Niall FitzGerald has accomplished a lot since he became co-chairman and chief executive of Unilever six years ago. But some investors still question whether he can turn the Anglo-Dutch consumer goods giant into the growth juggernaut he promised when he announced an ambitious five-year restructuring program 22 months ago.
After selling off noncore businesses in everything from heavy equipment to chemicals, FitzGerald had said he would concentrate on improving the company’s subpar sales and operating margins by disposing of or eliminating three quarters of Unilever’s 1,600 consumer brands. With 947 brands left, ranging from Dove soap to Lipton tea, Unilever says it is on target this year to increase its sales 8.4 percent, to E51.52 billion ($46.2 billion), and its profit 10 percent, to E3.55 billion.
Still, the 56-year-old FitzGerald may have trouble meeting his ultimate objectives: slimming Unilever down to just 400 brands by 2004 while boosting operating margins to more than 16 percent and annual sales growth to between 5 and 6 percent on a sustainable basis. When the Irish-born FitzGerald took over at Unilever (his co-chairman, Dutchman Antony Burgmans, was appointed in 1999 and is widely viewed as a junior partner), sales growth was 2 percent and operating margins were 8 percent. For the first nine months of this year, sales growth was 4.2 percent and the operating margin was 13.7 percent. Those kinds of numbers have made Unilever stock one of the best performers in the FTSE 100 index over the past two years.
Yet since September 11 Unilever has underperformed the index, despite its reputation as a defensive food stock.
Unilever stock still sells at a multiple of 9.6 times operating earnings, versus the European consumer goods sector’s average valuation of 8.9 times. “Unilever is still being treated as if it had already accomplished its goals when, in fact, that is not the case,” says Jennifer Tsang, a food manufacturing analyst at Credit Suisse First Boston in London.
FitzGerald’s headline numbers look great, but strong sales growth in home and personal care products has disguised poor results in the crucial food division. “To reach his goals FitzGerald has to kick-start growth in food, and that will be very difficult,” says Tsang, who downgraded Unilever to a sell in August.
Food accounts for about half of Unilever’s 650 core brands. The other half is home and personal care products. Excluding a boost from unusually high September ice cream sales, the food division has been growing at 1.5 percent for most of the year, well below the industry average of more than 2 percent.
Perhaps the biggest factor affecting investor sentiment of late has been the drag on growth and profit created by Bestfoods, Unilever’s largest acquisition ever. The U.S. maker of Hellman’s mayonnaise and Knorr soups was purchased a little more than a year ago for $24.4 billion, including the assumption of $3.1 billion in debt. This year its sales are down 4 percent even though it was supposed to bring the food division’s growth into line with industry averages. With Bestfoods performing poorly, many analysts think the only way FitzGerald can meet his profit goal for this year is by cutting his advertising budget. That could in turn put at risk the future market share of Unilever’s products and FitzGerald’s five-year plan.
FitzGerald, who takes strong stands on such diverse issues as the euro and excessive advertising fees - leading some to dub him the CEO who prefers causes to groceries - recently discussed Unilever’s outlook with Institutional Investor Staff Writer David Lanchner.
Institutional Investor: A major goal of your restructuring program is faster annual sales growth. Do you think you are delivering on that promise?
FitzGerald: Yes, it has been seven quarters since we announced the overhaul of our portfolio, and we are, if anything, a bit ahead of our timetable. We are very confident that our goals, in terms of both top-line growth and margin expansion, will be achieved. All the same, top-line growth is the one lever of value we have not pulled on as hard as we would like to yet.
Traditionally, Unilever has been a good defensive stock. Yet since September 11 your shares have underperformed the FTSE 100. Why?
We were the first consumer goods company, post-September 11, to draw attention to the fact that the world has changed. Although we are confident it will be minimal, none of us here know exactly how September 11 will affect us. The fact that we were trying to introduce a note of caution meant that at least initially there was a disproportionate influence on our stock price.
Is the global economic slowdown having an impact on Unilever?
Not much of one. We have a prestige fragrance business, which includes the Calvin Klein brand, and to a significant extent its sales come from department stores and duty-free. There are a lot fewer people going to department stores, duty-free shops or even flying today. Our food services business has also been affected because people are eating out less and going to fewer events in the U.S. So there are pockets where the business has slowed, but they account for no more than 4 to 5 percent of our sales. In the emerging markets we are seeing a bit of softness, but that is not a long-term worry because these markets tend to fluctuate up and down anyway. If you draw a line through the fluctuations, you see very significant, ongoing continuous growth.
How long do you think the current economic slowdown will last?
My feeling is that we are in for a longer and deeper recession than most economists have suggested. We’ve just had ten years of booming economic conditions, and at some point the world has to pause for breath. It does not do it for one or two quarters, it tends to do it for a few years.
You have been trying to slim down to 400 core products for more than a year and a half now, yet the process seems far from over. Why does it take so long?
It might seem simple to prune a portfolio, but it actually isn’t. The leading brands that we are focusing on accounted for 75 percent of sales when we began this process. If we had just dropped the other 25 percent, we would have been saying good-bye to E12.5 billion in revenue. If you allow the attrition of brands to run faster than you build your leading brands, you just wind up with a smaller and less profitable business. It is also taking a while because we have to sift through brands to come to conclusions. Equally, there are a number of products that are not important for the long-term growth of Unilever but that are very important profit generators today, and we want to get the most out of them. That said, we will never have a truly definitive list of 400 brands. As the business evolves, we constantly look at developing and acquiring new brands, just as we are constantly trying to identify brands where growth is slowing and that no longer have a place in the portfolio.
How do you square a strategy that relies on slimming down to 400 global brands with your recent string of acquisitions?
On the surface it is confusing. But you have to look at what we are acquiring. If you take our biggest acquisition, Bestfoods, we’ve essentially acquired only two brands, Knorr and Hellman’s. We sold off their bakery business, and now those two brands account for the vast majority of the former Bestfoods’ sales. Along with those brands, we acquired a very strong food services business selling to restaurants and catering businesses. Long term, that will be the most rapidly growing part of the food market, and we needed a presence in it. In the Bestfoods acquisition we also got a small number of regional brands that are strong in Latin America, a market in which we were underrepresented. Our other purchases have been even more focused. Slim-Fast weight management products and ice cream company Ben & Jerry’s represent only one brand each. Basically, we are dropping businesses that had a mixture of lots of little brands, and we are adding a few big brands with international reach.
The acquisition of Bestfoods last year was supposed to boost Unilever sales growth significantly, yet it has actually diluted top-line growth. Why?
We could have taken a slower, more deliberate route integrating Bestfoods, but we chose to take a fast route and get the integration over and done with in a year and a bit. That means the business is very inwardly focused, and there is some sacrifice to the top line. If you are integrating two huge sales forces and putting two and two together to get three in terms of numbers of people, it is hardly surprising that the sales force is not fully focused on selling the last case of Knorr soup or Hellman’s mayonnaise. Bestfoods’ business was very quarter-end promotion-driven. We happen to believe that is not a good way to run a business. So we moved very quickly to take out the quarter-end spike in sales. And on the comparisons, that is going to negatively affect us. There were some deficiencies in the information we provided investors and analysts concerning all this. Next time we buy a business we will lay out a lot more clearly what we are going to do.
If you eliminate quarter-end promotions, doesn’t that risk permanently hobbling sales?
No, once those quarter-end spikes are out of the way, we will have a much more even promotional pattern throughout the quarter. When the excess inventory is gone by the end of this year, we will put more emphasis on consumer pull, and you will see a return to strong, sustainable sales growth across Unilever’s product line.
You are sticking to your prediction of “low double-digit” profit growth this year. Is that dependent on a cut in marketing and advertising costs?
We will be spending less money on advertising and promotion, but we don’t think our profit is dependent on that. Take a look at the Bestfoods synergies and the costs of the restructuring program. All the benefits are back-end loaded. For example, 40 percent of the synergies we expect from the Bestfoods acquisition will fall in this year’s fourth quarter, when most of the restructuring is done. In the books for the fourth quarter, we also get the cash generated from the disposal of Bestfoods’ bakery division. That will allow us to pay off much of the money we borrowed to buy Bestfoods, and that will have a leverage effect on the overall numbers.
Since most of your major competitors say that they will maintain or even increase their advertising budgets, don’t you risk losing market share?
Sometimes you read announcements of competitors, and what they seem to be saying and what is actually happening in the industry are two different things. So we will not react to rhetoric but to what happens on the ground. We will do whatever is appropriate to ensure that we keep our numbers moving forward toward the goal of 5 to 6 percent sales growth annually, but we won’t just spend money for the sake of spending.
You have threatened to move your corporate headquarters from London if the euro is not adopted within the next few years. Why risk alienating many British consumers?
First, I would like to make clear that I would not take a position unless it was of benefit to Unilever. As chairman of Unilever I don’t have any right to pursue a personal view. Our position on the euro is relatively simple. The most important boost to competitiveness in Europe over the past ten years has been the advent of the single market. But it is the single currency that gives you the final benefits in terms of price transparency, unified capital markets and the elimination of needless transaction costs. Also, much of what needs to happen in the European Union in terms of further liberalization and deregulation is very much driven by a U.K. agenda. In other words, the U.K. is ahead of continental Europe in terms of deregulating markets and making them more flexible. Britain is in a very strong position to lead, but its force is diminished so long as it stands outside of a single currency. Since that has a direct impact on Unilever, it is imperative to make our position known, even if some people don’t like it.
