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.