Unilever (UL)

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Unilever (NYSE: UL) makes food and beverage products like soup, tea, and ice cream; Lipton, the company’s namesake tea brand, is sold in over 110 countries and has global market share three times greater than its nearest rival ^[1]. The company also sells home and personal care products like laundry detergent, skin care products, and deodorant. Each division accounts for around half of the company’s annual revenue. The European-based company makes 62% of its sales in the Americas, Africa, and Asia, ^[2] and 44% of sales come from emerging markets. ^[3]

Unilever faces a significant challenge in rising commodities prices, which are driving up the costs of making and packaging food. Unilever is dependent on fresh fruits and vegetables, soybean oil, and egg and dairy products, while oil is refined to make plastic bottles and used in dressing and sauces. The rising costs of these commodities are forcing Unilever into a difficult choice - raise prices on its products and risk losing customers, or cut its operating margins and earn less profit. In 2007, the company saw a 0.5% decreasing in operating margins for the year, due to higher raw materials prices and charges for restructuring ^[4].

The company faces additional challenges in its home and personal care product segment as its largest competitor Procter & Gamble continues to post record sales despite higher production costs.

[edit] Business Financials

[edit] Unilever Group

Unilever PLC (UL) and Unilever NV (UN) operate as the two parent companies for the Unilever Group. A series of agreements ensure that the position of shareholders in both companies is, as nearly as possible, the same as if they held shares in a single company. Unilever PLC (UL) is listed under an American Depository Receipt (ADR) on the NYSE and on the London Stock Exchange. Unilever NV (UN) is a public limited company registered in The Netherlands with listings on stock exchanges in Amsterdam, Frankfurt, Zurich, and New York (NYSE)^[5].

Unilever began a corporate restructuring in 2004, introducing a new board of directors and selling non-core product lines while making acquisitions that strengthened the company's presence in its traditional markets.^[6] The restructuring has boosted earnings, and in 2007 the company posted its third consecutive year of accelerating sales growth ^[7].

[edit] Product Segments

^[8]

The company’s two main products divisions are Food and Home & Personal Care, which accounted for 53.7% and 46.3% of revenues in 2007 respectively ^[9]. Within these two divisions, Unilever categorizes its products in four segments:

[edit] Food

• Dressings and Spreads is the company’s largest product segment as it represents 35% of the company’s revenue. In 2007, this was the only segment to see increasing positive operating profit when compared to 2006. Products sold in this segment include soups, bouillons, sauces, snacks, mayonnaise, salad dressings, olive oil, margarines, spreads, and frozen food. These products are sold under the brands Knorr, Hellmann’s, Becel/Flora (Healthy Heart), Rama/Blue Band (Family Goodness), Calvé, Wish- Bone, Amora, Ragú and Bertolli^[10].

• Ice Cream and Beverages account for 19% of Unilever’s revenue. However, ice cream sales (Ben & Jerry’s) dropped in the United States in 2007 due to high prices as a result of increasing dairy costs. Ice cream is sold under the Heart, Cornetto, Magnum, Carted’Or and Solero, Wall’s, Kibon, Algida, Ben & Jerry’s, Breyers, Klondike, and Popsicle brands. Tea products are sold under the Lipton, Brooke Bond, and PG Tips brands. Slim Fast is the company’s principle weight management product. The company also provides nutritionally enhanced products to developing markets such as Annapurna and Adez^[11].

[edit] Home & Personal Care

• Personal Care Products is the company’s second largest product segment as it accounts for 28% of the company’s revenue. Since 2005, this has been the company’s fastest growing segment; growth increased by 7.8% ^[12]. The company provides products in mass skin care, daily hair care, and deodorants sold under six global brands: Dove, Lux, Rexona (including Sure and Degree), Sunsilk (including Seda), Axe, and, Pond’s^[13].

• Home Care Products is the company’s smallest product segment and represents 18% of total revenue. Laundry products are sold under the Omo, Surf, Comfort, Radiant, Skip, and Snuggle brands. Surface cleaners and bleach are sold under the Cif, Domestos, and Sun brands^[14].

^[15]

[edit] Geographical Segments

• Europe is the company’s largest geographical segment and accounts for 38% of total revenue. 2.8% growth in 2007 was due to strong sales in Russia and steady sales in the UK, Germany, Italy, and the Netherlands. Despite a slowing US economy, European demand for products remained steady^[16].

• The Americas account for 33% of total revenue. The United States is the only country to provide more than 10% of the company’s total revenue; however, revenue in 2007 dropped significantly 80% from 2006. This decrease in revenue can be attributed to the slowing US economy, weak US dollar, and rising commodities costs, all of which contributed higher product costs. The company also saw lower sales in Mexico but higher sales in Brazil and Central America^[17].

• Africa-Asia is the company’s smallest but fastest growing geographical segment. It represents 29% of total revenue but has grown by more than 12% since 2005 ^[18]. The strong growth represents the company’s continued interested in investing and building business in developing countries. Growth was attributed by strong sales in India, Indonesia, the Philippines, South Africa, and Turkey. The company’s goal is to provide products for all income levels, ranging from products that are highly affordable to premium products. Sales volume increased by 7% in 2007 ^[19].

[edit] Annual Data Information

In 2007, Unilever saw a 1.3% increase in revenue and a 5.5% underlying sales growth. However, due to high commodities and raw materials costs, and a sluggish US economy, operating profit and operating margin fell 3% and .5% respectively. Strong sales in Europe and Africa-Asia were offset by declining sales in the US and Mexico. ^[20].

^[21][22]

Note: Conversions from Euros to US$ was done using the 2007 year end exchange rate of $1.471/1 Euro

[edit] Trends and Forces

[edit] Rising Commodities Prices are Forcing Unilever to Make Difficult Choices

The ability to obtain raw materials, which include agricultural commodities such as fruits and vegetables, soybean oil, and egg and dairy products, at favorable prices is an essential part of the company’s success. Higher commodities prices translate into higher production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing its profit margin. Many variables affect the availability of these commodities, such as government policy and regulation, crop shortages due to disease or pest infestation, adverse weather conditions, or other unforeseen circumstances. For example, 2007 and early 2008 saw the price of milk and diary products reach record prices; New York City saw the price of milk increase 36% ^[23][24]. Milk is an essential good that the company uses in many of its products, especially in its Ice Cream and Beverages segment, and higher milk prices leads to higher production costs that adversely affect the company's margins. The sharp increase in price can be attributed to the fact that there is a low supply and high demand for milk and dairy world wide. Supply is down because animal feed prices are up, primarily due to the increased price in Corn Prices as a result of more of it being divested into ethanol production for transportation. At the same time, growing countries like China are increasing the global demand for milk ^[25]. Put those together, and the result is increasing milk and dairy prices. As a result of the increase in milk and dairy prices as well as in other commodities, Unilever saw its operating margin decrease by 1.7% in Europe and 1.1% in the Americas and more specifically saw operating profits decrease in the Ice Cream and Beverages segment in 2007.

[edit] Health & Wellness

Consumers have become more health conscious in the past decade, evidenced by growing demand for healthier alternatives across all food categories. Research shows that the consumer isn't just going for the low-carb weight loss alternatives but also for natural and organic alternatives; from 2006 to 2007, organic food sales increased 17.7% ^[26]. In addition, there has been increasing sales in "light" product alternatives, which is a sector that is growing faster than normal category foods, 2.5% compared to 0.6% ^[27]. To meet consumer demand, Unilever provides many alternative low fat and organic products in all of its brands. The company established the Nutrition Enhancement Program in 2005 and since then has removed more than 30,000 tons of trans fat, 7,000 tons of saturated fat, 3,000 tons of sodium, and 17,000 tons of sugars from its portfolio ^[28]. Furthermore, as consumers turn to healthy meal options involving salads, fruits, and vegetables, Unilever’s products such as salad dressings, soups, and bouillons are going to be sold more.

[edit] Rising Oil Prices Cut into Unilever's Margins

Rising energy and fuel costs significantly affect the cost of manufacturing, transporting, and distributing products. High energy prices increase the cost of production in factories and high fuel prices increase the cost of transporting their products to distributors. Effects of oil prices are also seen in the cost of production of the petroleum-derived packaging materials in which Unilever sells its food and care products. Oil costs are also incurred by farmers, who in turn increase the prices of crops that the company uses. A continued rise in oil prices will force the company to either reduce operating margin or raise product prices higher and risk a decrease in sales. Unilever already saw its operation costs in 2007 increase by $1.3 billion due to high prices of edible oils, mineral oil, and packaging ^[29].

[edit] Can Unilever Bounce Back from a Corporate Restructure?

When Unilever began a corporate restructure in 2004, the company took a substantial risk in concluding that it would be able to gain value from the costs of reorganization. Under the restructuring, the company is in the process of hiring a new board of directors, and it is planning to reduce its workforce by 11 percent by cutting 20,000 jobs until 2012, reorganizing 60 factories, selling its North American laundry segment, and consolidating European country operations^[30][31]. In 2007, restructuring cost the company over a billion dollars in addition to more than a billion in rising commodities and oil costs.

[edit] Building Consumer Base: Focusing on the Youth

An important part of Unilever's marketing strategy is to focus their attention on teenagers. If the company can get young people to start buying its products at an early age and build a strong consumer relationship with them, this forms a strong and reliable consumer base that will continue to use many of those products into adulthood. ^[32]. Unilever has many products targeted at teens and young adults such as Axe body spray, Dove soap, and its new Clear anti-dandruff shampoo which has 15.6% of the shampoo market share and has replaced Procter & Gamble's Head & Shoulders for the market lead ^[33].

[edit] Competitors

Because Unilever makes a wide range of products selling in different markets, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.

In the Major Diversified Food industry, Unilever competes with ConAgra Foods (CAG) , Kraft Foods (KFT) , and Tyson Foods (TSN) .

In the Household and Personal Products industry, Unilever is second in the world only to Procter & Gamble Company (PG).

[edit] References

1. ↑ Lipton Key Facts
2. ↑ UL 2007 Annual Report pg. 77
3. ↑ Feed the World: Unilever’s Bold New Strategy. 3 Mar 2008
4. ↑ UL 2007 Annual Report pg. 23
5. ↑ UL 2007 Annual Report pg. 1
6. ↑ Unilever Revamps Divisions, Announces Board Changes. 28 Feb 2008
7. ↑ UL 2007 Annual Review
8. ↑ UL 2007 Annual Report pg. 79
9. ↑ UL 2007 Annual Report pg. 79
10. ↑ UL 2007 Annual Report pg. 8
11. ↑ UL 2007 Annual Report pg. 8
12. ↑ UL 2007 Annual Report pg. 78
13. ↑ UL 2007 Annual Report pg. 9
14. ↑ UL 2007 Annual Report pg. 9
15. ↑ UL 2007 Annual Report pg. 77
16. ↑ UL 2007 Annual Report pg. 77
17. ↑ UL 2007 Annual Report pg. 77
18. ↑ UL 2007 Annual Report pg. 77
19. ↑ UL 2007 Annual Report pg. 18
20. ↑ UL 2007 Annual Report Highlights
21. ↑ UL 2007 Annual Report pg. 122
22. ↑ UL 2007 Annual Report pg. 124
23. ↑ NY Daily News “Cost of Milk Jumps 36%” 14 Jan 2008
24. ↑ Boston Globe “Surging Costs of Groceries Hit Home” 9 Mar 2008
25. ↑ NPR “Global Dairy Demand Drives Up Prices” 24 March 2008
26. ↑ ACNielsen "Health & Wellness Trends—The Speculation Is Over"
27. ↑ Food Navigator "Report examines health and wellness trends set for growth"
28. ↑ Unilever “Nutrition Enhancement Programme”
29. ↑ International Herald Tribune “Unilever Profit Falls on Reorganization Costs” 7 Feb 2008
30. ↑ New York Times “Unilever to Cut 20,000 Jobs” 3 Aug 2007
31. ↑ Food & Drink Europe “Unilever Takes Aggressive Stance for Growth Aims” 2 Aug 2007
32. ↑ LA Times "Personal Care Product Marketers Reach for a Teeny Edge" 2 April 2008
33. ↑ Business Week "Unilever Lathers Up" 15 Feb 2008
34. ↑ UL 2007 10K pg. 123
35. ↑ HNZ 2007 10K Item 7 pg. 14
36. ↑ LANC 2007 10K Item 7 pg. 18
37. ↑ UL 2007 10K pg. 123
38. ↑ PG 2007 10K pg. 39