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Corporate Business Review
CORPORATE MARKETING STRATEGY
Author: Thien Tran
March 2015 | Iss.No: 3
SHOULD UNILEVER SELL FLORA AND
BUY PERSONAL CARE BRANDS?
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Executive Summary
Tough economic and financial headwinds with increasing competitive power made 2014 one of
the most challenging years that the industry and Unilever have faced for some time Michael
Treschow, Unilever CEO said. Unilever ended 2014 with unsatisfactory result when turnover
was down 2.7% reaching 48.4 billion. A slowdown in the growth of emerging markets and
changing consumer behavior in developed markets continued to show caution and impacted on
the Group turnover. It is evident that Personal Care and Foods are the companys most
profitable categories, but both recorded by far lower sale growths, especially Foods (-0.6%),
compared to previous year. To create sustainable corporate strategy, Unilever has disposed a
dozen food brands and acquired many personal care brands which enable the company to gain
accessed to wider global markets. Flora is one of Packaged Food brands but is has constantly
showed poor performances since 2009. Hence, Unilevers recent announcement shows that the
company plans to spin off spreads and probably sells Flora margarine to buy more personal care
brands. What are sustainable and profitable strategies Unilever should follow?
Introduction
Unilever, a long-standing cooperation merged between the Dutch margarine maker Unie and
British soap producer Lever Brothers is struggling with a tough decision of disposing its
heritage Flora margarine to acquire more personal care brands. The concern was raised after a
survey with Anglo-Dutch companys biggest shareholders had been conducted and reported by
Financial Time in 2015. Food solutions and personal care are two biggest categories that have
gradually boosted Unilever from market challenger to market follower without the exception of
being market leader in some sub-categories such as bath and shower. No one can deny that one
of crucial factors leading to this success is acquisition and disposal strategy Unilever has
constantly pursued in recent years. However, what to sell and what to acquire are not easy as
one two three as it not only affects brand equity, corporate sustainable development strategy,
but also impacts directly on investors and shareholders who trust and invest in the company.
With a constantly poor performance, Flora margarine is losing its reliability and profitability to
investors while its fellows, personal care brands are rising strongly and gaining value share in
major markets. Recent acquisitions and disposals of Unilever have raised concisions among
investors. The question is that whether or not Unilever should dispose Flora? What strategy
should the company do to ignite growth of this category growth in the long term? This report
will evaluate Unilevers personal care and packed foods performance, especially margarine to
recommend short-term and long-term strategies to help the company develop sustainably.
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Unilever Operational Highlights
2014 is considered as unsatisfactory year of Unilever as turnover was 48.4 billion, down 2.7%
due to a negative impact from foreign exchange of 4.6% and net acquisition and disposal of 0.9%
as reported by the company. Additionally, gross margin declined 0.2% points driven by
currency-related cost increase in emerging markets. Conversely, underlying sales grew by 2.9%
along with a steady increase in core operating marketing from 14.2% in 2013 to 14.5% in 2014.
Due to acquisition and disposal, Unilever free cash flow fell by 0.8 billion to stand at 3.1
billion in 2014 (Unilever annual report, 2104).
Unilevers portfolio has four categories: Personal Care, Foods, Refreshment and Home Care in
which Personal care is Unilevers largest category, accounting for 41% of operating profit and
37% of Group turnover equivalent to 17.7 billion in 2014 as reported by the company. This is
followed by Food category representing 45% of operating profit and 25% of Group turnover.
Home Care and Refreshment come next with exactly same turnover of 9.2 billion, and
underlying sale growth of 5.8% and 3.8%, respectively (see figure 1). As a matter of fact, Foods is
a core part of Unilevers business with over 12.4 billion turnover in 2014, but this category has
underperformed the rest of Unilevers segment since 2009. Foods growth has lagged behind not
only the personal care and home care but also refreshment (ice cream and beverages). 2014 was
not an exception, with Foods being the only declining segment in the companys portfolio
(0.6%).
Figure 1: Unilevers performance by category 2014 (Source: Unilever report, 2015)
While this category improved profitability, sales were affected by a continued deterioration in
market conditions, particularly for margarine. Therefore, Unilever has recently announced that
the company plans to spin off spreads division which makes investor doubt about the companys
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long term commitment to the category. Finding dynamically growing and profitable niches in
these markets will be crucial for Unilevers future growth performance in food.
Packed Food at Glance
As reported by Euromonitor (2014), the worlds packed foods comprising, snacks, oils and fats,
sauces, dressings and condiments and ice cream, and soup generated a significant sale value of
US$2,354 billion in 2014. Among these categories, oils and fats is the most outstanding with
US$125 billion, closely followed by Sauces, Dressings, and Condiments standing at US$121
billion. Ice Cream and Soup together made up approximately US$96 billion.
Figure 2: The worlds top packaged food companies (Source: Euromonitor, 2014)
Unilever is the four largest packed food companies in the world with the operating margin
reaching 14.5% and value share of approximately 1.7% in 2014. The company is considered as
the most profitable companies among its peers on a par with Nestle and PepsicCo as shown in
figure 2 and 3. However, the companys ranking in packed food fell over 2009 2014 as its
business switched to focus on beauty and
personal care, and home care. In 2014, Unilever
divested a number of packed food long-standing
brands, including the sales of its global meal
replacement brand Slimfast to Kainos Capital,
Peperami and Bifi meat snack brands in Western
Europe to Jack Links, its Royal pasta brand in
the Philippines to RFM Corporation, and its
Ragu and Bertolli pasta sauces in North Figure 3: Unilevers value share and market share
(Source: Euromonitor Passport, 2014)
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America to Mizkan Group. At the end of 2014, its struck deal with Peter Kollin to sell its Mazola
cooking oil in Germany, Australia and Switzerland in 2015 (Unilever, 2014). As a result of these
divestment, its share in packaged food dropped down by 15% basis points over 2009-2014.
Figure 4: Unilevers packaged food performance by sub-category (Source: Euromonitor, 2014)
As is shown in figure 4, the combination share of spreads and oils and fats sales within
Unilevers overall sales decreased to 20% in 2013 whilst ice creams share has surged from 33%
to 40% over 2009-2014. Margarine, cooking fats, spreadable oils and fats, butter and spreads
CARG are underplayed Packaged Food. The only product category which has outperformed the
market is olive oil. In terms of category value, margarine recorded the lowest value of
approximately US$ 5 million whilst majority of sale generated by vegetable and seed oil.
Spread, cooking fats and spreadable oils and fats recorded particular low growth over 2009
2014, highlighting the decreasing relevance of the categories to Unilever.
In a recent article, Financial Time raised a concern that Unilever should sell its
underperforming Flora margarines business and buy more personal care companies, according
to an investor survey with some of the Anglo-Dutch companys biggest shareholders. This seems
to conform to the corporate strategy of narrowing down weak brands and focusing on master
brands to compete against other giants in FMCG industry. However, acquisition and disposal
are not literally easy as one two three, so it is necessary to explore reason influencing to sale
drops before setting up strong place in the long term.
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Causes and Effects
Unilevers surrender is a tacit admission that
butters return to grace is no fluke (Bloomberg,
2014). The companys share of the U.S. market for
butter and margarine declined to 18.6 percent in the
four weeks ended November 2014, according to
Nielsen data cited in a Bernstein report. Thats a
three percentage point drop from previous year.
Flora Margarine is struggling with the switch from
margarine and spreadable oils and fats to butter as
consumers perceive as healthier, less artificial and
richer and creamer (Marketline, 2014). As is shown
in figure 5, butter had been more popular than margarine in the early 1930 but it dramatically
fell as opposed to a peak of margarine in 1976. However, these positions have been reset recently
as consumers opted for the naturalness of butter despite its high saturated fat content.
Besides the return of butter consumption, Unilevers Flora margarine is also impacted by bread
consumption. According Unilever, although the packed food profitability improved significantly,
sales were influenced by an increasing change in consumer eating habit, particularly for
margarine where the decline in bread consumption has had an impact the spreads markets in
Europe and North America. Last but not least, it is evident that the majority of Group turnover
stemmed from North America and Europe that are considerably most profitable yet sensitive, so
spreadable oils and fats together with margarine are not an exception. The US and core Western
European markets which combined accounts for 56% of Unilevers packaged food sales, these
categories are typically mature and slow growing (Euromonotor, 2104). Should Unilever sell this
low performing category to buy personal care brands? To answer this question, it is necessary to
evaluate long-term strategies Unilever towards personal care category.
Personal Care Scope
The global personal care market is constituted of companies that dominate the products
segment and those that lead the appliances segment. The major competitors of the personal care
appliances market mentioned in the TMR report include Colgate-Palmolive, Johnson &
Johnson, Procter & Gamble, Royal Philips Electronics NV, , and Panasonic Corporation. Some of
the top beauty care products companies are LOral Paris, Avon Products, Este Lauder,
Figure 5:US butter & margarine consumption
(Source: Bloomberg, 2014)
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Unilever PLC, and Procter & Gamble. Leading companies in the world hygiene industry are
Colgate-Palmolive Company, Unilever, Johnson & Johnson, Godrej Industries Ltd., Helen of
Troy Ltd., and P&G. Unilever is the third leading beauty and personal care (BPC) player globally.
Its sales in beauty and personal care mainly drive from beauty staple categories including hair
care, bath and shower and deodorants.
Figure 6: Unilevers BPC versus global performance (Source: Euromonitor, 2014)
The figure 6 indicates Unilevers beauty and personal care versus global growth performance
between 2009 and 2013. It is evident that the companys performance peaked in 2011 driven by
acquisition of Alberto-Culver which does not only
place Unilever in the US beauty and personal care
but also penetrate to mass-range salon brands in
retail channels. The companys BPC steadily went
down in the next two years due to the impact of
emerging market, but it still well exceeds global
market growth. It is no doubt that acquisitions
and new market penetration are key strategies to
drive growth of top players. Among the top 10
global BPC companies, Unilevers growth over the
2008-2013 periods is the most outstanding driven
by the forceful acquisition strategy it has pursued
between since 2010. This enables Unilever to
shorten the gap with other BPC players. Although
Unilevers global third position has been constant over the 2008-2013, its market from
expanded significantly from 6.1% to 8.1% as is shown in figure 7. This was fueled by dozens of
global scale acquisitions, including Sara Lees personal care brands in 2010 and Alberto-Culver
Figure 7: Global BPC players 2008-2013
(Source: Euromonitor passport, 2014)
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in the US in 2011. Consequently, Unilever has increased its beauty and personal care sales by
almost 70% since 2008 (Euromonitor, 2014).
Whats the story?
Under its newly announced premiumisation strategy, Unilever is aiming its activities to
strengthen personal care portfolio with new range of acquisition. Looking back to 2005, the
company decided to actively pursue commodities categories selling off its premium division to
Coty (Marketline, 2014). Before that Unilevers brands have traditionally been mass, selling at
lower price points and offering basis features. However, it is now pursuing premium tier to help
sales growth in developed market, valued for broadening market size and consumers
increasing income level, and expanding to emerging markets. The figure 8 shows that
Unilevers deodorants portfolio historically has had a wide coverage across the pricing
spectrum. The company is now working towards moving up the pricing tiers in the hair care
category by aiming to acquire more hair care brands in the next three years
Figure 8: Unilevers BPC growth prospect by subcategory 2013-2018
(Source: Euromonitor, 2014)
Unilever has strong exposure to emerging markets, accounting for 63% of its total beauty and
personal care sales in 2013, compared to approximately 50% for P&G (Euromonitor, 2014).
Increasing premiumisation of the companys portfolio allows it to achieve a wider growth
potential across the world. There are an increasing numbers of sophisticated products in
developed countries that can be sold at higher units price and thus help to drive value growth.
As is shown in figure 9, Middle East and Africa, Latin America and Asia Pacific are three
strongholds that Unilever will aim to win in the next 3 years.
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Figure 9: Unilevers BPC growth prospect by region 2013-2018 (Source: Europemonitor, 2014)
Results
Acquisition of personal care brands, especially hair care,
enables Unilever to increase coverage and gain market
share in profitably developed markets. Particularly,
Unilevers sale in Western hair care markets increased
40% following the acquisition of Alberto-Culver. Most of
which came from the worlds largest hair care market the
US, where Unilever sales increase over 100% between
2008 and 2013 (see figure 10). Through the acquisition of
this brand, Unilever gained access to one of the most
profitable segments of hair care which are affordable
salon brands in retail channel (Euromonitor, 2014).
TRESemme, an Alberto-Culver salon brand was
performing strongly in US retail channels with a distinct
value proposition. Unilever positioned this brand
portfolio at accessible price point compared to other salon
ranges, leading consumers to perceive the brand as good
value for money.
Furthermore, Unilever is the market leader in global bath and shower, with over 21% value
share followed by Colgate-Palmolive at 9% in 2013 according to Euromonitor research.
Traditionally, Western Europe account for a smaller proportion of Unilevers bath and shower
Figure 10: Unilever hair care in developed
markets (Source: Euromonitor, 2014)
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portfolio, although this is literally considered as the second leading regional market for global
bath and shower.
In addition, the company is leader in deodorants
making up over 35% of the global market in 2013,
compared to just 11% for the second ranked player
Beiersdorf as shown in figure 11 With the acquisition of
the Sara Lee personal care brands, Unilever aimed to
expand its presence in this category in Western Europe
and has recorded market share growth since 2008.
Beside hair care and deodorants, Unilever is also the
world third leading player of skin care category which is
the fourth leading category in its beauty and personal
care portfolio with US$5.6 billion in retail sales, mostly
generated by developing market. Recent acquisition of
skin care brands such as Simple, St Ives Swiss Formula
and Noxzema has increased Unilever exposure to facial
care in Western markets.
Recommendation
Flora Margarine
Despite of low turnover, it is recommended that Unilever should not sell Flora margarine, but
buy more personal brands. A potential sale of spreads business has its merits but could also be
risky. Exiting spreads could lead to a lower Unilevers EBIT significantly, which goes against the
companys priority of revenue growth. In addition, the move could also lead to a considerable
loss of scale. It is obvious that Unilever has been the leading player in oils and fats or over
decades, providing the company leverage to boost its market exposure. Exiting such as a big
category, which is an integral part of Unilever business and heritage, may result in reduced
bargaining power and visibility for Unilever product in retail outlets. Moreover, continuing to
sell its lowest growth business, as the company has been doing in the last few years, could turn
into a vicious circle which dilutes shareholder returns. Therefore, exiting this category could be
risky in the short-term for Unilever.
Figure 11: Global deodorant value share
(Source: Euromonitor, 2014)
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For the time being, developed markets, especially Western Europe and North America maintain
top two positions of Unilevers packaged food over 2009 2014. These two regions are
projected to decline further with a CAGR of less than 1% over 2014-2019. Meanwhile, Latin
America was the companys fastest growing market with a CAGR of 11.5%, accounting for 74% of
Unilevers packaged food value sales between 2009 and 2014 (Euromonitor 2014)(see figure 12).
Figure 12: Unilever packaged food growth by region (Source: Euromonitor, 2014)
The figure 13 clearly shows that developed countries shares in Unilevers packaged foods have
been decreasing continuously over 2009-2014 down from 74% in 2009 to 61% in 2014, whilst
emerging markets have shown the opposite trend up from 26% in 2009 to 39% in 2014.
Figure 13: Unilevers share of packaged food by geography (Source: Euromonitor, 2014)
Among emerging markets, China, Brazil and Russia made up 33% of Unilevers packaged good.
Relying on mature markets places, Unilever may take a significant risk in terms of earnings,
leading to potential decline in its long-term revenue growth. Therefore, to boost its long-term
revenues, Unilever should lessen reliance on developed markets instead of the Middle East and
Africa where consumers are more familiar with Unilever brands. Unilever probably considers to
investing in Asia Pacific, especially China and Indian, as with only 1% of value share in 2014, the
region is expected to grow for over half oils and fats category in 2019 (figure 14). However, the
most concerned with spreadable oils and fats is that they are mainly consumed with bread,
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which is not Asian eating habit. Hence, if Unilever plans for Asian expansion it should think of
investing in vegetable and seed oils categories. With sustainable competitive advantages,
nevertheless, local brands may turn Unilever to be premium brand, so it should prioritize Brazil
as a test market.
Figure 14: Unilevers oils and fats in emerging markets 2009-2014(Source:Euromonitor,2014)
Figure 15: Reposition for growth strategy (Source: Harvard business review, 2005)
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Furthermore, due to the popularity reduction of bread in Western Europe and North America,
margarine recorded a poor performance. To kick-start the growth in oils and fats, Unilever Flora
should either introduce the butter category or launch new product containing this ingredient to
meet consumer needs. In addition, the company should think of stealth and or break positioning
strategy to reposition its brand for specific consumption occasion like breakfast, cooking and
baking (Harvard business school) (see figure 15). This can enable the company to either bring
the product back to growth stage or understand which occasion consumers use margarine for to
make plan for sustainable growth in the long run.
Personal care
It is not enough to help Unilever develop sustainably. For personal care category, the company
should buy more hair care and skin care brands to fill up the gap of pricing strategy, especially
premium tier. In addition, the newly acquired brands have potential grow in emerging markets
to increase its footprint as these brands are affordable and reliable to consumer income.
Therefore, Unilever should invest in R&D to develop new products meeting different segments
in these markets.
Recently, anti-angers product has become popular in line with increasing complexity in product
technology that could be challenge for Unilever. The company lacks a brand that could be
sustainable for a specialized market such as anti-angers. Hence, it is recommended that
Unilever should consider making an acquisition to company to strengthen and complete its
portfolio.
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Disclaimer: The report was primarily based on Unilevers annual financial report in 2014. The author also referred to market research published by Euromonitor, Marketline and Havard Business School.