ADVERTISING & MARKETING : Unilever Moves to Simplify Business, Boost Earnings : The food and consumer-goods titan, like its rivals, is narrowing its focus to top-selling brands as competition intensifies.
Companies don’t come much more complicated than Unilever.
The food and household-products titan sells $5.5 million of Ragu pasta sauce, Aim toothpaste, Lipton tea, Wisk detergent, Lawry’s seasonings and hundreds of other products every hour worldwide, or $48 billion a year. It has two parent companies, one British and one Dutch. It has two stocks trading on U.S. exchanges alone and two co-chairmen of the board.
But Unilever knows that to get shelf space in stores today, complexity won’t cut it. So Unilever is following the lead of such rivals as Nestle and Procter & Gamble Co. and undergoing a massive restructuring to make itself leaner, more focused and more profitable.
They’re all taking that step because, with slow sales growth industrywide, the companies are fighting to grab market share from one another--and from stores’ growing lines of private-label goods. That means focusing all their firepower on those brands that are best-sellers.
Unilever still has an astonishing 1,800 branded products worldwide, and its top executives “have said explicitly that’s too many,” said Unilever spokesman John Gould Jr. in New York. The company is aiming “for less than half that,” he said.
In the U.S. market, especially, the pressure to rally around only the top brands is even more intense, because a wave of supermarket mergers has narrowed the number of customers Unilever and the others can pursue.
So Unilever, like its competitors, is thinning down.
“Unilever generally takes longer than others to find religion” when it comes to dramatic shifts in strategy, said veteran food analyst Nomi Ghez of Goldman, Sachs & Co. in New York. “But this is a formula that’s proven successful for others, and I think it will prove successful for Unilever.”
Practically speaking, Unilever operates as a single entity, and both its British and Dutch parents--Unilever PLC and Unilever NV, respectively--have the same directors. But they keep separate stocks, and each has a chairman: Niall FitzGerald on the British side and Antony Burgmans at the Dutch parent, based in Rotterdam.
Its strategic shift has already started to pay off. Unilever recently said its second-quarter profit edged up 3% from a year earlier, which was a strong showing relative to the company’s past performance. Its Asia-Pacific business is starting to recover from a deep slump.
Moreover, Unilever earned 6.5 cents for every dollar of sales in the quarter, a big improvement from the 4.5-cent profit margin it saw in the early 1990s. The gain is also impressive because it’s been tough for food and household-products makers to push through price increases.
“We look for further strong margin and profit growth in the second half” of this year as well, analyst Martin Dolan of Merrill Lynch & Co. said in a recent bulletin to clients.
Yet Unilever’s stock price shows that its comeback is still greeted with skepticism. The company’s American depositary receipts--which represent shares of Unilever’s British parent and trade on the New York Stock Exchange--have dropped 22% so far this year after gaining 30% in 1998. They closed Friday at $39.56 per ADR, up $1.38 on the day. Shares of Unilever’s Dutch parent also trade on the Big Board, and basically mirror the movement of the ADRs.
Unilever isn’t alone, to be sure: The entire food sector of the stock market has languished so far this year. Standard & Poor’s index of major food stocks has dropped 13% this year, compared with a 10% gain in the benchmark S&P; 500 index.
“The first half of 1999 saw the food and household-goods sectors underperform very sharply against a raft of profit warnings” from the industries’ major players, said Charles Mills, an analyst with Credit Suisse First Boston in London. But he predicted that Unilever’s sales growth and stock price “should do better in the second half this year.”
But Unilever’s sluggish sales--they are growing only in the low single digits--remain a concern. The company is predicting improvement as its restructuring takes hold, but “the [sales] volume growth of Unilever remains well behind that of its peers, i.e. Nestle,” said analyst Nic Sochovsky of Lehman Bros. in London.
Unilever’s enormous product line spans nearly every aisle of a supermarket: Birds Eye frozen foods, Country Crock butter spreads, Breyers ice cream, Lever 2000 and Dove bar soaps, Close-Up toothpaste, Sure deodorants and Suave hair products, just to name a handful. And the company spends nearly $1 billion a year on advertising to promote them in the U.S. market alone.
Unilever was created in 1929 when Lever Bros., a British provider of foods, soaps and other household products merged with Dutch rival Margarine Unie. A spree of acquisitions during the last 20 years has given Unilever its massive size; the company bought 100 companies between 1992 and 1996 alone.
But Unilever also labored under its titanic girth. It had too many unrelated, and underperforming, divisions. Costs weren’t aggressively controlled. Too many of its brands lagged too many competitors in market share. Unilever earned half what, say, rival Procter & Gamble earned on every dollar of sales.
So FitzGerald has led the charge to narrow Unilever’s focus. The company has sold assets ranging from a tractor franchise to a specialty chemicals unit. It’s also streamlining its entire operation--from buying ingredients to manufacturing to distribution--to be more efficient and shave costs. Emerging markets such as Russia, India and Latin America became a top priority.
There’s also the push to weed out Unilever’s mediocre brands. Yet the company also wants to take its most popular brand names and extend them to other products.
Example: its Lawry’s seasonings unit. Unilever is in pacts with supermarkets whereby the stores sell prepared meats and fish marinated with Lawry’s seasonings, and they’re wrapped in packaging that carries the Lawry’s name and logo.
“You’re going to see Unilever doing more things like that,” Gould said.
Unilever also doesn’t rule out buying more companies, even as it’s cutting back on its existing brands. But the company sharply reduced its war chest for acquisitions in May, when it paid its stockholders a special dividend that totaled about $8 billion.
Regardless, analysts are warning that from here on, Unilever is likely to be hitting more singles than home runs in terms of boosting its performance, simply because its markets are mature and rife with strong competitors.
“The low-hanging fruit has been picked,” said Ghez of Goldman Sachs. “The things that are easy to do and are visible, Unilever has done them. Now it’s a story that will be more gradual in unfolding, and require more patience” from investors.
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What Lever Sells
Unilever, the food and household-products giant, is streamlining its operations to boost its sales and earnings growth. Here’s a breakdown of Unilever’s product groups and their percentage of total sales:
Personal care: 25%
Household care: 23%
Foods and bakery: 18%
Ice cream and beverages: 17%
Culinary and frozen: 16%
*
Note: Percentages do not equal 100% because of rounding.
Source: Unilever
