Unilever this week held its annual investor day in Port Sunlight, the village built in the 1880s by one of the companies that were the forerunners of the consumer goods giant and now home to the research and development arm of the group’s home and personal care business. However, Unilever’s management used the occasion to give an update on the company as a whole, including on its plan to drive improvements in its profitability and on where it sees growth from food. Dean Best reports.
“The biggest change at Unilever for a decade”
Unilever has in recent months been busy working on a number of initiatives to adapt some of the macro pressures and challenges facing all FMCG companies: from lacklustre demand and deflation in much of Europe to volatility in emerging markets; and from changes in areas such as consumer eating habits, technologies and channels to the need to be, as the Knorr and Magnum maker sees it, being at the same time global and local.
At Unilever’s 2015 investor day in Singapore, held at the end of November and start of December, and when the company published its trading statement for the first quarter of 2016 in April, the company touted three initiatives – net revenue management, zero-based budgeting and new functional models – it said would drive efficiency and strengthen its organisation.
Since then, Unilever’s work on adapting to the macro pressures facing the business has crystallised into an overarching programme dubbed “Connected 4 Growth”, which the company first outlined in July when it announced its half-year results but about which CFO Graeme Pitkethly and then CEO Paul Polman spoke at length at Port Sunlight.
Pitkethly said Unilever has devised Connected 4 Growth to “put more resource directly in our markets” and, he added, to try to make the company “faster, simpler, more agile, more consumer- and customer-centric and ready for the connected world”.
The new organisational model contains Country-Category Business Teams – say, for example, UK Foods, – that, Pitkethly told analysts, are “responsible for driving performance, brand penetration, market share and competitive growth”. Alongside these teams are Unilever’s “global brand communities”, which, he said, are “closer to the markets and can select exactly the right person to create a piece of work and lead a project as required. This way, the organisation will reduce duplication and hand-offs, unlock trapped capacity, make us more agile and lower cost.”
Pitkethly added: “It represents the biggest change Unilever has undergone in the last ten years. We’ve invested a lot of time in the redesign as it’s really important to get this right and we’re now putting it into place.”
Polman described the Country-Category Business Teams as “the centre of gravity of the business”. He told analysts: “You should see them as mini-entrepreneurs, with full responsibility and accountability for delivering the results, including the financial parts of it. These CCBTs report into the categories to give the categories the connection with the markets and the ownership of delivering in these markets without any hand-offs, faster feedback on the insights and faster delivery of the results we need in the marketplace. At the same time, the markets themselves have a tremendous job. If you are the general manager in a market, you need to have a go-to-market strategy, which depends on your portfolio, your development in the market, the external constraints the market has – not every market deals with the same competitors or regulatory environment. There’s a huge job to be done to develop these country strategies, to enable these markets to grow.
“It really is a different operational model that affects everybody in the organisation. This makes it challenging and makes it one of the biggest change efforts this company has ever done. It fundamentally changes the way we do business. Where we’ve implemented this already, we see significant differences in results. We’re very positive that this is the right thing to do.”
Unilever is aiming to have the programme in place by the third quarter of 2017.
Extending zero-based budgeting
Pitkethly said Unilever’s Connected 4 Growth programme is being “enabled” by three initiatives – net revenue management, zero-based budgeting and “digital 2.0”, which he described as moves to “deliver consumer-centric, data-driven, multichannel media”.
At Port Sunlight yesterday, Pitkethly told analysts Unilever is aiming for its net revenue management, which includes moves to “optimise” prices and promotions, to have been rolled out to a portion of the business accounting for half its turnover by the end of this year.
Unilever, meanwhile, has been among a cohort of food majors to have started to implement zero-based budgeting in an attempt to manage costs and boost profits. The company had earmarked EUR1bn in savings by 2018 from the organisational changes through what was the new functional models but is now the Connected 4 Growth programme, plus from its implementation of zero-based budgeting. Pitkethly said moves to extend zero-based budgeting to Unilever’s supply chain and to a “wave of smaller countries” mean the company now expects those savings to grow to “more than EUR1bn” by 2019.
Speaking to analysts yesterday, Polman sought to emphasise why Unilever had decided to bring in zero-based budgeting but insisted the way the company is implementing the practice is different to some of its peers. “It’s not so simple as the zero-based budgeting that some of our other competitors out there make you believe – which has been roughly translated into ‘Let’s cut all the costs as long as we can get away with it to show you better margins for a short period time but I can’t promise any growth along the way.’,” Polman said. “Our ZBB is really about looking at re-engineering all of our processes to make our company more focused, more ownership accountability and to be faster, to take the waste out but also to re-invest where it counts, to be able to grow faster and to be more front-facing.”
A new margin target
Unilever outlined a new target for operating margin, in part driven by plans to widen the company’s use of zero-based budgeting.
The company has set a goal for its “core operating margin” to rise between 40 and 80 basis points a year between 2017 and 2019. The new target is up from Unilever’s current goal of annual growth of 20-40 basis points.
Pitkethly said Unilever’s core operating margin in its 2016 and 2017 financial years would “be in the lower half” of the new target range. “This year and next are years of transition. Restructuring costs will be slightly higher than the normal 100 basis points or so,” he explained.
Asked for the categories or countries that could help Unilever meet its new margin target, Pitkethly said: “Our approach to innovation. Having 75% of our innovation being accretive to gross margin is a very, very large driver of that. Looking around the geographies, whilst we need to invest to remain competitive first and foremost, a lot of the investments over the course of the last three or four years have been focused on North America. Our margin came down in North America as a consequence and we’re now seeing quite a fast recovery of the margin in North America.”
Unilever stuck to its forecast for its top line, which is “to grow ahead of the market”, even if the company expects market growth to be lower. Martin Deboo, an analyst covering Unilever at investment bank Jefferies, called out the new guidance in his analysis, published this morning, of the investor day. “It’s the symbolism that is resonating for us this morning. Unilever have felt compelled to offer guidance for the first time in nine years, having famously suspended it in 2009. The balanced ticket of growth, margin and cash contrasts with the ‘win share, grow volume and profit and cash will follow’ mantra of the early Polman years – the words are ours,” Deboo wrote. “The inference is that Unilever, like Nestle, have felt obliged to capitulate to the new verities of perma-deflation in developed markets, chronic volatility in emerging markets and the associated de-stabilising influences of channel shift and more vigorous local competition.”
Being global and local
It fell to Amanda Sourry, the president of Unilever’s foods business, to utter the ugly word “glocal” as she presented to analysts in Port Sunlight yesterday. But Unilever’s bid to be global and local was a common theme in all of the management’s presentations.
With Unilever’s worldwide presence and scale, it is obvious the company is one of the more global FMCG players and will continue to seek to push a range of international brands, which, in food, will include Knorr and, from its ice cream-to-tea refreshments arm, Magnum and Ben & Jerry’s.
However, Unilever looks set to be putting just as much importance on trying to be as “local” as possible. Polman, in explaining the rationale for the Connected 4 Growth organisational changes, admitted the company “became a little bit too centralised and in some cases far too removed from the consumers we wanted to serve”. He added: “When you see who is growing, you see it is local competitors. They are closer to consumers in these markets. We need to be sure that the next step in this company addresses this question of agility. We believe we do have a competitive advantage in responding to this, not least our long presence in these emerging markets.”
Pitkethly, explaining the macro pressures facing the business, pointed to how “new trends in technologies are shaping the future, disrupting traditional models on a global scale, while at the same time encouraging fragmentation at a granular, local scale”, adding that, while Unilever was “in aggregate” gaining share in its categories, “the big winner is local players”.
Kevin Havelock, the president of Unilever’s refreshment division, remarked: “We want to make sure we are truly global but also truly appropriately local.”
It is clear one of the biggest challenges facing the likes of Unilever is the growing strength of local competitors. The company’s strategists will be crucial in monitoring local competition and will be on the hunt for insight on the local businesses, especially in emerging markets, that could be threats to the multinational.
Food “very strategic”
The push to be as local as possible will perhaps be most felt in food, one of the most fragmented industries in FMCG as tastes and habits remain more region- or country-specific than in other consumer goods industries.
Sourry insisted half of Unilever’s food portfolio is made up of “truly iconic local brands” including Bango soy sauce in Indonesia and Kissan ketchup in India.
Most of Unilever’s recent acquisitions have been outside food and the bulk of its disposals have been in the category, taking the division down from being 35% of the business in 2008 to 24% at present. The more focused nature of Unilever’s food portfolio has helped the business eke out sales growth from the business, while the division has managed to see growth in its own core operating margin, Sourry noted.
The disposals from Unilever’s food portfolio have largely – though not exclusively – been in developed markets, contributing to the fact emerging markets now account for 43% of the company’s food sales, up from 30% in 2008. However, Unilever’s work to try to grow its food business in emerging markets has also paid off, with sales in those countries up over 3% in 2014, 7% in 2015 and more than 7% in 2016 so far.
Sourry says emerging markets will “continue to be a key pillar” of the strategy for Unilever’s food business, calling out some “powerhouse markets” including Brazil, Mexico, South Africa and Indonesia. “It’s about how do we continue to accelerating our powerhouse markets, where there’s enormous opportunity for packaged food still, underpinned by positive factors, such as continued urbanisation, increasing the number of women who are working and consumers looking for more convenient options and, in many cases, looking for other flavourful options from other parts of the world as well. Growing those powerhouse markets, where Unilever has also got incredible sales muscle as well. Leveraging very strong local jewels … and really embedding sustainable nutrition into everything we’re doing in emerging markets,” she explained.
Connected 4 Growth, she argued, would help Unilever’s local food brands. “In creating an organisation that is global and more local, it enables us to be more global but absolutely executed in the right way at a global market … giving far more flexibility to some of our local iconic brands to be fast, agile and to some extent unshackled from being part of a global category.”
When either attending or viewing analyst conferences, just-food has heard Unilever asked numerous times about the future of its food business in the wider group. Those questions have been asked less as the performance of the division has improved. In Port Sunlight yesterday, Polman was asked what role he sees food playing in the company’s strategy.
In his answer, Polman first looked to the past, pointing to the fact Unilever’s food business was now, after the company’s disposals, “more focused”, generated more of its sales through emerging markets and had strong positions in its five categories (including ice cream and tea). “It’s a very focused business, which is number one in each of these categories, with twice the share of our competitors, with the exception of savoury, where we are increasing the share gap but we don’t have the price,” Polman said.
He then suggested Unilever’s Sustainable Living Plan, a programme to reduce the company’s impact on the environment and “decouple” that impact from its growth, can help the company react to changes in consumer demand in the food sector. “What is happening in this category is there’s an enormous change at an enormous speed in the way people eat. I never thought the US market would change. The bigger the hamburger, the more on your plate, the more calories, the lower the price, the happier they seemed to be but that country has changed quite dramatically at a speed nobody had anticipated. It put a lot of companies in a challenging position. In that scenario, growing 4% is pretty good. One of the reasons we can respond is because of our Unilever Sustainable Living Plan.”
What’s the future for spreads?
Two years ago, Unilever announced a move to put its spreads business into a standalone operating unit – Baking, Cooking and Spreading – that would report into the consumer goods giant’s wider food business in a bid to try to get the division growing.
Sales, however, have remained under pressure and analysts have speculated about the future of the business, which includes Flora and Becel, weighing up it whether it could be put for sale. Ahead of Unilever’s investor day, some analysts were looking for the company to provide an update on the future of the unit.
Unilever’s management said the company is focused on preserving the value of the spreads unit and investing the cash from the under-pressure division into other parts of its operations – but will continue to look at options for the business were sales to remain in decline.
Polman, who sounded a little frustrated at the questions Unilever has faced in recent months about the unit, said the company would not simply “get rid” of the spreads unit and said there were “pockets” of the business where it was “responding”. However, he acknowledged Unilever would continue to look at the options for the business if sales carried on declining.
Jefferies Deboo, who attended the event, said this morning: “There was no get-out-of-jail free card played on spreads, as we expected. The objective is to preserve value. This would appear to resolve into an ambition to limit sales decline to low single digits (from the current minus five to minus seven per cent or so) and to harvest cash to compensate, following a capex bulge. A non-trivial challenge to our eyes, but one which Unilever have little choice but to accept. Strategic buyers are in short supply and we think that a listing simply isn’t viable with the top line in such poor shape.”