Introduction: Unilever, as a daily chemical giant, is widely known. Perhaps few know that Unilever is one of the world's largest food and beverage companies, the world's number one manufacturer of frozen food, condiments, ice cream, and tea beverages. After 20 years of strategic adjustments, with both slimming and bulking up, what brand story does Unilever want to write in the new era?

Unilever's shareholders may be glad they didn't sell Unilever. As of the author's writing, Unilever's stock price has reached $59.7, nearly 20% above the target acquisition price.

In February 2017, Kraft Heinz made a $143 billion acquisition offer to Unilever, which was larger than itself. Kraft Heinz, with a market value of about $106 billion, had the confidence to make such a bold move because 50.9% of its shares were owned by Warren Buffett's Berkshire Hathaway and Brazil's famous private equity firm 3G Capital. Buffett's strength needs no elaboration. 3G Capital has led several world-shocking mega-mergers, such as Anheuser-Busch InBev's $104 billion acquisition of SABMiller.

After the news of the acquisition offer was released, Unilever's stock rose to $48.53, a record high, but still below Kraft Heinz's reported $50 per share price. The news dissipated within three days. Unilever believed the acquisition price undervalued the company and stated it would not consider a deal that did not benefit its finances and strategy.

To appease investors, Unilever's CEO stated that it would increase its operating margin from the current 17.5% to 20% by 2020. Unilever then began frequent actions, adjusting its product portfolio and optimizing its business structure to fulfill this promise. As 2019 is almost over, it's time to show the report card. Has Unilever achieved its goal?

-01- Food Giant: In a Dilemma

On November 12, Burger King launched a "rebel Whopper" plant-based burger at over 2,500 stores in 25 European countries. As Burger King's largest product launch in Europe to date, this event attracted huge media attention. Perhaps few noticed that the plant-based patty supplier for Burger King is Unilever's plant-based meat brand, Vegetarian Butcher.

This is also the root cause of Kraft Heinz's acquisition offer to Unilever, as Kraft Heinz faced sluggish business growth.

Unilever's Wall's ice cream entered China in 1993, and within just six months, sales exceeded 3.5 million liters. The "freezer strategy" allowed Wall's to occupy streets and alleys across China in a short time, breaking multiple world records. Additionally, well-known brands like Magnum, Cornetto, and Lipton tea are also Unilever sub-brands.

Unilever's Knorr seasonings, aimed at professional restaurants, are quite influential among Chinese chefs. Since 2012, domestic mass dining has exploded. Seasoning suppliers led by Unilever and Nestlé have been quietly making big profits. About 40% of the dining market is used for procurement, and about 30%-40% of that procurement is for seasonings. By the end of 2018, the national seasoning and fermentation industry sales revenue reached 342.72 billion yuan, a year-on-year increase of 10.6%.

When Unilever's "Food Solutions" business entered the Greater China region in 1994, it was already one of the world's largest food service solution providers, with a solid product line. Its food business, led by the Knorr brand, includes chicken bouillon, stock cubes, instant soup, savory sauces, frying powder, tomato ketchup, etc. Pizza Hut, KFC, South Beauty, and other chain restaurants are its partners. Knorr, originating from Hong Kong, has Chinese cuisine roots and is highly adaptable in the Greater China region.

Chinese cuisine has complex flavors, and sauce preparation is cumbersome and difficult to master. Unilever understands chefs' pain points and has standardized complex Chinese flavors through more than thirty sauces, including seafood sauce, black pepper sauce, concentrated chicken juice, oyster sauce, steamed fish soy sauce, and chicken powder. With Knorr products, chefs can create dishes with excellent color, aroma, and taste without having to stir-fry sauces, with high yield. Through over a hundred culinary consultants dedicated to product development, Unilever ensures that chefs not only buy seasonings but also solutions for new dishes, making it famous in the Chinese food market.

Although Unilever does not consider Nestlé a competitor, they are increasingly in direct competition in the food service market. Although their product lines overlap, unlike Unilever's approach, Nestlé provides integrated solutions based on usage scenarios, such as Western fast food, street drinks and desserts, office cafeterias, school education, hotel accommodation, etc. From seasonings to dairy, beverages, and coffee, they sign contracts with restaurants as a package, building competitive barriers.

Moreover, unlike Unilever's widespread presence, Nestlé focuses on large clients in first- and second-tier cities. Nestlé cooperates more with chain enterprises like Yum! Brands and McDonald's, and even conducts product development with major restaurant brands. For example, they improved the soup base for Haidilao hot pot in terms of color, boiling resistance, and taste.

Although in the professional Chinese seasoning field, Unilever's Knorr series completely outperforms Nestlé's Maggi series, Unilever is heavily suppressed in Western food and integrated solutions. There are many challenges to stand out in the food sector.

First, the food and beverage markets in developed countries are highly competitive. Second, Unilever, which walks on two legs—food and daily chemicals—has a deep-rooted presence in daily chemicals, making market education in the food sector not easy. Moreover, from the recent major strategic layout, the food business is becoming less favored.

-02- Slimming and Bulking Up in Progress

Ma Huateng once said, "You didn't do anything wrong; you just got old." Many major brands have fallen into a midlife crisis because of this simple truth. Unilever is no exception. Pond's sales channels were "downgraded" from counter sales to shelf sales in 2014. Sunsilk, once very popular, saw its market share drop to 0.5% in 2017. With the entire daily chemical industry declining, it's not easy for Unilever to achieve perfect financial numbers.

In the half-century from the mid-20th century, the growth in the number of young people and high fertility rates in Europe and the United States supported a series of business miracles. Coca-Cola, Procter & Gamble, Unilever, Henkel, and the development of the automotive industry were all closely related to this. But then, changes in the market environment caused companies to enter a stagnation period.

Companies like P&G, Nestlé, and Kraft Heinz, which grew rapidly during rapid development, are increasingly like overweight riders on a bicycle track. Compared to smaller, more agile competitors, they appear bulky and slow. Slimming down around core businesses has become a necessary move for many companies.

Unilever once had over 2,000 brands. In 1996, profit growth was very slow, almost dragged down by bloated operations. In 1999, Unilever began to focus on core businesses, specializing in three advantageous series: home and personal care, food and beverages, and ice cream. In 2000, it sold the Elizabeth Arden fragrance business to FFI Fragrances; in 2003, it sold several home care products to Lehman Brothers and Witko Group. Gradually, over a thousand brands were sold, liquidated, or restructured, leaving 400 core brands. Organizationally, the number of companies was significantly streamlined, and personnel optimization accelerated, basically completing the strategic "slimming."

While divesting assets, Unilever completed the most expensive acquisition in its history, ushering in the highlight moment of its food business. In 2000, it acquired Bestfoods for $24 billion (approximately €21.7 billion), making Unilever the world's second-largest food company after Nestlé.

Although synergies and scale advantages brought Unilever a good market outlook, the joy of being second did not last long. The huge acquisition and changing consumer demands led Unilever to spend over a decade divesting a bunch of unpopular brands.

In 2012, Unilever surpassed P&G for the first time in another core business—beauty and personal care—becoming the world's second-largest cosmetics company after L'Oréal. Soon, P&G's brand focus also began. In 2014, P&G sold 43 brands at once, including Vidal Sassoon and Max Factor. By August 2017, P&G's brands had been reduced from over 200 to 65. Compared to P&G's core brands like SK-II and Olay, Unilever had no trump cards beyond Vaseline and Pond's.

Returning to the former glory days in the daily chemical field is Unilever's new goal. First, it has its eye on the high profit margins of the cosmetics industry. Currently, Unilever still has food and laundry products as its main business, but the gross margin for main businesses like laundry powder is only 30%, while personal care products have a gross margin twice that of the main business, as high as 60%, or even 80%.

Therefore, divesting lower-margin businesses brings the company closer to its 20% profit margin promise. Second, acquisitions can save Unilever product development and promotion costs, allowing it to quickly compete with companies like L'Oréal and P&G. In 2014, Unilever began to continue "slimming" and "bulking up" simultaneously.

Since 2015, Unilever has divested some slow-growing food businesses, selling €8 billion in assets, such as the spreads and margarine that once helped Unilever get started. It has focused acquisitions on skincare and cosmetics. In the past four years, out of 30 deals totaling €11 billion, beauty and personal care transactions accounted for nearly three-quarters. This includes the highly-watched Korean skincare brand AHC and the American professional makeup brand Hourglass. In 2017, Unilever acquired American makeup brand Hourglass, marking its first foray into makeup in its century-long history.

Between 2001 and 2017, Unilever's product portfolio underwent major adjustments. The share of food business in turnover dropped from 40% to 23%, while beauty and personal care rose from 24% to 38%. In April 2017, Unilever announced the merger of its food and tea-based beverage businesses (which included Wall's ice cream and Lipton tea) into one division.

In November 2018, Alan Jope, former president of Unilever's Beauty & Personal Care business, became the new CEO of this old FMCG giant. In his first interview after taking office, he pointed out that Unilever's business focus would shift to the higher-profit beauty and personal care market.

The grand blueprint in the daily chemical field and the continuous slimming of the food end even led to misunderstandings about its divestitures. On November 23, the UK's Daily Telegraph reported that Unilever was considering selling its traditional tea business PG Tips and Lipton brand to PepsiCo. The rumor was quickly clarified, but from the outside, the food business's strategic position seemed precarious.

Unilever's food end seems irreversibly heading toward contraction. The news that Vegetarian Butcher, the Dutch food giant acquired last year, launched a plant-based burger finally gave the dejected food business a moment of pride.

Unilever, formed by the merger of a cream and soap company, has dual headquarters in the Netherlands and the UK, and the status of the Dutch food business is hard to erase. The good performance in emerging markets makes food a trump card for Unilever to gain high market share, which is the logic behind its acquisition of India's Horlicks brand from GlaxoSmithKline.

The 2018 annual report shows that Unilever's food and beverage business, including Wall's, Knorr, Lipton, and Unilever Food Solutions, recorded double-digit growth in the Chinese market last year. Unilever's food and beverage business achieved sales revenue of €20.2 billion in 2018 and contributed 58% of operating profit. Excluding the one-time €4.3 billion gain from the divestiture of the margarine business, which accounted for 30% of Unilever's total revenue, it improved compared to 2017.

The seemingly disadvantaged food segment actually has considerable future potential. After market education is completed, product premiumization will naturally bring good profit margins to the food business. The plant-based burger is one example. Nestlé's capsule coffee brand, priced ten times higher than its Gold Roast Nestlé, also points the way for Unilever. Therefore, Unilever, walking on two legs, is not facing the highlight moment of beauty and daily chemicals, but the highlight moment of its "trump cards."

-03- Buy, Buy, Buy; Sell, Sell, Sell: The Moment of Verification

Unilever has been slimming and bulking up for 20 years. Although the business focus varies at different stages, the goal of all activities is to focus on core businesses, optimize the product portfolio, and bring higher profits to the enterprise. Unilever is about to submit its report card. What is its "grade"?

Unilever's third-quarter 2019 sales were €13.3 billion, up 5.8% year-on-year, including a 2.3% growth from currency fluctuations and a 0.8% growth from acquisitions, ending six consecutive quarters of negative growth. But this is still a certain distance from a perfect report card.

The highly anticipated beauty and personal care business grew steadily but failed to support the company's expectations. Third-quarter turnover was €5.6 billion, up 2.8% year-on-year, with volume growth of 2.1% and price growth of 0.7%. Operating margin increased from 19.8% in 2016 to 20% in 2018.

Compared to P&G's over 20% profit margin, Unilever still has room for growth. But against the backdrop of slowing growth in the overall industry, growth is not easy. Moreover, Unilever has two other businesses with less optimistic profit margins.

In the third quarter, Unilever's food and tea-based beverage turnover was €5 billion, up 1.7% year-on-year. In 2017, food business turnover was €12.5 billion, accounting for 23% of total group turnover and 26% of operating profit. In 2018, sales reached €20.2 billion; if the one-time €4.3 billion profit from business divestiture, sales reduction, and currency fluctuations are excluded, the actual profit margin was about 17.5%.

Home care products had third-quarter turnover of €2.7 billion (approximately $2.98 billion), up 5.4% year-on-year. In 2018, this business achieved sales of €10.1 billion, up 4.2% year-on-year, but the operating margin was only 11.5%.

From recent financial reports, although Unilever has performed steadily in emerging markets like Southeast Asia and India, growth has slowed in Europe, North America, and China, and operations in Latin America are difficult. Amid changing consumer environments and market upgrades, Unilever has been continuously adjusting its brands, and frequent brand changes have brought a continuous focus on business priorities.

But drastic changes have also led to serious deficiencies in brand upgrading and brand synergy. Moreover, in the face of intense market changes, only by upgrading brands and services can existing markets be retained and substantial profits be achieved.

-04- Conclusion

Achieving a 20% profit margin by 2020 is almost impossible for Unilever. Even if achieved, the number is only a temporary achievement; brand synergy and upgrading are Unilever's greater long-term battle.

Every day, 2.5 billion people in 190 countries use Unilever products. Among the world's top 50 daily chemical brands, Unilever owns 30. But the father of brands is P&G, not Unilever. You can't become the other by simply running onto P&G's and L'Oréal's track.

Compared to Unilever's chaotic brands, P&G's brand appeal lines are clear, with each product serving a specific segment. Unilever's brands find it difficult to form combined advantages; Sunsilk, Lux, and Dove products compete with each other. Unilever has also recognized this issue and begun optimizing its product line combinations; the launch of Clear was to fill the gap in the anti-dandruff market.

Unlike L'Oréal's solid pyramid brand portfolio ranging from thousands to a few yuan, Unilever has streamlined its brands but clearly hasn't built enough brands to address different markets. In the past year, Unilever introduced nearly 10 new brands in the Chinese market, including Grom, Love Beauty and Planet, Flower Earth, and The Laundress, ushering in an era of small batches, multiple varieties, and customization in China. However, these brands have not yet made waves in the market.

Driven by digital marketing and the appearance economy, P&G has turned around in just a few years, and Unilever is also striving. In terms of channels, e-commerce has become Unilever's most important growth channel, with the company's e-commerce business growing by 30%.

But replicating P&G's success is not easy. P&G's main business is daily chemicals and cosmetics, while Unilever's main business is daily chemicals and food. Although a series of acquisitions provide an opportunity for Unilever to quickly shift its business, brand acquisition is only the first step; building and perfecting the brand pyramid is the ultimate test. Not to mention the potential internal friction from resource competition between daily chemicals and food, and with the slowdown in China's daily chemical and food growth, Unilever's growth story in China is not easy to write.

Source: Lishishangye Review (ID: libusiness) Tips will be paid 400-2000 yuan once adopted.