In Emerging Markets, Unilever Finds a Passport to Profit
Hari Sumarno runs a small shop selling tobacco and household sundries at the Palmerah market in Jakarta, the bustling capital of Indonesia, which has one of the world’s fastest-growing economies. Palmerah is a hive of more than 100 mom-and-pop stores, and shoppers haggle over everything from duck eggs to flip-flops as flies buzz overhead. The front of Sumarno’s cramped stall is plastered with small packages of Sunsilk shampoo, Fair & Lovely skin cream, Bango soy sauce, and Rexona deodorant. It’s a seemingly random assortment with one common denominator: All are Unilever brands.
Unilever, the world’s second-largest consumer-products company, provides Sumarno with discounted goods in exchange for prominent placement, and company sales reps check in weekly to make sure everything’s in stock and displayed neatly. Unilever brands account for about 30 percent of Sumarno’s 15 million rupiah ($1,500) in daily sales, and stores like his helped Unilever Indonesia boost sales 17 percent last year, nearly triple the growth rate of the nation’s gross domestic product. Competing products are “in the back,” says Sumarno, grinning as he jerks a thumb toward the dusty, unlit shelves behind him. “You can’t fight Unilever.”
From the markets of Southeast Asia to the aisles of American supercenters, that message is spreading. The Anglo-Dutch maker of household staples such as Dove soap and Lipton tea has accelerated its sales growth, new-product development, and presence in emerging markets over the past three years while many of its rivals in the $7 trillion consumer-goods sector, Procter & Gamble in particular, are struggling amid the prolonged economic downturn. “It’s Unilever’s moment in the sun,” says Harold Thompson, a Deutsche Bank analyst who has spent a decade following the company, which sells 400 brands in 190 countries.
Unilever’s newfound luster—its sales are growing at more than double the rate of P&G’s—comes courtesy of emerging markets such as Indonesia, which comprise 55 percent of sales, up from just 20 percent in 1990. That’s a higher proportion than at peers like P&G, France’s L’Oréal, Swiss-based Nestlé, Germany’s Beiersdorf, and Britain’s Reckitt Benckiser. In the third quarter, Unilever’s emerging-market sales rose 12.1 percent, its sixth consecutive quarter of double-digit gains.
Half of Unilever’s €50 billion ($65 billion) in annual sales comes from food and drinks, one-third are beauty products, and the rest are from household items such as detergents. By focusing its innovation and marketing firepower on fewer, bigger projects with global appeal, Unilever is able to get products like TRESemmé shampoo and Magnum ice cream into stores in São Paulo, Mumbai, and Jakarta faster than ever before. Once there, it uses local knowledge gained over decades operating in developing markets—Unilever has been in Indonesia since 1933, and India since 1888—to lure shoppers to its brands.
In the decade prior to 2009, Unilever’s sales were stagnant, and its shares languished as the sprawling company shed brands, factories, and employees and jumped from one grand strategy to another. The architect of Unilever’s resurgence is Paul Polman, a Dutchman who once fancied being a doctor or a priest. Since his recruitment in 2009 as Unilever’s first-ever chief executive officer from outside the company, the P&G veteran has brought an emphasis on winning market share that was lacking in the 170,000-employee company. Polman’s lofty rhetoric about doubling Unilever’s 2009 size (to €80 billion) while cutting its carbon footprint in half and improving the hygiene habits of more than a billion people—all by 2020—was met with skepticism at first. But as sales improved even in recession-wracked Europe, which accounts for a quarter of Unilever’s business, investors signed on. Company shares have soared 68 percent during Polman’s tenure and trade at a higher price-earnings multiple than both P&G and Nestlé for the first time in more than six years.
Excluding the impact of acquisitions, divestitures, and currency fluctuations, revenue increased 6.6 percent in the first nine months of 2012, better than the previous year’s 6.5 percent and almost double 2009’s 3.5 percent. Over the past three quarters, P&G’s sales growth on the same basis hasn’t topped 3 percent. “Our business is not rocket science,” Polman says. “There’s nothing intellectual about this. It’s about being a little bit better every day.”
Polman has cut more than €1 billion in costs each year and is jettisoning excess layers of management and red tape. (He says the company once had 20,000 different types of financial reports, which it’s whittled down by 90 percent.) In 2005, Unilever had 5,000 new-product projects in its pipeline and could only bring eight of them to 10 or more countries within a year of their debut. Last year it cut the pipeline to 600, with 90 of those rolled out globally inside of 12 months, he says. “You want fewer, bigger ideas,” says Polman, who says he won’t even look at a new project unless it can potentially generate at least €50 million in sales.
One success has been TRESemmé, a shampoo acquired when Unilever paid $3.7 billion for Alberto Culver in 2010. Polman quickly rolled the brand out in Brazil, but not before getting 40 big retailers behind its marketing plan, courting fashion bloggers, and distributing 10 million free samples. Finally, Unilever’s biggest-ever single-day online ad blitz lured 1 million fans to TRESemmé’s Brazilian Facebook page in just six months. In under a year, TRESemmé went from zero market share to besting P&G’s Pantene in hypermarkets and drugstores. Sales reached €150 million in its first 12 months. Polman hopes to repeat that launch success in India and Indonesia.
Retailers worldwide are fans because Unilever’s so-called on-shelf availability, a measure of how well it keeps products in stock, has risen 8 percentage points in the past three years. That translates into higher sales for merchants, who in turn are more likely to give Unilever brands more shelf space or promotion than rivals. The world’s two biggest retailers, Wal-Mart Stores and Tesco, recently named Unilever as supplier of the year.
Polman wants to move Unilever’s personal-care products upscale. Premium-priced shampoo and skin creams generate profit margins as much as 8 percentage points higher than mainstream products, he says. So he’s pushed 80 percent of his product development staff into the field, where they can work closely with suppliers, who he says now contribute to 7 of every 10 new ideas. He’s also put €500 million into a venture fund that invests in next-generation products such as personalized skin-care treatments. “This is a big opportunity for us to make sure that we are able to play the top end as well as we play the mass end,” Chief Operating Officer Harish Manwani says.
In Jakarta, that means targeting shoppers such as Fitri Zenitia, a 34-year-old mother of three who visits the Pond’s Institute in south Jakarta every two weeks for a $20 “Gold Radiance” facial treatment. Since Zenitia first came to the spa, which Unilever opened in 2010, she’s increased her monthly spending on Pond’s face creams from 16,000 rupiah to about 500,000 rupiah. “I’m very concerned about my hair and my face, so this is worth it,” she says.
Of course, with 46 percent of the population living on less than $2 a day, many Indonesians can’t afford a $10 bottle of Pond’s, so lower-income shoppers can grab a 35¢ sachet of Fair & Lovely cream from the Palmerah market. “We capture all the prices,” says Maurits Lalisang, Unilever’s Indonesian chairman, clad in a maroon-and-gold batik patterned shirt. “Being Indonesian, we don’t need to spend thousands on research to understand Indonesian consumers. We live here. We know. We tell London what to do, not the other way around.”