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Unilever's Global Fight


Business Week International Cover Story

UNILEVER'S GLOBAL FIGHT

To the outside world, it was billed as the soap story of the century: By early 1994, Unilever, the Anglo-Dutch company that has made brighter washes its business for 106 years, was ready to launch a new detergent in a Europewide promotional extravaganza. Company executives were eager to best archrival Procter & Gamble Co., which had drubbed Unilever in a recent U.S. price war and was now grabbing a commanding lead in Europe. With Unilever's stock price getting battered and profits slipping, this one had to be a hit. Or else.

But P&G was already working to counter the new offensive. In February, one of Procter's European research and development managers, Nabil Y. Sakkab, got his hands on a box of the new powder. He sifted the detergent through his fingers, noticed pinkish granules among the white ones, and said: "I can't believe they did this." Sakkab rushed the soap into a lab for testing, which revealed, as he suspected, that the pink granules contained manganese. The substance can clean clothes whiter than white--but it can also eventually tear holes in the family wardrobe. In May, P&G released damaging lab tests and pictures of clothes allegedly eaten alive by Omo Power, the new powder.

At first, consumers paid no attention. They loved the superconcentrated new stuff, called Persil Power in Britain and Omo Power elsewhere. It really did remove stains at low temperatures, just as the ads said. But suddenly, the blockbuster started to look like a bust. Tests by consumer groups in late May confirmed P&G's findings that, even at low temperatures, the new detergent weakened fibers in as few as 15 washings. Incredibly, Unilever may also have failed to put the product through sufficient testing (page 36). Now, instead of sweeping rivals off the shelves, Unilever faces a tough slog to recoup the $400 million it invested.

And this is just one of many wars the octopus-like Unilever is fighting around the world. With $42 billion in sales, 1,000 brands, and 300,000 employees, Unilever is mired in battles over market share in ice cream, soap, margarine, shampoo, and sauces. Sometimes, the opponents are name brands like P&G's Ariel detergent in Europe or Tide in the U.S. Sometimes, they are powerful store brands such as those sold by Britain's top retailers. Sometimes, they are relative newcomers--like Snapple iced tea.

STAGNATING. Whoever the rivals are, Unilever has to fight them off while dealing with a lingering European recession, slow-growing populations in its mainstay markets, and gigantic increases in advertising and promotion costs. It's a strain on management, which European analysts say has contributed to the soap-powder controversy. "The last year has been a bit of a nightmare for Unilever," says David P. Lang, a London analyst at Henderson Crosthwaite.

The problems come at a critical juncture for the company. As profits in the developed markets of Europe and North America stagnate, Unilever is shifting its weight to Asia, Latin America, and Central Europe. Unilever already has a decades-old presence in such places as India, where the promise is great (page 37). But Unilever has also run out of experienced managers to handle it all. "Unilever is meeting its limits," admits Co-Chairman Morris Tabaksblat in Rotterdam. "It can be quite painful because there are opportunities out there."

The detergent war in Europe is the first real test of Tabaksblat and fellow Co-Chairman Sir Michael Perry. Because Unilever is the result of a 1930 merger between a Dutch margarine company and a British soapmaker, it has maintained two equally powerful chairmen. In May, Tabaksblat started his tenure in Rotterdam. Perry has been running Unilever's London headquarters since April of last year. Together, they face the task of making their twin-headed organization and its 300 operating divisions respond faster to newly aggressive American rivals, as well as intensified competition from Nestle, L'Oreal, and Japan's Kao.

Perry and Tabaksblat have tremendous resources to work with. Unilever's cash flow is more than $3 billion a year. It dominates global markets in such products as margarine and ice cream (page 38). In some emerging markets, Unilever is a titan: It has 90% of Chile's detergent market, 70% of the Indian soap market, and 60% of toothpastes in Indonesia. In the U.S., where its detergent business has sagged badly, executives have nonetheless produced big hits with global potential--Lever 2000 soap, for example, and Lipton bottled iced teas, sold in partnership with PepsiCo Inc.

The question is whether Unilever can capitalize on these strengths and turn itself into a nimble enough player for today's hypercompetitive world. The drive to be faster and smarter collides head-on with a culture that for decades stressed geographic decentralization--where country managers were kings. With such highly balkanized operations, Unilever's bid to keep rolling out the strongest products globally in the shortest possible time is at stake. And any mistake can be costly. "Losing a fight over market dominance isn't just a blow to the corporate ego--it means forgoing hundreds of millions of dollars in sales that may never be recovered," says Paribas Capital Markets analyst John H. Campbell.

COAXING SHOPPERS. The numbers also reflect a company in need of a new shot of growth. After restructuring charges and adjusting for currency shifts, pretax profit for the year ended December, 1993, declined 9%, to $2.9 billion, on a 6% sales increase. Next year's earnings should rise to $3.5 billion--unless another write-down takes place, says S.G. Warburg & Co. analyst Mark Duffy. But margins are still under pressure (charts, page 35).

The market is waiting to see if Unilever can regain its momentum. In the U.S., shares of Unilever PLC have slipped--from almost 73 in January to a recent 61. Long-patient institutional investors are starting to wonder when the $1.6 billion in recent restructuring costs will boost earnings. "They've been treading water for a couple of years," says Jay H. Freedman, a fund manager at Lincoln Capital Management Co. in Chicago.

A big reason for the stock slip is investor concern over whether Unilever can coax shoppers into paying premium prices. In the past year, Unilever has had its comeuppance as consumers rejected its higher-priced teas in Britain, Ragu and Chicken Tonight meal sauces in the U.S., and margarine in Germany. In each case, "we were asking too much. We got greedy," concedes Tabaksblat.

Rivals are all waiting for a chance to stop Unilever. In ice cream, Unilever is No.1--but Nestle is snapping up properties, determined to contest the issue. In India and Brazil, Unilever wants to consolidate its hold, but P&G, Colgate-Palmolive, and Nestle are resisting. In food sauces in the U.S., products from Newman's Own spaghetti sauce to Campbell Soup's Prego line have undermined Ragu's dominance. In hand soap in the U.S., it's a seesaw battle: Unilever has beaten out P&G with its Dove, Caress, and Lever 2000 brands, but the Cincinnati company is fighting back with new versions of Camay and other products.

Perry and Tabaksblat seem to share a vision for how Unilever must respond to this multitude of challenges, even though in person they are like the oil and water that form the basis of many Unilever products. Perry, 60, is reserved, choosing his words carefully and exuding the air of an English gentleman. Tabaksblat, 56, is garrulous and, insiders say, more comfortable around people. Because they spent much of their careers working abroad--including a stint each in the troubled U.S. operation--observers say their rise couldn't come at a better time. Sir Michael Angus, who chaired the company in the 1980s, says of his successors: "I can't think of a better team to lead Unilever."

STRIPPING DOWN. Between them, Perry and Tabaksblat speak 13 languages. One of Perry's first jobs after joining in 1957 was as brand manager of a cleaner called Handy Andy. By 1964, he was running part of the Dutch detergent business, becoming Tabaksblat's first boss in Rotterdam. Together they launched All, the first detergent with enzymes and bleach, in 1965. Perry then shipped out to Thailand, Argentina, and Japan. Tabaksblat went to Spain, Brazil, and New York. While in the U.S., he acquired the Elizabeth Arden and Calvin Klein brands and the Chesebrough-Pond's family of brands.

The essence of their strategy is to keep stripping Unilever's broad array of products down to four categories: foods, personal products, detergents, and specialty chemicals. In foods, it's pasta sauces, tea drinks, margarine, and ice cream. In personal products, it's prestige fragrances, cosmetics, and anti-aging skin creams. They're also aiming for new efficiencies--with manufacturing plants that serve entire continents, not just one country.

Perry and Tabaksblat have also hit upon a highly unusual solution to the age-old problem of balancing headquarters, brand managers, and country managers: Instead of expanding the control of Rotterdam or London, they're delegating the responsibility for developing new products and marketing strategies for an entire region. In Southeast Asia, that means Thailand is the detergent expert, while Malaysia handles ice cream. In Europe, the Paris office oversees shampoo, while the Frankfurt office does skin care. Thus one country develops new products and creates marketing campaigns for the whole region.

The co-chairmen monitor these new operating regions closely with a sophisticated electronic-mail system. They're getting tougher on weak performers, shutting down plants, laying off workers, and jettisoning products that don't fit the overall strategy. Among the changes: a $750 million charge against 1993 earnings to close or consolidate 60 plants and lay off 7,500 workers.

The new, streamlined European detergent operation, which just handled the launches of Omo Power and Persil Power, is supposed to be a model for the rest of the company. Niall FitzGerald, the worldwide detergent coordinator who is widely assumed to be Perry's heir, has just finished creating Lever Europe out of 18 separate country units that often marched to their own drummers. Now, the group is centrally run, with advertising campaigns planned for the entire region. For the first time, Unilever can land new products on retailers' shelves in a matter of weeks, instead of years.

That's the kind of speed every major marketer wants. But the new efficiency can amplify mistakes. In the past, a serious problem would have been corrected early, in part because rollouts weren't rapid enough to let a problem spread. "Three years ago, yes, their reputation was one of extreme caution. Now, there's a preoccupation with speed," says Terry L. Rosenquist, the Lintas Worldwide official who looks after much of Unilever's advertising. Unilever officials say they spent three years testing the new detergent in the lab and with consumers. Nonetheless, the company is changing the formula and the instructions for its use, and withdrawing a lawsuit charging defamation against Procter & Gamble.

"THINK AGAIN." The U.S., where the company has 25% of total assets that deliver only 13% of profits, remains a major problem as well. First-quarter operating profit on $2 billion in U.S. sales was a mere $15 million, down 50% from a year ago. To cut costs, the U.S. detergent division, Lever Brothers Co., is cutting 25% of 4,200 jobs and is shutting a Los Angeles plant. Three different consulting companies have been called in to help with the reorganization at Lever, which lost money in the first quarter this year. A second plant, this one for pasta sauces, is closing in New York. Finance Director Hans Eggerstedt says American managers have enough good ideas to keep the parent company at bay for now. "But if they don't manage to bring in a satisfactory return in a couple of years, we'll have to think again," he says.

Lever Brothers' decline is due to a bitter market-share war with P&G, which lowered prices by as much as 20% on most of its products and hiked ad spending. To retain share, Lever also had to cut prices and boost its ad budget. But Lever's own marketing bloopers also hurt. Most dramatically, Lever's share of the liquid detergent market has plummeted from 35% to 27% in the past year, according to Information Resources Inc.

First, P&G beat it to the market with a concentrated liquid. Determined to offer a superefficient detergent, Lever doubled the concentration of its liquid and halved the bottle size, making its products smaller than P&G's. The consumer just wasn't impressed. Says an executive at another detergent supplier: "Sooner or later, they seem to make whopper mistakes, which Procter doesn't." Admits Lever Brothers President Charles B. Strauss: "I'm disappointed with our launch. We overestimated consumers' interest in the benefits of reducing the package."

TEA BAGS IN CHINA. While the company sorts out its headaches in the industrialized world, Unilever is spending much more time and money in emerging markets, where it now derives one-third of its profits. In 1992 alone, it launched 30 new products in Brazil, where sales last year came to $2.2 billion. Not far behind is India, with $1.3 billion in sales. By Western standards, consumption in these countries is still small, giving Unilever a chance for rapid growth. The strategy: Buy market share quickly and eliminate competition by acquiring existing companies.

In China alone, it has spent $100 million and plans to double that over the next two years. Chinese consumers are just becoming brand-conscious, and Unilever execs are stepping in to fill the void left by the inconsistent quality of local goods. It has even been successful selling tea bags to a nation that has never known anything but bulk tea. "China is the future," says Anton Lenstra, chairman of Unilever China Hong Kong. So are India and Turkey: The latter is one of Unilever's most profitable countries.

The question is whether profits in the developing world will come on stream fast enough and big enough to help compensate for the bloody wars in Europe and the U.S. Tabaksblat readily admits that no one really knows, but he adds that a "fascinating debate" is taking place inside his and other companies over the subject. He says evidence so far shows that once consumers in what was the Third World get a little discretionary income, first they buy better soaps to clean their family's clothing and dishes, because they know it reduces the spread of disease. So Unilever's first offering is usually new dishwashing soaps and detergents.

Next, they buy personal grooming items, such as shampoo and toothpaste, which Unilever makes. "Then, something quite amazing happens," Tabaksblat says, "once their basic needs are taken care of. People will spend what little is left on indulgences, such as a small bottle of perfume, a Coke or Pepsi with meals, or ice cream for the kids." Other consumer-goods companies have spotted these same trends and are rushing in, but for the most part they remain several years behind the Anglo-Dutch giant.

Viewed in this light, Unilever's push into personal products looks like a brilliant move. Unilever is No.3 in the world in this sector, trailing Procter & Gamble and L'Oreal, but it's gaining ground fast, having entered the business in only 1989. Last year, personal-product sales jumped 10%, to $6 billion, and operating profits were up 8%, to $620 million.

In this case, the decentralized Unilever model works. The business is managed worldwide from New York, where the stars are Elizabeth Arden cosmetics and skin-care products, managed by CEO Robert Philips, and Calvin Klein perfumes, run by Kimberly Delsing, one of just a few women among Unilever's top-100 managers. "They're not ego-driven, they're team-driven," says Allan Mottus, a cosmetics consultant and publisher of industry newsletter The Informationist. Together, they launched last year 15 new products, most of them targeting the middle market.

STILL ELUSIVE. Philips and Delsing have been given almost free rein by personal-product coordinator and board member Antony Burgmans. Perry boasts that Arden, "a somewhat tired and neglected brand when we bought it" from Eli Lilly & Co. in 1989, is now one of Unilever's biggest success stories. Unilever also triumphed in turning Pond's, a boring American brand, into a global workhorse, especially in Japan, a country which alone accounts for 40% of the world skin-care market.

The successes in big developing markets and in fields such as personal products are examples of how Perry and Tabaksblat want their whole company to work. With missteps like the latest detergent rollout still occurring, however, the ideal of a perfectly organized, nimble giant obviously still eludes them. Stretched thin and under competitive pressure on so many fronts, Unilever could remain a company under fire.

UNILEVER TARGETS THE GLOBE...

The company is focusing on brands it can roll out around the world. But the sheer variety of products, combined with competitive pressure, makes for a formidable management challenge

FOOD AND BEVERAGES

1993 SALES $22.2 BILLION

Includes Lipton tea and iced tea, Good Humor and Breyers ice cream in the U.S., Blue Band margarine in the Netherlands, Rama margarine in Japan, Wall's ice cream and Birds Eye frozen vegetables in Britain

DETERGENTS AND SOAPS

1993 SALES $10.1 BILLION

Includes Surf and Wisk detergent, Dove and Lever 2000 soap in the U.S., Omo and Persil detergent in Western Europe, Pollena detergent in Poland, Wheel soap in India, Jif cleanser in Japan

PERSONAL PRODUCTS

1993 SALES $6.2 BILLION

Includes Calvin Klein and Elizabeth Arden cosmetics in the U.S. and Europe, Mentadent toothpaste and Vaseline Intensive Care in the U.S., Timotei shampoo in Europe, Sunsilk shampoo in Japan, Maxam toothpaste in China

OTHERS $3.5 BILLIONPaula Dwyer in London, with Zachary Schiller in Cleveland, Laura Zinn in New York, Shekhar Hattangadi in Bombay, and Lynne Curry in Beijing


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