a Total Shareholder Return of 190% over the last eight years”.
However, the review also “highlighted the opportunity to go faster and further” building on “the progress already made with Connected 4 Growth”. The key announcements made were:
⦁ The Foods and Refreshments categories would be combined in the Netherlands. It was expected that this would unlock some synergies but the major savings were expected in category overhead coming down by 15% + by 2020
⦁ Within the Connected 4 Growth initiative Unilever was decentraling to 250+ Category, Country, Business Teams (CCBT’s). Each team would in effect run their own business with a ‘general manager’ with full responsibility and accountability reporting directly to the category. This would save cost and increase speed, agility and the ability to tap into local trends/innovations (which to the central category would be too small to be of interest and not as responsive to – “a light touch to local innovation”
Authors Note: Unilever was returning to its historic approach of empowered local managers - but this time within a global category framework. The role of the ‘Region’ was significantly diminished, the new organisation was ‘global’ and ‘local’.
⦁ The active management of the portfolio through bolt-on acquisitions and disposals would be accelerated. Here it was decided to either sell or demerge the Baking, Cooking and Spreads unit and rest of world’s Spreads (€3 billion of turnover).
⦁ Review of Unilever’s legal structure by the end of 2017. The current duel structure (listings in Amsterdam and London) has complications if share capital was issued. Having a single set of shareholders would help in major transactions and demergers.
⦁ Cumulative savings between 2017-2019 which had been planned at €4 billion were increased to €6 billion. Connected 4 Growth, Zero - base budgeting and the 5S initiative aimed to increase Supply Chain cost savings from €3 to €4 billion and Overhead and Brand & Marketing Investment from €1 to €2 billion. Polman and Pitkethly stressed that two-thirds of these savings would be re-invested in the business to secure long-term growth ahead of the markets. The €6 billion in cost savings were likely to incur €3.5 billion of restructuring charges over 2017-2019.
⦁ With the restructuring and cost savings Unilever was looking to increase operating margin, excluding restructuring, from 16.4% in 2016 to 20% by 2020 (40-80 bps improvement had previously been outlined for 2017).
⦁ The cash conversion ratio (free cash flow as a percentage of net profit) was targeted to be 100% by 2020.
⦁ Leverage on the balance sheet was to increase to a target net debt to EBITDA ratio of around 2x (raising some €11 billion) whilst maintaining at least an A/A2 rating. The increased leverage would be used to increase dividends by 12% for the coming year and consider special dividends; start a programme of €5 billion share buy-backs (which started on May 19th) and continually assess the opportunities for value enhancing acquisitions.
In response to the announcement Unilever’s shares rose by 1% to £39.78 – 19% higher than before Kraft Heinz initial approach at a 18% premium. On the 10th April in a Sunday Telegraph interview Polman outlined: “I have to find a balance between not giving up our long-term sustainable compounding model and satisfying increasingly a group of shareholders who want to see at any time the short term return. That’s a fine balance, I don’t deny it”. “We’ve put a floor on the share price and now it’s a matter of delivering”.
Authors Note: Kraft Heinz would have no doubt put more stress on short-term return. In May Colgate-Palmolive’s CEO outlined that he would consider a takeover at $100 a share ($88 billion – refer to Appendix IX for detail). Unilever were rumoured to be evaluating the deal.
‘One Unilever’, the 2011 reorganisation into four centralised categories and then the 2017 reorganisation into three categories, decentralising to Country Category Business Teams, USLP had major implications for the functions. Appendices III to VIII look at recent developments in the functions and Appendix IX overviews developments at key competitors.
Case A Appendices
Appendix I Unilever 2012-2015 Quarterly/Full Year Performance
Appendix II Unilever’s Major Acquisition, Investment, Alliance and Disposals 2012 - 2017
Appendix III Discover, Design and Deploy: Research and Development/Innovation
Appendix IV Branding & Marketing Investment
Appendix V Retail Initiatives, e-commerce, Food Solutions
Appendix VI Supply Chain, Procurement, Manufacturing: Smart Complexity, Project Half for Growth, Zero-Based Budgeting
Appendix VII Enterprise & Technology Solutions
Appendix VIII Leadership Development in Unilever
Appendix IX Key Competitor Profiles: P&G, Colgate, RB, Nestle
Author’s Note:
Strategic Management is a capstone Course, one that integrates the other MBA disciplines. During the Case we have referred to nine Appendices. Many of the Appendices integrate with other courses you have, or will, study on the MBA.
Strategic Management calls for a holistic view (the big picture) and the ability to drill down to the detail. You need to select from the ‘detail’ in the Appendices to support your Pre-Workshop Individual Assignment and selected Group Workshop Brief. The relevance of the Appendices will vary depending on your Assignment topic/Workshop Brief.