It (Path to Growth strategy) is all about how we can reshape ourselves for faster growth and expanded margins.
"
- Niall FitzGerald, Co-Chairman, Unilever Group, in February 2000. 1
A Troubled Giant
In September 1999, Unilever, one of the largest consumer goods companies in the world, announced
plans to restructure its brand portfolio by end of 2004.
The plan involved cutting down on its unwieldy portfolio of 1,600 brands and focusing on the top 400
brands. This move was read by the market as an indication that the company was unable to manage its
brands and so was scaling back growth plans. This development, coupled with the fact that the growing
popularity of Internet and telecom stocks was luring investors away from old economy stocks, resulted in
Unilever finding itself in deep trouble - its stock price plummeted rapidly during 1999. According to
reports, Unilever's market capitalization of about £51 billion ($82 billion) in June 1999 shrank by almost
£20 billion by January 2000. As a result, the company lagged far behind its competitors like Nestle and
Procter & Gamble (P&G) in market capitalization.
The fact that Unilever had failed to meet its performance expectations for 1999 added to its problems.
Analysts attributed this failure to the sluggish growth of its top line brands. They said that the company's
existing brand strategy framework had lost its focus. They also criticized Unilever for investing less in
strengthening its leading brands during the 1990s (as a majority of its investments went into business
restructuring and acquisitions).
Meanwhile, the competitors had begun eating into Unilever's market share in a major way. Unilever
realized that it had to restructure its brand portfolio and operations to meet the challenges brought about
by the changing market conditions. In February 2000, the company announced a €5 billion five-year
growth strategy, aimed at bringing about a significant improvement in its performance. The initiative was
named the 'Path to Growth' Strategy (PGS). The exercise involved a comprehensive restructuring of
operations and businesses. While many industry observers welcomed the move, some were skeptical
about the slow-moving old economy giant's ability to regain its momentum in time to meet the
intensifying competition.
Background Note
Unilever (called the Unilever Group) functioned as the operational arm of Unilever NV (Netherlands), and
Unilever Plc., (UK), its two parent companies.
Though the parent companies operated as separate legal entities (with separate stock exchange listings),
they functioned as a single business, with a single set of financials and a common board of directors (See
Exhibit I for the group's structure). Unilever was formed in 1930 when a Dutch margarine company,
Margarine Unie, and a British soap company, Lever Brothers merged (See Exhibit II for a brief timeline of
Unilever).
While, Margarine Unie had been formed by merging many margarine companies during the 1920s and
was a leading global player in the business, Lever Brothers was a name worth reckoning with in the
worldwide soap market and had soap factories across the world.
Lever Brothers, diversified into many other businesses (primarily related to foods). At the time of the
merger, Margarine Unie and Lever Brothers, together, had operations in over 40 countries. In the 1930s
and 1940s, Unilever strengthened its presence in the US by acquiring Thomas J. Lipton (1937) and
Pepsodent (1944).
While the company's competitive position was adversely hit when its arch rival P&G launched Tide, a
synthetic detergent, in 1946, it continued to prosper in Europe.
This was because of the post-war boom in the demand for consumer goods, the growing popularity of
margarine and personal care products, and the new detergent technologies. During the 1960s and 1970s,
Unilever rapidly expanded its operations through vertical and horizontal integration, emerging as a
diversified conglomerate by the early 1980s.
Diversification into different businesses was prompted in one way or the other by the existing business
lines. For instance, oilseeds crushed for use in the margarine and soap businesses, yielded a by-product
called 'cattle cake,' and this led the company into the animal feeds business.
Likewise, by-products such as glycerine and fatty acids, formed from processing oil for use in margarine
and soap production, prompted its entry into the chemicals business. The company operated 24
packaging plants (for its consumer products) in six European countries, from where goods were
distributed worldwide. This activity made the company one of the largest truckers in Britain and one of
the largest shipping company owners...
What 'PGS' is all About
To achieve the objectives of the PGS, Unilever decided to concentrate on the following areas - modify the
existing organizational structure, focus on leading brands, support these leading brands with strong
innovation and focused marketing strategies; rationalize the supply chain; simplify business processes;
and restructure or weed-out under-performing businesses and brands (See Exhibit III for the key drivers
of value creation in the PGS).
Unilever expected the PGS to result in annual cost savings of €1.5 billion by 2004. An additional €1.6
billion in savings was to come from global procurement by the end of 2002.
Apart from this, the PGS was to involve laying off over 25,000 employees (approximately 10% of the
employee base) by 2004, on account of divestments or site closures, and restructuring and simplification
of processes.
The company announced that though the restructuring would be worldwide, it would mainly focus on the
US and Europe...
Results of PGS (Till 2003)
In 2000, the company witnessed a dramatic increase in its turnover with sales increasing by 16% to
€47.6 billion. This was mainly attributed to the acquisition of the Bestfoods, Slim-fast, Ben & Jerry's and
Amora Maille businesses.
Since the announcement of the PGS, Unilever's share price had recovered by 30% to $59 in August 2001,
and this seemed to By July 2002, Unilever's 400 leading brands accounted for 88% of the sales, up from
75% in 1999.
By then, over 30,000 employees had been laid-off. Commenting on the positive results of the PGS in mid-
2002, FitzGerald said, "We have now reached the mid-point in the PGS and we continue to be confident
about delivering our program.
Brand focus continues apace with 88% of our turnover now attributable to leading brands. These brands
are showing great resilience in a tough economic environment and will drive accelerating top line
growth..highlight the positive results of its restructuring exercise.
Unilever's Future Prospects
In August 2003, Unilever announced its half-yearly results for the year - sales dropped by 15% and profits fell by
13%. During this time, the company reduced its growth forecasts to 4% from the 5%-6%, it had promised its
investors in the early 2003, stating that it was struggling with a more challenging business environment - poor sales
in the dietary and food service markets, and the sluggish growth in the retail market on account of slower economic
growth, worldwide.
In October 2003, Unilever's share price fell by 7% (to 487 pence) on the London Stock Exchange, immediately after
it announced that it was lowering its growth forecasts for its leading brands to below 3% for 2003.
The company attributed this move to the waning popularity of its famous fragrance and dieting products
(including Calvin Klein, Eternity, Prestige and Slim-Fast), and the poor performance of its other health
and wellness products. This was the second time in 2003, that the company had reduced its growth
forecasts for its leading brands.
FitzGerald blamed himself for the fall in the company's share price, after the announcement of reduced
growth rates. According to him, the market had misunderstood Unilever's growth forecasts previously as
the company had failed to communicate them clearly to its investors...