FMCG

by Greg Thain

  What Have They Done Recently?

  2004

  Here is a selection of comments Unilever’s two chairmen made about their company:

  · We are not where we set out to be

  · We do not end this period of Unilever’s history with the level of growth we wanted

  · We have not been fast enough in reacting to toughening market conditions and competitive challenges

  It’s fair to say that the Path to Growth laid out in 2000 had taken a wrong turn along the way, although it had not all been bad news:

  · Twelve brands had sales in excess of €1 billion, and approximately two-thirds of total sales derived from brands larger than €0.5 billion, no mean feat given a starting point of 1,600 brands

  · Knorr, the company’s largest brand, was sold in over 100 countries

  · Dove, Signal and Pepsodent were all re-launched

  · The Pro-Activ cholesterol-lowering spread was extended into other dairy categories

  · The ever-reliable Sunsilk grew by double digits

  · The €1 billion+ R&D programme had been realigned behind the new Vitality agenda to fast-track incorporating health and wellness benefits into foods and beverages, registering 370 patents in the year

  · The Latin American region had an underlying sales growth in the year - mostly through volume – due to successes with Vitality initiatives for the well-to-do and low unit price offerings for the monetarily challenged

  But overall there was still more bad news than good, not least a feeble increase in underlying sales of 0.4%. All the unwanted brands and businesses were being sold off - 70 in the previous two years with a combined turnover of over €1.8 billion – but the components that were kept on weren’t making up the difference. The entire Unilever foods category had an underlying sales decline in the year. Beverages were the worst culprit, with a 4% decline as Slim-Fast didn’t Change-Fast in the light of shifting consumer attitudes towards its carbohydrates (i.e. sugar) content. Ice cream was almost as bad, losing 3.4% of underlying volume with a bad summer being blamed. If you want to be the world’s largest maker of ice cream, which Unilever is, you are going to get bad summers: the onus is on the market leader to de-seasonalise and temperature-proof the category. The best excuse was in the spreads and cooking products category: ‘Overall growth in the category was held back by lower sales of ‘tail’ brands which are being managed for value and where investment is low’. No, overall growth was held back because the big brands that had the investment didn’t grow enough.

  The chairmen had clearly seen enough of such poor performance and embarrassing excuses: change was needed. The long-running sore of too many levels and committees muddying the waters with unclear responsibilities would finally be addressed under new CEO, Patrick Cescau, currently chairman of Unilever NV. For the first time since its formation, Unilever would have one chairman, one board, one CEO with one executive team. There would be two category presidents, one each for foods, and for home and personal care (HPC), responsible for R&D, brand development and category development. Alongside would be three regional presidents (Europe, The Americas, Asia/Africa, Middle East and Turkey) responsible for country and customer development. The company would support this new structure with increased brand investment, paid for out of the new One Unilever efficiency programme. No more excuses.

  2005

  It was perhaps a sign of the times for Unilever that holding market share in the year would count as a success. The new CEO had set the focus on stopping the rot in Europe, (the company’s largest region accounting for 41% of sales), accelerating growth in developing and emerging markets (long a strength for Unilever with over half their employees working outside of Europe and the Americas), spreading the Vitality programme across the portfolio (especially in personal care) and pushing structural reorganisation down through the company.

  Overall results were positive, kind of. More disposals, primarily of the prestige fragrances business (Unilever Cosmetics International) to Coty Inc. for $800 million, put a big dent in the underlying sales growth of 3.1% But that sales increase had been driven by volume, supported by an extra €500 million in advertising and promotions and combined with some price decreases, particularly in Europe where the company’s value offering, failing to understand then respond to hard discounters like Aldi, had got badly out of line. In Europe volume was very slightly positive but the price decreases meant that there was another annual decline in cash sales. And there were still issues in France, Germany and particularly the UK where sales declined, mostly in personal care, which wiped out an excellent year in Central and Eastern Europe where Russian sales had grown by 20%. The Americas, however, driven by a US recovery, grew by 3%, Asia/Africa etc. grew by 9% with China up by over 20% and a strong recovery in the key Indian market. For the first time, sales in all the developing and emerging markets exceeded those in Europe.

  The driver of most of the good regional performances was the personal care, up over 6%. The combination of strong global brands such as Axe, Dove, Sunsilk and Rexona, combined with Vitality-based programmes such as the Dove Campaign for Real Beauty, Omo’s Dirt is Good and Lifebuoy’s regular hand-washing campaign in the poorer parts of Asia was Unilever working at its best. And now such initiatives could be quickly rolled out regionally or globally. The Foods Division was having more challenges, with a more fragmented brand portfolio and substantial challenges in implementing the Vitality programme. The company also assessed the nutritional profiles of over 16,000 products in the year and found many in difficulties: fast-evolving consumer attitudes to saturated fats, sugar and sodium were seriously compromising sales. Developed-world initiatives such as Knorr Vie mini shots and developing world affordability initiatives such as Knorr Cubitos were all well and good, but a couple of decades of acquisitions had bequeathed a huge list of products not designed for success given modern-day sensibilities.

  Organisationally, much had happened quickly: merged One Unilever single-country organisations accounted for 80% of total turnover by the end of the year and had also delivered savings that more than paid for the extra €500 million in marketing spend. The remainder would start the merging process in 2006. At the board level, in the light of the organisational changes made at the beginning of the year, a six-month project had reviewed Unilever’s unique PLC/NV dual listing share structure, concluding that it still offered more benefits than a single structure, particularly in terms of financial flexibility and the company’s unique multi-cultural operating style.

  2006

  Now Unilever was finally a pure packaged goods business with a structure that enabled rather than hindered its global scale and reach, the company could, for the first time in its history, define a clear mission for itself:

  · Our 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

  It was something that hadn’t been really possible when running breweries, an ad agency and selling GM trucks. And the company had a global balance: only one-third of sales coming from Western Europe, it had built up via growth and acquisition a substantial personal care business and had a raft of €1 billion-plus brands joined most recently by Rexona. It was leaner and fitter after the sales of most of their European frozen foods businesses. There was a clarity of purpose and a toolkit it had never enjoyed before. But how good would the company be at exploiting its new persona?

  2006 didn’t really answer that question. Top line sales grew by 3.8%; about on par given a strong U.S. economy and booming emerging and developing markets. But Unilever hadn’t gained share for four years now. Personal care was still making the running, growing at over 6% again while food was limping along. In personal care the brands were more concentrated - Omo was now over €2.5 billion – and the Vitality programme seemed to have more, well, vitality. Domestos, an unexciting brand if ever there was one, launched Domestos 5x which killed germs in the toi
let bowl for five times longer than anything else on the market, as consumers could see for themselves with a helpfully supplied test strip to dunk in the bowl. Small and Mighty super-concentrated detergents were being rolled out. And Surf Excel in India, with its unique low-rinse formulation, was reducing the water needed for a wash-load by two-thirds. Meanwhile the foods division was wrestling with removing 37,000 tons of fats, 17,000 tons of sugar and 3,000 tons of sodium from its products without altering the flavour, initiatives which begged the question as to what all that unhealthy stuff was doing there in the first place.

  Nor had the European malaise had yet been cured: volume was going nowhere again. Whenever gains were made in ice cream, soup, deodorant or body care, there was bad news in detergents, hair care and tea. A second problem was that new, rapidly growing markets for many of the company’s less international competitors were mature markets for Unilever. In Brazil, they had been big for over fifty years, in Mexico for forty. Yet the company was not growing distribution or pushing forward by acquisition, but struggling to fend off the companies who were doing precisely these things. In Asia/Africa, the company’s underlying sales growth of over 7.7% was not significantly better than GDP growth. China was really the only market where Unilever was growing at a new entrant’s pace, through a mix of strong global brands such as Lux, Omo and Pond’s, together with some local brands such as Zhonhua toothpaste.

  As befitting a company of Unilever’s size, it was now doing what was normally expected of a global player. On the cost side, large chunks of IT, Finance and HR were being outsourced. On the opportunity side, the company was investing €350 million in venturing activities to develop the winners of tomorrow. However, the real challenge was to make the combination of unique heritage and newly coherent structure work to achieve competitive advantage: to, in point of fact, consistently gain market share.

  2007

  With an underlying sales growth of over 5% and even Europe pitching in with more than 3%, it looked like the hard work in restructuring Unilever was finally paying off. The company was now able to do what it had never been able to manage before: launch with breadth and speed. Clear, a new shampoo with enhanced proprietary ant-dandruff technology was launched simultaneously in some of the largest hair care markets in the world, including China, Russia and Brazil. Unilever had also sharpened its execution capabilities: Axe became the best-selling male deodorant brand in Japan just six months after its launch.

  The continued direction of resources into Vitality, personal care and developing and emerging markets was also providing a consistent focus that the company had previously lacked. Personal care grew by almost 7%. Rexona was the world’s largest deodorant brand and Axe the largest male deodorant. Knorr was now almost a €4 billion brand. The top 25 brands accounted for almost 75% of turnover and 44% of company sales came from developing and emerging markets.

  Most crucially, success was now becoming more widespread throughout the portfolio, including the less glamorous parts. The company’s roster of household cleaning brands, including Domestos and Cif, grew by an impressive 9%. Vaseline grew by 8% and Dove’s Campaign for Real Beauty was partnering with organisations in over twenty countries. In foods, while the Nutrition Enhancement Programme continued to root out fats, salt and sugar, a more focused R&D programme was delivering increasingly relevant breakthroughs. Hellman’s Extra Light was using citrus fibre to deliver a very low-fat content and a very high profit margin, Lipton’s was meeting each region’s differing healthy beverage needs via Lipton Green Tea in the U.S., Lipton Linea slimming teas in Europe and Lipton Milk Tea in Asia. Most interestingly, a range of nutritious snacks and drinks specifically designed to assist mental development was launched in Turkey under the take-no-prisoners brand name, Amaze Brainfood. These were all examples of the new foods R&D focus on delivering one or more of functionality, lighter, and naturalness and authenticity.

  Within the regions, Europe’s more than 2.8% underlying sales growth was based on a stronger performance in all the key markets which reflected general improvements in execution capability rather than one or two new and blockbuster products. This was exactly the kind of improvement Unilever had been striving to achieve. Two developments of high potential were the extension to all European markets of a 50:50 partnership with Pepsico to sell Lipton ready-to-drink teas and the announcement of the acquisition of Russia’s leading ice cream company, Inmarko. The Americas did somewhat better too, with an underlying growth of 4.1% thanks to a reasonable balance of pricing and volume increases, while Asia/Africa set a new standard, growing by over 11% with volume and contributing two-thirds of the growth. Areas of strength were India, the Philippines, South Africa and Turkey, which all grew double digit. The company had a good category balance of growth, with laundry and personal wash tending to lead in the lower income groups whilst ice cream - led by the Moo brand rolled out throughout the region - and deodorants led with the more affluent.

  A year in Unilever wouldn’t be complete without the announcement of more structural changes: the latest being the regionalisation of head office functions to jointly serve several country markets, a rationalisation which arrived in the same year that some countries - Brazil, Argentina and Mexico, for example - were still catching up with the One Unilever single-head-office-per-country notion. More global and regional overheads were slated for the chop, along with more than fifty factories. The disposal programme was also getting ramped up again, not only including brands that didn’t fit in with the new laser focus but also those ones deemed structurally disadvantaged. Thus the company’s North American laundry business was put on the auction block, over a century since William Lever himself put it on the too-difficult pile and went the acquisition route.

  2008

  For the third year in a row, Unilever increased its rate of underlying sales growth, this time to an impressive sounding 7.4% increase. While all of this came from price increases to cover raw material cost increases, it was very encouraging that volume was not lost given the scale of the pricing changes. The sales growth was spread fairly evenly across all the product categories; home care charging ahead at more than 9.8% and ice cream and beverages bringing up the rear at more than 5.9%. Savings from One Unilever and elsewhere provided over €1 billion to protect both the marketing budget and the margin, although new CEO Paul Polman, previously chief financial officer and head of North America for Nestlé, still felt there was more fat to be shed.

  There were big changes on the R&D front, where the nearly €1 billion budget and 6,000 staff were finally brought together into one organisation. This was a consequence of another structural change, as the company’s two product sectors were combined into one cohesive group. That there were synergies to be had by combining expertise across product groups was demonstrated with the launch of Signal White Now, the world’s first toothpaste that whitens teeth instantly by adopting the detergents’ trick of including a blue dye to make yellow teeth look white, a ruse that had been pioneered by P&G’s Daz with its Blue Whiteness decades ago. So now, brands were managed under four sub-groups: savoury, dressing and spreads, ice cream and beverages, personal care; and home care. Another reorganisation was the detachment of Central and Eastern Europe from the Europe region for the more similar markets of Africa/Asia.

  By removing the fastest-growing part of the European region, Western Europe was now looking poorly once more, with underlying growth of only 1.3% versus 6.5% for the Americas and 14.2% for Africa/Asia. Prices increases of 3.8% also dug deeply into European performance and volume slipped by 2.5%, choking off the company’s recovery in the region. While this kind of performance was quite typical for a packaged goods company in 2008 - cash-strapped shoppers were looking more to private label and deep discounters - it was encouraging that in the countries where the One Unilever integration of separate business units and multi-country back-offices was more accelerated, the UK and Netherlands for example, performance had been better. But the nature of growth across cate
gories was varied: innovation led deodorants and oral care whereas in spreads and dressings it was driven by deep discounting.

  In the Americas, the US business grew by 3.8% whereas – the usual story for everyone - Latin America steamed ahead by 12%. Campaigns like Dirt is Good were proving particularly effective global rollouts in Latin America. The newly named Asia, Africa and Central and Eastern Europe region (AACEE) seemed to be recession-free: underlying sales grew by an impressive 14%. Unilever’s top five developing and emerging markets in the region also grew by approximately 20%, with both prices and volume moving ahead and the region was further bolstered by the acquisition of Indonesia’s Buavitaq brand of fruit-based vitality drinks. It was a busy year for disposals too: for a €3 billion total, the Boursin cheese brand, Lawry’s and Adolph’s brands of seasoning and marinades and Bertolli olive oil and vinegar joined the North American laundry business (sold to venture capitalists) in leaving the company.

  Also evident was an increasing focus on social and environmental issues, a logical consequence of the Vitality programme, which as well as adding Vitality to Life at the individual and family level, also needed to do so at the corporate, impact-the-planet level if it really a true operating philosophy and not just a marketing flavour of the month. This the company proudly boasted of in its 10 years as a of the Dow Jones Sustainability Indexes sector leader, although it accepted that more needed to be done on emissions, water usage, waste production and the nutritional profiles of its food brands.