by Greg Thain
Meanwhile The United Africa Company seemed to be following a strategy all of its own. It was the main African agent for Caterpillar heavy earth-moving equipment and Africa’s largest brewer through joint ventures with Heineken and Guinness: Nigeria was Guinness’s second largest overseas market after the US due to a long-running marketing campaign claiming aphrodisiac and performance-enhancing properties qualities (in stark contrast to amateur European and American bedroom-based market research). UAC was even expanding beyond Africa, opening up operations in the Middle East and Pacifica Islands, mainly to provide ongoing career opportunities for its vast army of professional expat managers.
It was indirectly due to UAC’s involvement in the beer business that Unilever almost merged with Allied Breweries in the late 1960s. One member of the Unilever Special Committee had spent most of his a career in UAC and pushed the company to the very brink of amalgamation after an Allied approach in 1968 intended to leverage Unilever’s immense grocery distribution capabilities on the deregulation of alcohol sales. However, few outside a handful of senior executives were convinced by the logic. The move fell through following a collapse in the share price of Unilever Ltd during consideration of the deal by Britain’s Monopolies and Mergers Commission.
By the end of the 1960s, Unilever, with its vastly extensive range of categories and brands, was truly immense, with more sales than P&G, Colgate Palmolive, Nestlé and Henkel combined. In market share terms, it held around one-third of the global market for detergents, its relative weakness in Europe and the US made up by being first mover in many other markets and a much greater geographic spread than its main soap and detergent competitors. In edible fats, Unilever enjoyed a 12% global market share, 50% accounted for by butter. In personal care, however, the company was barely beginning: its global share was a measly 4%. But the biggest issue was the never-ending tension between decentralisation and central control. But whilst decentralisation had hurt the detergents business, it was a positive advantage in the food sector, where tastes remained resolutely national. In this much more fragmented food market Unilever had many category strengths, not least the world’s second-largest soup manufacturer in a subsidiary of T.J. Lipton. And it was expert in opening new markets, making acquisitions and marketing locally, all keys strengths. Two-thirds of turnover was accounted for by detergents, edible oils and foods.
Although business seemed to be proceeding as normal with the 1970 acquisition of the Dutch meat business Zwanenberg’s, the launch of Impulse deodorant by the South African business and the purchase of Lipton International (combined with the US’s Lipton & Son the acquisition made Unilever one of the world’s largest tea businesses), all was not well. The lack of central direction hit home when the company was hit by a cash flow crisis that accelerated dramatically between 1968 and 1970, caused primarily by a rapid decline in margins. Many of its key markets suffered rapidly rising costs and price controls and return on capital dropped from 8.2% to 6.8% during the same two-year spell. The company had not foreseen the problem, which was exacerbated by a fall-out between the Dutch Head Office and the British Finance Director. Sales had kept growing, but profit performance was well off the pace.
An accounts system where each operating company submitted detailed and accountable forecasts was now a necessity, a more disciplined approach to cash allocation of cash for new investments, previously doled out to whoever marshalled the most convincing arguments. Times were suddenly getting tough. Struggles in detergents, margarine and the US business combined with the 1973 world oil crisis made them worse. Europe, previously the business cash cow, stalled and then declined, due mainly to a precipitous drop in the yellow fats market in Britain and Germany - around 25% during the 1970s and early 1980s. Across Europe as a whole in the first quarter of 1975, the company actually made a loss. The year after, fourteen out of thirty-one Netherlands operating units were also making a loss.
In detergents, Unilever was still being steamrollered by P&G, whose 200-plus global detergent portfolio compared to a ludicrously large Lever Brothers portfolio of 665 spread across 42 markets. Even worse, while Tide was being launched everywhere, Unilever’s strongest brand, Persil – the UK’s largest grocery brand - was only available in relatively few. Henkel, its original inventor, had kept a grip on its star performer. Henkel. Frozen foods were little better as other companies piled into the market, reducing Birds Eye to a loss by the end of the 1970s. Ice cream did little better, although the company was still having some personal care successes. Rexona (Sure in the UK and South Africa) became the world’s number two deodorant, whilst the launches of Timotei and Signal were fighting Colgate hard for the top European toothpaste slot.
In the US Lever Brothers was by now almost a byword in that country for management incompetence. It had declined to a paltry 12% share in detergents and was losing money on everything apart from Lipton’s tea and its sideline in soups, forcing the company to rely on its largely unchallenged detergent and personal positions in Asia, Latin America and Africa for the generation of any growth at all: around 26% of its detergent sales were coming from these markets compared to single digit levels for P&G and Colgate-Palmolive. A further 25% in the 1970s originated from the combination of UAC, plantations and chemicals, hardly the sign of a vibrant packaged goods business. UAC was the most profitable component of the sprawling Unilever empire: Nigeria accounted for up to 60% of total sales outside of Europe and the US: in addition to 13 breweries, UAC was into textiles and importing GM trucks and cars.
The only solution to its US woes looked like some kind big acquisition, and from a long list of luminaries - Chesebrough-Ponds, Gillette, Heinz, Quaker Oats, Gerber and CPC -they settled in 1978 for the chemicals company, National Starch and bought it for a then whopping $487 million, a record for a foreign-based company investing in the US. While the deal would not be transformative in the long run, it did send a signal that the company was serious about building a viable operation in the world’s largest market. But the 1970s effectively remained a write-off: sales increases barely kept pace with inflation and over 50% was wiped off the stock value of the joint holding companies. Things were so bad, McKinsey were summoned to cast their beady eye over the sorry state of affairs.
One of McKinsey’s first observations was that the company wasn’t seeing much of a return from its 7,000 R&D employees scattered around the world. Many of the better innovations, such as Cornetto, had come with acquisitions. All too often the company was second best, or took so long bringing breakthroughs to market the advantage was lost. A case in point had been with the company’s development of Tetra-Acetyl Ethylene Diamene (TAED), which enabled bleaching action at lower temperatures, which is precisely what most Europeans were doing: coloured fabrics could not be boiled. It had been the biggest advance in the category since Tide. Work had begun in the mid-1960s but Unilever were not able to bring a product to market until the patent had almost expired. Result? Competitors followed quickly and any long-term gain was lost.
McKinsey, unsurprisingly, also homed in on the failing US business which, amongst its many other troubles, had been progressively slashing its R&D spend for years trying to protect its worsening bottom line. Following the review, a 1980 R&D spend of $9.6 million rose to $42 million two years later with the emphasis on personal care. McKinsey also recommended the company withdraw from the US margarine market, but the company decided differently, closing its manufacturing facilities and sourcing from a third-party supplier, immediately boosting margins whilst they waited for a better idea to come along, which it duly did. In 1983, the supplier launched a brand of its own, a low-fat spread called Country Crock, which was an immediate success. Unilever promptly bought the supplier, secured a much lower than their own factories and a stronger brand in the market. On the downside, the fact that a primarily private label supplier had shown Unilever how to innovative proved McKinsey’s point about Unilever’s feeble innovation capabilities.
Whether due to McKinsey’s promptin
gs or simply a blocked pipeline, the company actually came up with some winners in the early 1980s. A bright spark in the ice cream R&D team was Vienetta – an affordable luxury ice cream dessert, with a production technology protected by patent with many years left to run. The French personal products division created Axe body spray (branded Lynx in the UK), by the end of the decade was Unilever’s largest deodorant. Dove had been re-launched in the United States and was on its way to becoming the country’s best-selling soap bar. But just when the R&D director was feeling confident enough to look his colleagues in the eye, the company walked into the disaster that was New System Persil, the changing of the brand from soap to enzymes. It was a catastrophe: widespread reports of skin irritation caused brand share to plummet, forcing the company to execute a New Coca-style about face and reintroduce the old version as quickly as possible. By 1984, the company had had enough; a dramatic change was required if it was going to prosper.
How Did They Build the Modern Company?
By the early to mid-1980s, many companies who had taken their consultants’ advice to diversify were beginning to regret the experience, so diversification on the Unilever was old-fashioned to say the least. Focus and core competences were the new buzzwords, which Unilever needed to adopt more than anyone. The company had to decide what it wanted to be and the fact that money could be made (occasionally) from trucking, fishing, car dealing, advertising and packaging was insufficient reason to be in those businesses. So, in 1984, Unilever embarked on what it called its Core Business Strategy.
As a first stage, Unilever identified a set of businesses it identified as being core to the company which were to be strengthened and grown, mainly through transformative acquisition. Unfortunately, as well as including some clear long-term packaged goods growth categories such as foods, detergents and personal products – the three legs of two decades ago – the list also included elements deemed core for other reasons, such as too big or too profitable to let go, in particular speciality chemicals and some chunks of UAC. It would be another ten years before Unilever took the steps to become a fully-fledged packaged goods specialist, but it was a good start. First on the chopping block were the transport companies, soon to be followed by market research, advertising, animal feeds, packaging and the non-African components of UAC. The next step was to go out and buy some businesses that were capable of transforming the shape and growth prospects of what was still one of the world’s largest companies.
Unilever had initially been attracted to Richardson-Vicks but alerted that Brooke-Bond might soon be in range, switched attention to the British tea and food giant. Unilever had thought previously about bidding Brooke Bond but the company’s substantial tea plantations, then a bridge for even for the sprawling Unilever had put it off. However, the attraction of becoming the world’s largest tea company plus a few other trifles like Fray Bentos and Oxo convinced Unilever it should not let slip the prize this time. The company embarked on its first-ever hostile takeover bid, winning through in in September 2004 at a price of £390 million.
Attention then turned to personal care where there were successes but little further capability to grow organically. So it began looking at some mostly US-based industry giants, with Richardson-Vicks at the top of the pile. A hostile bid was launched: it went spectacularly wrong. The Richardson family took great exception to Unilever’s straight out of the gate hostility, a dislike that sunk to new depths when a family member keeled over with a fatal heart attack in a meeting with Unilever executives and advisors. The Richardson family were more than happy to spurn Unilever’s $60 a share offer; they accepted a white knight bid from P&G.
Unilever were re-buffed. But hearing that Chesebrough-Ponds was being stalked by American Brands, they moved in with a white knight offer of their own and acquired the company in January 1987 for an eye-watering cash pile just a shade under £2 billion. Brands such as Vaseline and Pond’s catapulted Unilever from nowhere to the fourth-largest global skincare company, with the added bonus of food brands such as Ragu sauces. By now the secret was out. Companies were approaching Unilever suggesting with acquisition offers – them not Unilever - most notably Elizabeth Arden-Fabergé who made their pitch in October 1988 (Fabergé had only acquired Elizabeth Arden the year before). This deal was consummated in 1989 for £996 million and soon followed by Calvin Klein with its highly successful Obsession and Eternity brands. As the chemicals division was still on the expand and grow list, acquisitions were made in that area too making the company one of the world’s top fifty chemical companies and one of the top two makers of adhesives. One small acquisition that would pay back many times over was that of a small US margarine manufacturer, J. H. Filbert. Filbert was bought primarily bought for its production facilities, part of the deal being the purchase for one dollar of a brand by the name of I Can’t Believe It’s Not Butter. By the end of the decade, the butter substitute would have US sales of $100 million.
Within the core businesses, fortunes began to improve. The Becel margarine brand was proving a success, as was the subsequent extension of the brand into cooking oil and beyond. Sunsilk was selling in over 30 countries, with particular success in South America, giving the brand 12% of the world shampoo market in 1985. Signal was sold in eighteen countries and had 5% of world toothpaste sales. The company’s Unipath subsidiary developed a highly successful pregnancy testing kit called Clearblue. The Dove brand began its European rollout in 1989, the same year that the Magnum brand appeared as a response to the entry of Mars into the ice cream category. The company had also started the long and tortuous process of adding some global discipline to its local entrepreneurship, with baby steps such as a single logo for Lipton’s Tea, the company’s largest global brand with annual sales of £600 million, pretty good for the highly fragmented Unilever but less than a quarter the size of Nestlé’s Nescafé. The problematic US market had begun to turn around, but the pursuit of market share at any price on detergents lost the company over $70 million between 1985 and 1987. Head Office gave the US a year to turn around the chronically loss-making Breyer’s Good Humor. A further acquisition solved that problem.
By the end of the 1980s, Unilever was a very different company from six years ago. Over seventy mostly low margin commodity businesses had been sold; a staggering 197 acquisitions had been made. Three-quarters of these were small - less than £10 million each - and overwhelmingly single country, single category companies that could be bolted onto a Unilever operation. The majority were in Europe. While sales in real terms were still well below the level of fifteen years ago, the company was now much more profitable, with a return on capital employed better than P&G. The Core segments of food, detergents, personal care and chemicals were now accounting for over 90% of sales and the company had built up some strong global market share positions: 10% in personal care, 50% in margarine, 14% in ice cream and just a shade behind P&G in detergents.
Two consequences to the make-up of the business from this unprecedented acquisition and disposal splurge were, firstly, that the marketing to sales ratio had risen substantially, partly because most of the disposed businesses had had little or no marketing spend but also because the company had simply increased what it spent by a considerable amount: 50%. A more negative consequence was that the brand portfolio was now almost grotesque: 1,500 brands were being actively marketed. Half were in food, there were over 300 in detergents and a paltry 170 personal products. But even the company’s biggest brands were relative minnows compared to the market leaders. Omo was one-third the size of Ariel and Tide; Sunsilk was smaller than any one of five P&G personal care brands. Unilever’s two biggest toothpaste brands combined, Close-Up and Signal, were still not as big as P&G’s Crest.
The early 1990s saw some major restructuring within Unilever along category lines, the company having finally decided to grasp the decentralisation issue so that finally some global strategies for brands could be put in place. Axe became the world’s largest global male toiletries brand thro
ugh following a disciplined rollout of new products into new markets. Signal was repositioned as the company’s key brand to fight tooth decay. And Organics shampoo was a global brand two years after its introduction in Thailand. Further divestments followed as what was considered core was redefined to exclude firstly the remaining portions of UAC - finally sold by 1994. Agribusinesses followed in 1995, the meat processing and fish businesses in 1997, the same year that the chemicals division, despite its 15% contribution to company sales, was sold to ICI for a hefty £4.9 billion.
But Unilever wasn’t just trying to shrink its way to being a pure packaged goods company. Significant acquisitions were also being made, including the Helene Curtis hair-care business, Breyers ice cream (which made Unilever America’s largest ice cream company), Ben & Jerry’s, Slimfast, and in 2000 the company’s biggest acquisition by far, Bestfoods, which took total company sales to $52 billion a year. Bestfoods brought some leading brands into the fold too: Knorr and Hellman’s and, with 40% of its sales from outside North America, it was an ideal fit with the globalised Unilever. Now the company could combine all its disparate food companies to form one distinct entity, Unilever Bestfoods. The company also had second thoughts about its moves into upscale cosmetics – recognizing these as a different category altogether - so it sold both Elizabeth Arden and Calvin Klein. By 2000, the company was now beyond a shadow of doubt a packaged goods company. But one nettle remained to be grasped – the brand portfolio.
The same year as the Bestfoods acquisition, Unilever announced it would reduce its range of marketed brands from the then current 1,600 to just 400: 1,000 of the brands delivered only 8% of total company sales. The collateral damage was that 100 of the 350 factories would go along with 25,000 employees. Only a year later the company portfolio was down to 900 brands as 87 businesses were sold off. However, by 2003 it became clear the plan wasn’t quite working: sales, which had been growing quite nicely, turned south. The long tail of products contributing little to the top line is a seductive and compelling argument, but the devil was in the detail: many brands, minute though they may have been in the overall company scale of things, tended to sell in one country only, where they were quite significant. Cancelling or selling them was no guarantee that Unilever’s other brands would pick up all the slack, which indeed was the problem. The extra management and financial focus on the 400 brands wasn’t making up the 8% of chopped-down sales. 2004 needed something of a tweak to the plan.