Unilever focussed on volumes, “no such thing as holding share” in FMCG

Posted by Daniel Palmer on 6th February 2009

Consumer goods giant Unilever has reported 2008 represented the fourth consecutive year of accelerating organic sales growth, to 7.4%, although this time they were primarily price driven as volumes remained flat. Paul Polman, Chief Executive Officer of Unilever, remained optimistic about the future with plans in place to counter market difficulties.

The company has now completed the transformation program specifically associated with disposals, their CFO advised, following the sale of the Bertolli olive oil brand. “In (taking total disposals €1.6 billion of turnover) we have raised the long term growth profile of Unilever and generated returns well in excess of the retention value of the businesses we have sold,” Jim Lawrence, Chief Financial Officer, noted. “Some of the Brands originally identified (for a sale) are performing well and there is no longer a compelling economic case for exit. That said, a number of minor disposals will be progressed and we will continue to keep the portfolio under active review.”

Underlying sales rose 7.3% in the quarter and 7.4% for the year as a whole, with growth increasingly driven by price as the year progressed. Price hikes helped deal with commodity cost inflation but negatively impacted volume growth. “As a number of markets have gone into recession and consumers have adjusted their spending, the effect on volume has been more pronounced, ” Mr Lawrence added. “Trade de-stocking in Quarter 4 has been a further drag on volume. Price growth for the year as a whole was 7.2% with volume growth slightly positive. Volume declined by 1.6% in Q4 as pricing peaked at over 9%.”

Operating profit rose to €370 million (A$726m), 6% up on 2007, while Advertising and Promotional expenditure climbed by €50 million in the year but fell by 0.7% as a percentage of sales. “Our share of advertising spend relative to competitors in our markets increased in 2008 in both Foods and Home and Personal Care, which indicates that we have continued to invest to strengthen our brands,” Mr Lawrence suggested. “Something not all competitors have done to the same extent.”

In the Asia/Africa region, the company reported a rise of 3.5% as the company as a restructure continues apace. The one Unilever organisation is now in place throughout the region, with supply chain management for Asia/Africa being centralised in Singapore and a move to a single SAP system progressing to plan.

The company saw their diversification in consumer goods cushioning the impact, with their strong food sector – which includes brands such as Streets, Lipton and Flora – seen to be of great benefit in the current climate. “The fact that we have both Foods and an HPC (home and personal care) business is an advantage, especially as Foods seems to be holding up better,” new CEO Paul Polman noted. “We are also able to increasingly leverage our technologies across both segments. Good examples are the ways in which we are deploying our emulsion and extrusion technology.”

“I believe that Unilever has made good progress in recent years and now is in a much stronger position to compete,” he continued. “We have been able to hold volume despite restructuring the organisation and the disruption associated with significant disposals.”

Mr Polman noted a number of trends in the grocery sector that the company was closely monitoring, with the company helped by not being as exposed to the premium sector as some other FMCG companies. “In developed markets we see consumers trading down, drawing down from their pantry stocks or simply consuming less. At the same time we see retailers increasingly pushing their own brands and driving efficiencies in the supply chain by reducing their inventories. All of this puts pressure on the ‘system’,” he said. “With consumers trading down it serves us well to be positioned across a broad spectrum of the market rather than to be overly exposed to the premium sector.”

“In Fast Moving Consumer Goods you simply do not succeed by closing gaps,” Mr Polman added. “You only win by creating gaps versus your competitors. To do that we will need to raise our game. There are several areas where we will need to set the bar higher. First of all we have to get our volumes growing again. As I have said before, you cannot save your way to prosperity.”

Their primary focus is on boosting volumes, which will hopefully be achieved by: maintaining basic competitiveness, boosting innovation, attempting to grow in all markets rather than just shifting focus to developing markets, sharpening the organisation and culture, improving the efficiency of the supply chain, and strengthening brand portfolios.

“In fast moving consumer goods there is no such thing as holding share,” Mr Polman contended. “We need to better communicate the inherent value of our products; play the full price piano; offer choice, including different formats and variants. And we need to be where the shoppers are shopping.”

“And we are putting increased capabilities in place to drive shopper knowledge into our plans. In the US we have just opened our new Customer Innovation Centre and the first customers are already coming through the door.”

The consumer goods manufacturer, which has already placed a freeze on all management salaries and external hirings, is currently integrating all the different supply chain functions, from buying, manufacturing, distribution, into one organisation and contemplating “value creating bolt-on acquisitions”.

Mr Polman would not be drawn on forecasts for 2009 and 2010, but said that his company was ready for the economy to take 18-24 months before exhibiting significant improvement. “We will certainly plan our business on this basis. Better to be proven wrong by being on the conservative side rather than the other way around,” he commented. “In these exceptional times I believe that it is not helpful to provide top and bottom line guidance for 2009 let alone for 2010. “