Unilever Finally Knows Where It's Going: East
The Billa supermarket in a drab residential neighborhood in Prague is hardly bustling on this weekday afternoon. But that doesn't faze Unilever's local chief, Nick Stenning, and its national sales manager, Richard Krejci, as they check out the store's well-stocked shelves. Krejci zeroes in on a competitor's poorly displayed toothpaste. It won't get much bang for the crown, he comments. Then, Stenning heaps scorn on a bar of Magnat ice cream--a local entrepreneur's knock-off of Unilever's 75 cents Magnum. "We'll have to have a word with him," he says.
Welcome to the new Unilever. Staking its future on emerging markets, the $46.2 billion company is dispatching expatriate marketing pros such as Stenning and hiring talented locals such as Krejci to go after the former Soviet bloc's 420 million consumers. Gone is the sluggish, directionless company that hawked everything from specialty chemicals to Caterpillar tractors alongside its soaps, margarines, and skin creams. After a blizzard of disposals, it is a leaner, nimbler company with a clear growth strategy (table). Last year alone, it invested $750 million in developing markets from Latin America to India.
NO DEBT. Unilever has also reorganized management, set clear investment guidelines, and shaken up research and development. It is boosting profits by cutting costs and steering savings into higher-margin products such as ice cream. Before, managers could get almost "anything they wanted" financed by the company, says Co-Chairman Morris Tabaksblat. "We said `No!' You have to have priorities. Certain things have to come first," he adds. With a war chest of $9.6 billion and no debt, Unilever is ready to make acquisitions. Indeed, says Finance Director Hans Eggerstedt, the company has the firepower to spend up to $20 billion on them.
Unilever's remake has been forged by Tabaksblat, 60, chairman of Unilever N.V., and by Niall FitzGerald, 52, chairman of Unilever PLC. Although Tabaksblat, a lawyer and marketing whiz, had been pushing hard to revamp the company since he took the job in 1994, the pace picked up after FitzGerald, an Irish financial specialist, joined him two years ago. FitzGerald orchestrated a raft of sell-offs--from the Caterpillar franchise to the Nordsee fast-food chain.
But the biggest move was last year's sale of Unilever's big specialty-chemical business to Imperial Chemical Industries PLC for $8 billion. It was a good business, but it didn't fit Unilever's consumer-products focus. "Specialty chemicals would have required massive investment going forward, and that would have meant consumer businesses would have been starved," says John Campbell, an analyst at London's Rabo Bank International.
The shakeup has certainly pleased the markets. Once considered a doggy stock, the company's American depositary receipts (ADRs) have roughly doubled in price since early 1997, to $42. Operating profits rose a modest 7.3% in dollar terms, to $4.6 billion last year. But with currency effects stripped out, they were up a respectable 13.5%. And in markets where Unilever is working hardest to cut costs, profits are taking off. Operating profits in North America jumped by 17% last year, for example, though sales fell by 1%. Europe, where Unilever still makes 46% of its sales, saw a 17% profit rise despite slow volume growth.
But the company's heart is clearly in building new businesses in developing markets, such as the Czech Republic. Since it bought a former state-owned oils factory outside Prague in 1992, Unilever has invested $42 million to turn it into a center to make soaps, margarine, and Chesebrough Pond's skin creams for the region.
More important, the company has harnessed the full power of its marketing savvy to soften up Czech consumers. A campaign on the dangers of cholesterol is turning Czechs from butter gluttons into margarine fans. Unilever has also brought in its Organics shampoo, developed in Asia, to seize top market share from Procter & Gamble Co.'s Pantene. Last year, Czech revenues increased about 20%, to $158 million, pushing up profits 31%, to $5.1 million.
WAR CHEST. Unilever is trying to repeat that performance from Budapest to Vladivostok. It has invested in detergent, ice-cream, fish-finger, and margarine factories in Poland. It also has a wide range of businesses in Hungary. It is scrambling to set up an ice-cream business in Russia in time for this summer. Meanwhile, it is shipping as many as 750 truckloads of margarine--15,000 tons of the stuff--to Russia every month. Sales in Central and Eastern Europe rose a stunning 42% last year, to $1 billion. And though the company isn't yet making money on the margarine shipments, Unilever considers Russia a potential gold mine. "All the way to the Urals, [people] are basically Western European," declares Jean Martin, Unilever's boss for Central and Eastern Europe. "They eat a lot of bread and spread something on it."
Now, the big question is where Unilever will apply its hefty war chest. Tabaksblat and FitzGerald say they want to speed up growth in emerging markets. Another possibility is to buy an additional hot product line to go with their Calvin Klein fragrances or Helene Curtis cosmetics. Last year, the company spent $930 million on Kibon, Brazil's leading ice-cream business, and added other cold-treat companies across Latin America. But prices, except in Asia, are high, and Unilever doesn't want to pay through the nose. "We sold in a seller's market," says Tabaksblat. "We have to take our time to see if anything comes forward."
Unilever bosses say that if they can't find satisfactory ways to spend the money, they will consider giving it back to shareholders in a couple of years. Already, laws in both the Netherlands and Britain are changing to make share buy-backs easier. "They have a collection of targets," says David Lang, an analyst at Henderson Crosthwaite Institutional Brokers Ltd. in London. "The question is whether a sufficient number will come up at attractive prices."
Unilever has other problems. It needs to fix its money-losing Elisabeth Arden cosmetics line. It has fallen way behind Procter & Gamble in its core European detergent business. And the company can also expect sterner challenges from P&G in emerging markets. As gains from cost-cutting run out, Unilever may have to consider more radical downsizing. Moreover, longtime observers wonder whether Unilever's two leaders bring a fresh enough perspective to a fast-changing world. Both FitzGerald and Tabaksblat have been with the company more than 30 years.
They are defying the conventional wisdom that two people can't run a company. "Any chief executive's role can be very lonely," says FitzGerald. "You are the person who has to take those final decisions, which are not always popular. To have two sharing that role enriches both the decision-taking and the decisions." They seem to enjoy hammering out the company's strategy together, spending as many as 10 days a month working together in the company's Rotterdam and London headquarters. The major test of their co-leadership will be making their big bet on emerging markets pay off.