FMCG
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2009
The top priority for the year, despite dire economic conditions in many countries, was to get Unilever back to volume growth without sacrificing margin. Growing only through price increases, as had been the case the previous year, was neither desirable nor sustainable in the eyes of the new CEO. Although turnover was down slightly at €39.8 billion - a level at which it had hovered for some years as divestments wiped out organic sales – underlying growth excluding divestments and currency impacts was a more healthy plus 3.5%, two-thirds of which was the result of volume increases.
As had recently become the norm, performances within the three regions were starkly different. Africa, Asia, Central and Eastern Europe were now the largest of the three at nearly €15 billion and also delivered the biggest operating profit, nearly €2 billion. The region had had another excellent year with underlying sales growth of more than 7.7%, with volume up 4.1%. As economies had begun to recover during the year, so had Unilever’s rate of volume growth, which had reached nearly 10% in the fourth quarter. Market share gains were made in most markets and categories, the exception being the huge Indian business, under intense attack from low-cost local competitors and failing, in the eyes of the CEO, to respond quickly or aggressively enough. Not good to be on the new chief’s radar so early in his reign.
The Americas, second-largest with sales of nearly €13 billion and with the highest operating margin of the three, delivered an underlying sales growth of more than 4.2%, volume accounting for more than 2.5%, rising to more than 5.5% in the fourth quarter. The two key markets in the region, the US and Brazil, were the strongest performers, helped by increases in advertising and promotional spending paid for from cost savings. As had been the case for several years, Western Europe was still the sick man of the triumvirate with a 2% decline in underlying sales to €12 billion. Volume slipping very slightly, although with some marginal share gain. The downward trend on the top line, which happened in most of the key markets, reflected rising sales of private labels and price decreases, which were dialling back some of the previous year’s increases that had proved unsustainable in the tough economic conditions.
Overall it was an improved performance in the circumstances. Unilever was now gaining share in two-thirds of its business compared to one-third a year previous, it was global number one in seven categories, and ten of the thirteen €1 billion-plus brands were gaining share. Four reasons were highlighted for the improvement:
Bigger and better innovations were rolled out faster, facilitated by the One Unilever reorganisations
Dove Minimising Deodorant had been launched in 37 markets. Clear shampoo was now in 35 markets, Signal White Now in 21 and Knorr Stockpots (using a proprietary gel formula) in 12. With a new innovation centre opened in Shanghai and a doubling of projects in the pipeline - sales potential of greater than €50 million – the pace could only keep increasing.
More discipline throughout the organisation
Unilever was now acting more like a global company doing things the Unilever way than a loose collection of affiliates of varying entrepreneurial abilities.
A more competitive cost structure
One ironic advantage of Unilever’s long-term structural complexity was that it now reaped huge cost savings each year as it simplified and went global. As an example, the company appointed its first ever chief global supply chain officer during 2009, a role long common elsewhere. Another €1.4 billion had been thrown into the pot in 2009 which had enabled a substantial increase in marketing spend while covering input cost increases. Unilever’s competitors were now having to choose between maintaining ad spend, putting up prices or taking a hit on margins.
Driving a performance culture
The delayering, simplification and clarification of the organisation meant that there was now a much greater emphasis on individual target-setting and performance. There was also a shift from divestment to acquisition, with the purchase of the TGI professional hair care brands to boost the company’s hair care business, a Russian ketchup business and, most crucially, the announcement of the impending purchase of Sara Lee’s personal care brands, Sanex, Radox and Duschdas, which Unilever would be able to take more global.
The company’s global environmental and sustainability agenda received a further boost with the appointment to the board of Louise Fresco, the Professor of International Development and Sustainability at the University of Amsterdam. While the company was improving the sustainability aspect of its ingredients, with 2 billion people using a Unilever product every day, Unilever had the reach to change things for the better in how its products are used. One aspect of Unilever’s unique sales footprint in developing and emerging markets is that it sells its laundry products in some of the more water-challenged parts of the world. So the company was actively developing more products like Comfort One Rinse fabric conditioner, which required dramatically less rinsing. Even more impressively, since 2002 the Lifebuoy disinfectant soap had been running a campaign in India encouraging frequent hand-washing to decrease transmission of water-borne illnesses to children. Expanded to Bangladesh, Sri Lanka, Pakistan, Indonesia, Vietnam and South Africa, the campaign was grown to include backing of Global Hand-washing Day, and reached over 133 million people. Lifebuoy was voted one of India’s most trusted brands.
While it seemed that all was coming together quite nicely, new CEO Paul Polman was clearly not a man to rest on his laurels He announced a bold new strategy that would really drive the new Unilever hard. The new vision – to double the size of the business while improving its environmental footprint - was both simple and stretching, although it did sound just a little generic:
· Winning with brands and innovation
· Winning in the marketplace
· Winning through continuous improvement
· Winning with people
Who could say no to any of that? However, the unique aspects though were in the detail and they all stressed the same theme: overlaying world-class performance standards on Unilever’s unique global footprint:
· Now the company finally had one integrated R&D function, it could act like a global innovator through its somewhat Star Trek-sounding Genesis Programme
· Now the company had one integrated go-to-market organisation, it could lead the development and growth of its categories with the 5.9 billion people living in developing and emerging markets, where the company had a presence second to none
· Now the company had a global supply chain, it could source globally
· And now the company understood the critical importance to its Vitality strategy of its environmental footprint, it could set ambitious goals: reducing wash temperature and water usage in the 125 billion wash cycles a year its products made and, for Lifebuoy, changing the personal hygiene of one billion people by 2015
Exciting times for Unilever.
2010
Turnover finally left the €40 billion mark, rising 11% to over €44 billion. While 7% of the rise was due to currency changes, the remaining 4% hid an impressive story of an underlying volume increase of nearly 6% - the highest for more than thirty years – coupled with a pricing decrease of 2% as protection against low price and private label competition. That this could be done while increasing the underlying operating margin, was due once again to another €1.4 billion in savings, mostly from global sourcing.
Within the regions, the same three-tiered performance standards were still in place. Asia, Africa, Central and Eastern Europe excelled with an increase of 18% on the currency-enhanced top line, underpinned by a 10% volume increase - close to amazing given the absolute size and spread of the region. Every major unit delivered at least a 5% volume increase with China, India, Turkey and Vietnam being well into double-digit territory. Indian management in particular will have been delighted to move themselves off the CEO’s problem pile, showing what they could do with initiatives such as re-launching the Wheel detergent brand across 25 Indian states in just 49 days and ex
panding their direct delivery network to another 630,000 stores in 110,000 new villages during the year.
In the Americas, Latin America, in particular Brazil, Argentina and Mexico once again drove the volume increase to nearly 5%, with even the USA managing modest volume growth to maintain overall market share and gaining share in the hair and skin cleansing categories, although losing it in spreads and weight management. Western Europe once again brought up the rear, although it did return to an over 1.4% volume growth: not bad, given the basket cases of Ireland, Greece and Spain, all substantial Unilever markets. The company grew volume by at least 2% and grew market share in the UK, France, Italy and the Netherlands.
Such broad-based success was clearly a result of the improving condition of the Unilever organisation. More than forty innovations in the year were launched into more than ten markets and some, such as Magnum Gold and Dove Men+Care rolled out to thirty. There was also great progress in retail customer management, with the development of more joint business plans, pro-active use of an increased number of the company’s Customer Insight and Innovation centres and much improved in-store execution, particularly in emerging markets, with the development of agreed perfect store standards. One recognition of the progress Unilever had made in the whole area of customer management was their Global Supplier of the Year award from both Wal-Mart and Tesco.
Unilever’s great advantage was, however, its sheer size in developing and emerging markets, now over 50% of business. Performance in each of their four product categories correlated directly with the exposure of the category to such markets. Savouries, dressings and spreads had only 35% of its turnover in the developing and emerging markets and delivered an over 2.5% volume increase; ice cream and beverages had 45% exposure and grew by 5.9%, whilst personal care had 61% of sales and grew 7.9%. At the top was home care: 78% of developing and emerging turnover grew by 8.2%. And William Lever’s initiative in getting into these markets decades before P&G was now paying off in spades. In 2010, Comfort gained 5.7 million new users in China while Rexona deodorant lotion picked up 5.3 million in Indonesia. The future of Unilever would be decided in these markets, where brands and categories were being built with staggering numbers of new consumers.
The Unilever sustainability agenda also took another step forward with the announcement of the Unilever Sustainable Living Plan, which committed to help more than a billion people take action to improve their health and well-being, halve the environmental impact of company product use and manufacture and source 100% of agricultural raw materials sustainably. With some tidying up of the brand portfolio through divestment and the announcement of the blockbuster purchase of the Alberto Culver Company for $3.7 billion, Unilever was, as the CEO proclaimed, ‘now fit to compete’.
2011
Given the renewed economic uncertainty in many of Unilever’s key markets, it would have been hard to match the 2010 performance. And so it proved. Underlying volume growth dropped back to 1.6%, although significant cost-driven price increases totalled €2.4 billion, driving the underlying sales growth up to a recent high of more 6.5%. As ever, performance differences between emerging and developed markets were marked. India, China, Turkey and South Africa again grew double digit, powering an 11.5% sales increase across all emerging markets: the company’s developed markets trod water. The combination of price increases and a further €1.5 billion in cost savings protected the operating margin and enabling a modest increase in the company’s €6 billion advertising budget (Unilever are the world’s second-largest advertiser). Dove became the company’s first €3 billion personal care brand and more than three million shops signed up to the Unilever perfect store programme.
The speed with which Unilever now operated was light years ahead of the days of the special committee and the convoluted organisation chart. Axe Excite was launched in 100 markets in the year, seventy innovations were launched into more than ten markets, and within nine months of completing the Alberto Culver acquisition, TRESemmé had been launched into Brazil, Simple into the U.S., and Motions into South Africa. The Genesis programme was now producing some genuine breakthroughs, including a process to preserve the essence of freshly picked tea leaves - incorporated into PG Tips and Lipton Yellow Label - and the Motionsense technology that greatly prolonged the efficacy of Rexona deodorant: tiny bundles of fragrance were released during the day as the wearer moved around. Unilever had also joined the herd of big companies embracing open innovation, working with five hundred external partners during the year.
The categories were again reflecting the differential exposure to emerging markets. Personal care led the way with an underlying volume growth of over 4%, home care delivered 2.2% more volume, and refreshment (the newly-named ice cream and beverages category) grew volumes by only 1.4% while the beleaguered foods division dropped 1.2% by volume: spreads, dressings and soups were not developing and emerging favourites.
2012
But 2012 was strong year. Despite increasing commodity costs, the core operating margin increased to 13.8%, boosted by Magnum and Sunsilk. Unilever now have 14 brands with sales of more than $1 billion per year and these key brands accounted for almost 50% of the 2012 growth. The launch of TRESemme in Brazil was also one of the company’s most successful ever, adding €150 million to turnover, which increased by 10.5% and took Unilever above the €50 billion barrier for the first time, although the emerging markets continued to be the prime engine for growth. They now account for more than 55% of total business
What is Their DNA?
There can be no doubt that Unilever is a unique company. And much of that uniqueness can be traced back to the company’s three key formative elements: William Lever himself, the 1929 merger that created a multi-category, multi-national company and the company’s remaking into a focused packaged goods company.
Making Acquisitions Work
William Lever saw almost from the very beginning that acquisitions were the path to success in the soap and detergents battlefield. Anybody could make soap; indeed, when he started his business, most housewives did. But it was only scale that could provide the security of low cost ingredients and the resources to create entry barriers by bringing in ever more complex science. Lever acquired his way to complete UK market dominance and his successors were equally enthusiastic participants in the great inter-war shakedown of the US soap industry. Similarly, the company’s Dutch margarine barons employed the same before the big the merger. Afterwards, and for almost all of Unilever’s history, it has been a serial acquirer of businesses, buying at least a thousand. It may have bought the wrong ones sometimes, like prestige cosmetics that didn’t fit their strengths, and it may have purchased the occasional dud, but along the way it built unparalleled experience and expertise at absorbing what it bought. It is a strength that was not much needed during the prolonged divestment phase, but we forecast it will play an increasingly important role in the drive to double the size of the business.
Emerging Markets
That this is a unique strength of the business has been apparent throughout this chapter. The scale of Unilever’s emerging markets business, accounting for 54% of the sales and rising, is impressive enough: Nestlé clock in with around 40% and P&G with 36%. Second comes organic sales growth, which Unilever has been achieving ever since emerging markets hit the radar. It has averaged a 9% underlying sales increase over the past twenty years in these very fertile markets. Put perhaps most important is the depth of engagement the company has with retailers and consumers. Unilever has not simply acquired its way to an emerging market presence as have many of its packaged goods peers, but has been building brand equities and retail relationships for many decades. The company has unparalleled experience of operating in sometimes extremely basic and volatile economic conditions, which give it an expertise often absent elsewhere. Lifebuoy, for example, is the hand-washing soap of choice for countless millions rural poor. Who amongst Unilever’s global competitors would possibly devote the resources
needed to distribute and then displace this fantastic brand that William Lever invented? Unilever’s primary competitor in emerging markets is emerging local companies, so it is important Unilever can act locally enough to head off these threats. But Unilever has been managing local talent for decades. In virtually every emerging market of note it is number one and the most sought-after packaged goods employer. The huge advantage of emerging markets is only Unilever’s to lose rather than someone else’s to supplant.
Local Roots with Global Scale
The divestment of non-packaged goods businesses followed by the creation of a global operating structure has created a new and recent addition to the Unilever DNA: a superb balance of global and local capabilities. In the past it must have seemed to the likes of P&G that competing with Unilever was competing with a loose association of extremely local companies, an advantage that enabled P&G to decimate Unilever’s detergent market shares in Europe. Today however, P&G are in effect facing a new global competitor with strong global brands being rolled out - seemingly effortlessly - into almost every market by a strong, very well established, ear-to-the-ground organisation. Somewhat ironically, this is the very model William Lever envisaged as he took Sunlight soap to as many countries as possible. The sharpening of Unilever’s somewhat lax historical performance culture by the current CEO looks like being the final piece of a now-complete puzzle that should make Unilever the very best global-local packaged goods business.