FMCG

by Greg Thain

  William had immediately realised the future of Sunlight soap was not to grow the wholesale business, but to make a soap business. He would sell Sunlight to any and every wholesaler and retailer he could find, a novel approach in an industry where the leading soap-makers carved up the country cosily between themselves on a regional basis. By the mid-1890s Sunlight sales were at a staggering 40,000 tons a year, a level that encouraged the ever-frugal William to find uses for the waste that came from the various production stages. Thus Lifebuoy was launched in 1894 and made from waste from the boiling pans plus a large helping of an antiseptic. Then followed by Sunlight Flakes - waste from the bar cutting machines soon to be rebranded as Lux Soap Flakes in 1900. As business continued to boom, the Lever Brothers product range expanded, and not just in soaps. As well as a good number of toilet soaps at prices higher than Sunlight, it moved into other emerging cleaning needs: scouring powder with Vim in 1904 and laundry powder with Omo – first conceived simply as a bleaching powder - in 1908. William never forgot the lesson as a salesman, driving his horse and trap far and wide to expand the business’s reach: scale was a big benefit.

  In the meantime, his key ingredients were now coming from all corners of the globe and he worried endlessly about securing their supply. One way to solve this was to be as big a buyer as possible, which he set about in two ways: acquisition and international expansion. He had no time for the soap makers’ cartel and took great delight in buying out as many of its members as possible as they were crushed under the Sunlight bandwagon, his greatest triumph being the snaring of the famous Pears soap company in 1915. But perhaps the most significant acquisition came in 1919 with Crosfield of Warrington, with which came the rights to sell in the UK a German washing powder brand developed by Henkel: Persil. With over 60% of the UK soap market, William was a big believer in the power of internal competition to keep everyone on their toes, so most of his acquired companies happily competed against each other while Lever Brothers benefitted from the increased economies of scale. This sowed the seeds of a Unilever operating style that would prove very troublesome in later years: a very high degree of operational independence at the operating company level, with head office being more administrators than managers.

  William Lever was also an early internationalist, and by this time had set up operations in several countries including the United States, Switzerland, Canada, Australia and Germany: more scale, which meant, however, more worry over his raw materials, which need integration back up the supply chain. But he had already begun the process in 1892, when emerging margarine companies began competing for his precious copra oil: he himself had made the arduous journey to Fiji and Samoa to see the industry for himself. But by 1909, his eye had turned to palm oil and the company began developing its own palm plantations in the Solomon Islands. It had not escaped his notice that the Dutch margarine companies, Jurgens and Van den Bergh, had set up a palm plantation joint venture in Germany’s African empire (both companies had several factories in Germany). A year later Lever Bros opened its own African company to do exactly the same.

  Lever Brotherss venture into Africa would have profound effects at two points in the company’s future. After further investments in the Congo, in 1920 the company made an investment in Nigeria that was near disastrous and terminal for William’s leadership. Lever Brothers massively overpaid for the Niger Company, which produced 100,000 tons of oilseed a year, at a time when a post World War One depression had badly impacted demand for soap in most of Lever’s key markets. The net result was the company could not finance the acquisition and were rescued from possible bankruptcy only by their bankers, in return for a large proportion of the company voting stock, until this point 100% owned by Lever himself.

  Despite having built one of Britain’s largest companies from scratch, the fact is that the banks and some of his senior management had been losing faith in the great man. William was a somewhat unique and polarising leader. His management style took the word autocratic to new levels: ‘We won’t argue, you’re wrong’ was his favourite response to any discussion. His own ideas were railroaded through by referring the decision to the shareholders: himself. Yet despite his autocracy, his company had become so vast and convoluted that it had become impossible for him to control. Diversification had followed diversification to the point where, he discovered to his own surprise, he owned a saw-mill, a coal-mine, a limestone quarry, a paper mill and an engineering firm.

  The outcome was that William’s effective sidelining by the new majority banker shareholders, who, appalled at the near catastrophe the Niger Company purchase had precipitated, installed one of the company’s accountants, Francis D’Arcy Cooper, as the new managing director. Cooper went through the company like a dose of salts, questioning every penny of expenditure, trying to restructure the convolutions along more logical lines and selling off anything he thought didn’t fit in. The moving of the company’s head office from Port Sunlight to London in 1921 removed any lingering doubts that things had permanently changed.

  Even after William’s corporate demise, his influence was still significant. In the last few years of his reign he had branched out on his own and purchased a whole raft of companies including a fishing fleet and a chain of fish shops. These, along with a sausage company, T. Wall & Sons, that now sold ice cream during the slow summer months, were taken over by Lever Bros and would form the nucleus of their future Foods Division. The Niger Company would also form the nucleus of The United African Company, the subsidiary whose profits would be virtually propping the company up fifty years later. However, William never recovered from this hammer blow to his pride; he passed away in 1925 having just informed the AGM that the company had made a profit for the first time in five years since the Niger Company debacle.

  Even before William’s fishing and sausage businesses joined, the company had actually been in the food business for more than a decade. In 1914, to utilise its expertise in using fats, the company had been asked by the British government to manufacture margarine when the German invasion of France and the Low Countries cut off supplies. This of course meant that Lever Brothers was bumping heads with the likes of Van den Bergh, a friction amplified by the Dutch margarine companies’ diversification into soap. As both sets of industry giants continued to expand internationally during the 1920s, the sources of friction multiplied. A series of margarine industry mergers in Holland in the late 1920s created Margarine Unie, a company every bit as monolithic as Lever; both soon realised that perhaps cooperation might be more productive than competition for sales, new markets and raw materials.

  Jurgens and Van den Bergh, the component companies of Margarine Unie, had been in business since 1872, even longer than Lever Brothers. By 1888, both had set up factories in the much larger German market. In 1908 the two companies did a deal to share profits while still nominally competing against each other; in the 1920s, following the collapse of a German economy beset by hyper-inflation, set up in Britain, competing against Lever’s brand, Planters. So, when Jurgens and Van den Bergh officially merged in 1927, the competitive threat to Lever Brothers was greatly magnified, which brought both companies to the negotiating table. At first the plan was for a cooperation agreement but, as both companies had been built on the premise of scale and plenty of it, a full merger was the obvious conclusion.

  How Did They Evolve?

  The form the newly merged company took was unique at the time and almost remains so to this day. Unilever was two holding companies: a British Unilever Ltd, listed on the London Stock Exchange and capitalised in sterling and a Dutch Unilever NV, listed on the Rotterdam Stock Exchange and capitalised in guilders. The two companies also had different shareholders. An Equalisation Agreement between the two ensured that both sets of shareholders would always be paid equivalent dividends. There were two boards with the same members but for a joint chairman, and the boards sat in London and Rotterdam respectively. A Special Committee was established to manage the affairs of the joi
nt companies, reporting to both boards.

  The timing of the merger - in the same year as the Great Depression - was not propitious, neither was the news the next year that the mighty American firm, Procter & Gamble, was finally moving into the British market with the acquisition of Thomas Hedley Ltd., one of Lever’s few remaining soap competitors. But even though William Lever was gone, his approach of growth through acquisition and overseas expansion plus a decentralised operating culture continued regardless. Some acquisitions were by design, such as that of the largest U.S. manufacturer of tea, the Thomas J. Lipton Company, while others were through necessity: Nazi restrictions on exporting dividends meant the large profits from Unilever’s substantial German assets had to be reinvested into whatever German companies they could buy, taking Unilever into cheese, ice cream, transportation and public utilities.

  During the war years the company’s decentralised style became even more accentuated as businesses in German and Japanese occupied territories were cut off from head office, as indeed was the Rotterdam head office itself. But during the war, business continued wherever it could. In Britain, Lifebuoy soap provided a free washing and bathing service to bombed-out civilians. Acquisitions were still being made too, the most notable being the 1943 purchases of Batchelor Foods and a majority stake in Frosted Foods, who owned the U.K. rights to the Birds Eye frozen foods brand. The purchases were followed by the 1944 acquisition of the Pepsodent toothpaste. And thanks to the 1919 Crosfields acquisition, Unilever was also big in silicates, plastic and paint, all of which were ramped up during the war.

  After the war, the company decided to continue its high wartime levels of decentralisation as a matter of policy, leaving its many operating companies to get on with their own business, Head Office operating more as a central banker, with local operating companies making cases for local acquisitions and pitching head office for the funds. Thus, the American arm of the business, still called Lever Brothers, bought a Chicago-based margarine manufacturer and America’s oldest cosmetics firm, Harriet Hubbard Ayer, to prop up a soap business that was struggling to keep up with P&G.

  The purchase of the not very modern-sounding Harriet Hubbard Ayer brand awakened Head Office to the potential of personal care brands. It was a growing category, highly responsive to innovation and advertising, and delivered higher than average margins and identified as a category that suited the company’s soap brand-building skills. Thus, Sunsilk was launched in the UK in 1954 and by the end of the decade was selling in eighteen countries. Sunsilk had arrived just in time to benefit from the 1955 launch of British commercial television, Unilever running the very first television advertisement in the country for its Gibbs SR toothpaste. The French soap and toothpaste company, Thibauld Gibbs, was purchased in 1956, the product range being slowly moved into transitioned over to hair-care products under the more alluring-sounding name of Elida Gibbs. In 1957 the US operation acquired the rights to a toothpaste tube technology that enabled the squeezing of stripes, and then immediately launched the brand Signal, marketed as a breath-freshening toothpaste with the magic ingredient in the little red stripes. The same year, the US Lever brothers also launched Dove, containing 25% moisturising crème and sold at twice the price of Lux.

  During the 1950s, it became readily apparent that the decentralisation strategy was a mixed blessing. On the plus side, many innovations that would later have global significance sprang up seemingly spontaneously from local business units grasping local opportunities. Thus, in 1955, the fledgling British frozen food arm borrowed the idea of fish fingers from America and within a decade was accounting for 10% of the nation’s consumption of fish. The German operation, which had survived the war largely unscathed (the economy for consumer goods having continued far longer in Germany than in Britain during the war), came up with the idea in 1959 of selling margarine in tubs, the extra cost of the tub being more than mitigated by the consumer benefits softer, spreadable fats. Netherlands Unilever bought an ice cream company and in Africa, the Niger Company that had almost everything, and now renamed the United Africa Company, was buying into a whole range of industries in multiple countries during the de-colonisation phase. By the mid-1950s, it was earning 15% of Unilever’s entire profits.

  However, there was a downside to all of this local entrepreneurism. Unilever had an excessive number of brands, most of which only sold in one country, and the company struggled to come up with a coherent response to P&G’s regional approach to its European entry, a situation highlighted by Unilever’s piecemeal and feeble response to the arrival of Tide. Tide, launched in the US in test market in 1946 and fully national by 1949, was a synthetic detergent not made of soap at all which had decimated the American soap brands of not only Lever Brothers but P&G itself. Unilever executives understood the technology - pre-war relationships with its inventors at Germany’s I.G. Farben saw to that - but they were shy of bringing out their own version in Europe: no national company had the nerve to decimate their own soap brands to ward off a threat that might never arrive. In any case, there was no over-arching management structure to impose a region-wide response once Tide did arrive. Consequently, Unilever’s dominant shares of many of Europe’s markets - 80% in Britain in 1955 – went into a prolonged decline that took decades to reverse. The 1957 reformulation of the UK’s Persil – it remained a soap powder - was a typically inadequate response given that Tide had halved their US market share, resulting in an 80% share bottoming out in the 1970s at 25%. Not too bad, actually: the company’s share in the much larger German market would fall by three-quarters. The re-launch of Omo in 1957 as a synthetic detergent was simply too little, too late.

  Unilever’s response to the unfolding soap opera was to encourage a focus on the foods side, currently less than 10% of company sales. This became a third leg of the business alongside detergents and margarines, although in truth the company’s leg count was almost centipede standard, ranging from advertising agencies to roll-on roll-off ferries. Thus, in 1957 Unilever in Britain bought out its junior partner in the UK Birds Eye franchise, the American parent General Foods, as many of the European companies got into the rapidly expanding category. While increasing home ownership of refrigerators with freezer compartments was driving consumer demand, setting up in the business required a huge investment in frozen manufacturing, transportation and retailing equipment, an area where the huge scale of Unilever gave the company an advantage; they could easily afford to invest ahead of demand.

  The 1960s continued in much the same way as the latter part of the 1950s. Faced with tumbling market shares in detergents – even in a growing market, Unilever would lose one-third of its total European market share during the decade – and a margarine business that had benefited from rising edible fats markets that had now stalled, the company was forced to compete much more aggressively for its butter brands share. So it ramped up its diversification and innovation efforts. It was a big enough brand in many countries, and could afford to pursue its expansionist strategy with little fear of takeover or running out of cash.

  Two areas where both parts of the strategy came together were in ice cream and frozen foods, which of course shared the need for frozen storage. With both Wall’s in the UK and its enforced German diversification, the company had been in ice cream since the early 1920s, upgrading and expanding capacity in both. The first major additions came in 1960 with the purchases of Streets in Australia (who would later invent the Magnum bar) and Frisko in Denmark. A year later the becalmed US operation bought the Breyer’s Good Humor brand, but were singularly inept at managing it, driving it into loss in 1968 and for the next sixteen years. Success would come with the 1962 acquisition of Italy’s Spica, with Cornetto in its portfolio. There followed several more European acquisitions, several of which were juiced up by a partnership with Nestlé to share infrastructure costs.

  One advantage of the Unilever operating model now and then is that companies were not shy to borrow a good idea from another market, so just a
bout every Unilever ice cream company ran with Cornetto, some too early: the company had not yet perfected the means of keeping the cone crisp. Other innovations that quickly spread around the Unilever Empire were Cif/Jif, the first liquid abrasive household cleaner. The Dove cleansing bar made its way across the Atlantic into several European markets albeit with a different formulation and the 1968 launch of Persil Automatic helped stem detergent market share losses. However, Unilever’s overall innovation record was patchy. The US launch of Dove washing up liquid, soon marketed as a cut-price budget brand, was a flop that harmed the brand image of the soap, and Comfort fabric conditioner, launched in Germany in 1966, failed to put much of a dent into P&G’s Lenor. Unilever was first to market dishwashing liquids in Europe, but soon lost their lead to P&G.

  On the diversification side, the company was already the biggest fish British retailer and owned of a fully integrated German fish operation from trawler fleet to fish restaurants. The company moved into salmon farming too, then set about expanding its slaughterhouse businesses for the Walls and Hartog meat brands. Anything that looked even remotely like the Next Big Thing was snapped up, a German-owned Ceylon-based tea company experimenting in an instant tea, for example. The company was also expanding its operations in animal feeds, chemicals, paper, packaging and transportation (sold mostly to other Unilever companies). The in-house Unilever advertising agency, Lintas, was by now in over twenty countries and taking on work from any non-competing advertiser.