Thesis for Reference

7/31/2019 Thesis for Reference

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ACCOUNTING AND FINANCE DIVISION

AN INVESTMENT ANALYSIS OF UNILEVER

THANH HUONG VU

SUBMITTED IN PART

FULFILMENT OF THE DEGREE OF

MSc IN INVESTMENT ANALYSIS

THE UNIVERSITY OF STIRLING

AUGUST 2009


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Dissertation Declaration

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o title page

o an abstracto Table of contentso

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Acknowledgements

I would like to express my gratitude to the Accounting and Finance Division - Stirling

Management School, and Mr. Russell Napier for granting me the Karen Napier

Scholarship to enter the MSc in Investment Analysis programme.

I would like to thank all the lecturers and university staffs who have offered me the

great knowledge and experience during the programme.

I would like to thank my supervisor, Darren Henry, for his valuable advice, guidance

and encouragement during my dissertation period.

Finally, I would like to thank my family and my friends. The love they give to me has

always been my greatest motivation.


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ABSTRACT

The Case study is conducted as the fullest possible investment analysis of Unilever,

which is among the largest multinational groups operating in the Consumer Products

industry.

The analysis covers both the economic environmental factors affecting Unilevers

operations, as well as the internal characteristics of the firm. This helps build up the in-

depth knowledge of the firm, which is the basement for the valuation process to

estimate the intrinsic value of Unilevers share.

Despite the current unfavourable economic conditions, Unilever has still positioned

well to overcome the difficult time, thanks to the experience, the scale, the popularity,

the strategies, the management capacity, and the financial strength which it has built up

over 80 years of development. That is the foundation for the expectation that the firm

will weather the current economic volatility, and emerge stronger with the recovery of

the global economy. The following estimated intrinsic value of Unilevers stock price,

combined with the fact that the stock is outperforming the market, has strengthened the

BUY recommendation for Unilevers share.


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TABLE OF CONTENTS

CHAPTER 1 - INTRODUCTION

1.1 The objective of the case study .............................................................................. 11.2 The structure of the case study .............................................................................. 11.3 Business description .............................................................................................. 21.4 Limitations ............................................................................................................. 3

CHAPTER 2 - THE ECONOMIC OUTLOOK

2.1 Introduction ........................................................................................................... 42.2 The Global economy ............................................................................................. 42.3 The Advanced economies ...................................................................................... 72.4 Emerging economies ............................................................................................. 82.4 The UK economy................................................................................................. 102.5 Conclusion ........................................................................................................... 11

CHAPTER 3 - INDUSTRY ANALYSIS

3.1 Introduction ......................................................................................................... 133.2 Industry overview ................................................................................................ 13

3.2.1 Global industry overview ............................................................................. 143.2.2 Geographical industry overview ................................................................... 16

3.3 Porter Five Forces analysis .................................................................................. 173.3.1 Rivalry among existing firms ....................................................................... 173.3.2 Threat of new entrance ................................................................................. 183.3.3 Bargaining power of buyers ......................................................................... 193.3.4 Bargaining power of suppliers ...................................................................... 203.3.5 Threat of substitutes ..................................................................................... 20

3.4 Conclusion ........................................................................................................... 21CHAPTER 4 - LITERATURE REVIEW

4.1 Introduction ......................................................................................................... 224.2 Mergers and Acquisitions .................................................................................... 23

4.2.1 Definition and classification ......................................................................... 234.2.2 Motivations ................................................................................................... 24

4.3 Mergers and Acquisitions in the Food and Beverage sector - Benefits and

Prospects .................................................................................................................... 244.3.1 Forms of Mergers and Acquisition ............................................................... 254.3.2 Benefits and Prospects .................................................................................. 26

4.4 Implications for Unilever ..................................................................................... 344.5 Conclusion ........................................................................................................... 35

CHAPTER 5 - COMPANY ANALYSIS


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5.1 Introduction ......................................................................................................... 375.2 Strategy and corporate governance analysis ........................................................ 37

5.2.1 Strategy analysis ........................................................................................... 375.2.2 Corporate governance analysis ..................................................................... 40

5.3 Financial analysis ................................................................................................ 41

5.3.1 Ratio analysis ................................................................................................ 415.3.2 Cash flow analysis ........................................................................................ 49

5.4 SWOT analysis .................................................................................................... 525.5 Conclusion ........................................................................................................... 53

CHAPTER 6 - VALUATION

6.1 Introduction ......................................................................................................... 546.2 Discounted Dividend Valuation (DDM) ............................................................. 546.3 Discounted Cash Flow Valuation (DCF)............................................................. 556.4 Discounted Abnormal Earnings Valuation (DAE) .............................................. 566.5 Sensitivity Analysis ............................................................................................. 576.6 Price Multiples ..................................................................................................... 586.7 Conclusion ........................................................................................................... 59

CHAPTER 7 - CONCLUSION

7.1 Introduction ......................................................................................................... 607.2 Investment recommendation ................................................................................ 60

7.2.1 Investment analysis summary ....................................................................... 607.2.2 Stock performance ........................................................................................ 617.2.3 Investment recommendation ........................................................................ 62

APPENDIX 1 - Financial Statements64APPENDIX 2 - Industrial average ratios..67APPENDIX 3 - Forecasted Financial Statements.69APPENDIX 4 - Forecast assumptions72APPENDIX 5 - Valuation assumptions.76BIBLIOGRAPHY....82


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Chapter 2The Economic Outlook UNILEVER

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CHAPTER 1 - INTRODUCTION

1.1 The objective of the case study

The main objective of the case study is to apply the knowledge gained from the MSc

Investment Analysis program in analyzing a chosen firm, to come up with the

appropriate value of the firms share. In this process, the fundamental analysis will be

used as the main approach. The final recommendation of BUY, HOLD or SELL the

stock will be based on the valuation result, by comparing the intrinsic value obtained

from the analysis with the market price of the share.

In line with this objective, this case study will be conducted as the fullest possible

investment analysis of Unilever, coming up with the intrinsic value and the appropriate

investment recommendation about the Unilevers stock.

1.2 The structure of the case study

In order to achieve its objective, the case study will be structured into seven main

chapters, as the following:

The first chapter is the Introduction of the case study, outlining the objective and the

structure of the analysis. It also provides the brief business description of Unilever.

Chapter 2 will be The economicoutlook of the global, the advance, the emerging and

the United Kingdoms economy.

Chapter 3 will be The Industry Analysis. In this chapter, the industry of Unilever will

be examined, complemented by the use of Porters Five Forces model.


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Chapter 4 is theLiterature review with the topicMerger and Acquisition in the Food

and Beverage sector - Benefits and Prospects. This is the sector in which Unilever is

operating and the topic is relevant to the subsequent analysis of the firm.

Chapter 5 will be Company Analysis, in which the firms strategies, corporate

governance and financial performance will be analysed. The SWOT analysis will also

be used in the chapter.

Chapter 6 with the content of Valuation will apply appropriate valuation models to

determine the intrinsic value of Unilevers share.

Chapter 7 will be the Conclusion of the investment analysis with the final

recommendation of BUY, HOLD or SELL the stock.

1.3 Business description

Unilever Group was established in 1929 with the merger between British soap maker

Lever Brothers and the Dutch margarine company Margarine Unie. The two parents

companies, which are now under the name of Unilever PLC and Unilever NV, together

with their group companies, operate as a single entity - the Unilever Group1.

Unilever has long been considered as one of the leading firm manufacturing packaged

consumer goods. Products of the firm are classified into four segments of Savoury,

dressing and spreads; Ice cream and beverage; Personal care and Home care 2. The

1Unilever Annual Report and Accounts 2008:

Unilever PLC is registered in the United Kingdom and listed on the London Stock Exchange and as AmericanDepository Receipts on the New York Stock Exchange. Meanwhile, Unilever NV is a Dutch public limitedcompany which has shares and depository receipts for shares on Euronext Amsterdam and of New YorkRegistry Shares on the New York Stock Exchange2 Unilever Annual Report and Accounts 2008


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products can also be grouped into two categories for the purpose of analysing, including

the Food division3, and the Home care and Personal care division4,5. Over 80 years of

development, Unilever has become a giant company, with various well-known brands

all around the world including Lipton, Slim-Fast, Persil, Dove, Walls, Hellmanns, Lux.

Those popular names are parts of the huge range of world-class brands that Unilever has

built up, both organically and through mergers and acquisitions throughout its history.

Starting trading on the LSE from 1939, Unilever is among the top ranking firms in the

sector with the market capital of 47,235

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million. With 174,000 employees, around 270

manufacturing sites and operations in about 100 countries worldwide 7 , Unilever is

implementing its mission of adding Vitality to life, satisfying everyday needs for

nutrition, hygiene and personal care with brands that help people feel good, look good

and get more out of life.

1.4 Limitations

The Case study dissertation has the cut-off date of August 15th 2009. All the available

relating information before this date will be used to analyse Unilever.

The valuation process of Unilevers share is based on prospective assumptions about the

future performance of the firm, which have certain limitations, despite being created

through the analysis of the firms past performance and the current business

environment.

3Including soups, bouillons, sauces, snacks, mayonnaise, salad dressing, olive oil, margarine, spreads, liquid

margarines, tea, ice cream and frozen foods4

Including deodorants, anti-perspirants, oral care, laundry powders and liquid, and a range of cleaning products5

Thomson ONE Banker, , accessed on 06/20096

Thomson ONE Banker, , accessed on 15/08/20097 Unilever Annual Report and Accounts 2008
http://banker.thomsonib.com/http://banker.thomsonib.com/http://banker.thomsonib.com/http://banker.thomsonib.com/


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CHAPTER 2 - THE ECONOMIC OUTLOOK

2.1 Introduction

The macroeconomic environment always has a substantial impact on firms business

performance. Indicators such as Gross Domestic Product (GDP), consumer price index

and inflation, unemployment rate are very important in evaluating the past, current, as

well as the future performance of firms.

In the case of a multinational group like Unilever, which has operations spread around

100 countries, the economic outlook will be examined with the global view, then from

the perspective of advance and emerging economies, respectively. Considered as the

home market location, the United Kingdom economic outlook will be analysed at the

end to come up with the conclusion for the macroeconomic analysis.

2.2 The Global economy

The global economy is now suffering a serious recession that had its root from the

outbreak of the US subprime crisis in 2007. The dramatic write-downs of subprime

mortgage loans and derivatives had led to the subsequent financial crisis which

exploded in September 20088. The crisis in the banking system spreads all over the

world in different degrees between countries and created a domino reaction in nearly

every industry in the so-called deepest post-war depression9.

8The collapse of the giant investment bank, Lehman Brothers, was on September 15, 2009

Guardian (2008) Banking crisis: Lehman Brothers files for bankruptcy protection, The Guardian, 15September, , accessed on 05/06/20099 IMF (2009) World Economic Outlook - Crisis and Recovery, , accessed on 11/06/2009
http://www.guardian.co.uk/http://www.imf.org/external/pubs/ft/weo/2009/01/index.htmhttp://www.imf.org/external/pubs/ft/weo/2009/01/index.htmhttp://www.guardian.co.uk/


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The global economy is in a severe recession inflicted by a massive financial crisis and

an acute loss of confidence10

The general situation of the global economy is not favourable at the present and so is its

prospective outlook, at least in the short term:

Gross domestic product (GDP):

The global economy had enjoyed a long prosperous period with the average annual

growth rate of 4.7% in the five years preceding the crisis11. With the blowout of the

crisis in 2008, the GDP growth rate declined to only 3.2%.

In the World Economic Outlook 2009, IMF expected that GDP growth rate would

decline to 1.3% in 2009, then increases to 1.9% in 2010 and reach 4.8% in 2014. The

predicted figures can be seen in the following graphs:

With great efforts being implemented throughout the world in the form of aggregate

interest rate cuts, massive government bailout and credit accelerating policies, forecasts

10IMF (2009) World Economic Outlook - Crisis and Recovery, accessed on 11/06/2009

11 Morgan Stanley (2009) Global Forecast Update, , accessed on 18/06/2009
http://www.imf.org/external/pubs/ft/weo/2009/01/index.htmhttp://www.morganstanley.com/http://www.morganstanley.com/http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm


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show that the global economy is expected to recover in 2010, however, it will take a

long time for the economy to achieve the pre-crisis level. The great threat is that the

global recession can be deeper than predicted, with unforeseeable consequences in

emerging economies.

Consumer Prices Index and Inflation:

There were great changes in commodity prices within 2008 due to the impacts of the

crisis. With the growth trend of the global economy, commodity prices rose

continuously during 2003-2008. However, the slowdown of the economy has decreased

the inflation pressure, creating the particularly sharp drop in commodity prices 12,13.

Commodity prices are expected to remain at the current level through 2009 and only rise

modestly from 20101415, much lower than the peaks of 2008. Inflation is expected to

continuously decrease through 2010, before surging again with the recovery of the

global economy.

12The oil price collapsed to $30.28 a barrel on 23/12/2008 from its peak of $145 on 14/07/2008

Energy Information Administration, , accessed on 11/06/200913

Food price declined by 34 percent in the second half of 2008

IMF (2009) World Economic OutlookCrisis and Recovery, pp.5414

IMF (2009) World Economic OutlookCrisis and Recovery, Prospect15 UBS (2009) Global Outlook
http://tonto.eia.doe.gov/http://tonto.eia.doe.gov/


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However, a persisting sharp fall in house and equity prices, coupled with the low growth

rate and the consequent high unemployment rate could further threatening consumer

prices, depressing the inflation expectation, even increasing the concern of deflation

which can make downside risks more serious.

2.3 The Advanced economies

The advanced economies have suffered seriously from the current recession. During

2003-2007, they enjoyed a reasonably high growth rate of 2.7% annually. However, the

crisis has created the dramatic changes and these can be seen from the decline of GDP

growth rate to only 0.9% in 2008 and, more severely, it is expected to be as low as

negative 3.8% in 2009, to be zero in 2010 and to recover to its prior level of 2.6% in

2014. With these GDP growth rate projections, the unemployment rate is forecasted to

continue rising, and to be over 9% in 201016.

IMFs GDP forecast for the advance economies can be seen in the chart:

16 IMF (2009) World Economic OutlookCrisis and Recovery, Appendix A1


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The United States has a significant influence on the global economy.The US GDP is

expected to drop 2.8% in 2009, and then the economy will only slowly recover from the

middle of 2010 with an annual growth rate of zero. The worlds biggest economy is

forecasted to achieve the growth rate of 2.4 percent in 201417. This projection highly

depends on the effectiveness of government monetary policies, including rate cuts and

credit facilitating, as well as on the recovery abilities of its core financial institutions.

Euro zone - Fears about losses from US-related-assets in major banks caused the

wholesale market to freeze, and credit constraints spread over the Euro zone, affecting

various aspects of the economy. Annual growth of 0.8% is the slowest since the early

1990s. Inflation moderated to only 1.1% in January 2009, from the level of 3.2% in

January 200818.

Japan seems to be in the better situation to weather the crisis, thanks to its limited

exposure to the toxic assets that the US and Europe are struggling to deal with. The

GDP growth rate in Japan fell quickly from 2.4% in 2007 to a mere 0.6% in 2008,

mainly due to sharp drops in exports and private investment 19. GDP is expected to

decline 6.2% in 2009 then reaching 0.5% in 2010, and 2.5% in 201420.

2.4 Emerging economies

The influences of the global recession on emerging economies are said to be through

both financial and trade channels.

17IMF (2009) World Economic Outlook - Crisis and Recovery, Appendix A1

18ADB (2009) Asian Development Outlook 2009

19ADB (2009) Asian Development Outlook 2009

20 IMF (2009) World Economic Outlook - Crisis and Recovery, Appendix


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The GDP growth rate of these economies could not remain at the average annual level

of as high as 7.4% during the five pre-crisis years, obtaining only 6.1% in 2008. This

figure is expected to be as low as 1.6% in 2009, before recovering to 4% in 2010 and

returning to 6.8% in 201421.

East Asian economies, which rely heavily on the manufacturing exports, are

experiencing lower demand from main importers like the US and European countries. In

India and China, however, the impacts of the recession are less severe thanks to the

lower shares of their export sectors being in the domestic production, and more resilient

domestic demand22.

Meanwhile, the downturn seems to be more serious in the African, Latin American as

well as the Middle East, which are suffering due to plummeting commodity prices,

financial strains as well as weak export demands23.

The more important impact of the crisis to emerging economies is in the financial

aspect. The economic uncertainty and the deteriorating investors confidence created the

rise of flight to safety and home bias, under which, capital flows to countries with the

most liquid and safe government securities market, and out of emerging ones, creating

the increase in threats to solvency.

21IMF (2009) World Economic Outlook - Crisis and Recovery, Appendix A1

22IMF (2009) World Economic Outlook - Crisis and Recovery, pp.5

23 IMF (2009) World Economic Outlook - Crisis and Recovery, pp.5


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The inflation rate is falling, largely due to the significant drops in petrol and fuel prices

since the middle of 2008. Moreover, the reduced VAT which applied from December

2008 also contributed to the decrease in inflation in the UK economy.

The unemployment rate is also rising, and this is a trend that started from the second

half of 2008. The higher unemployment rate will continue putting pressure on consumer

confidence and spending in the coming period.

Various macroeconomic policies have been used to deal with the recession, including

the aggressive interest rate cuts and the huge rescue package and substantial intervention

of the Government into the banking system. The financial service sector, which played a

major role in the economic growth of the UK in the past, has now become the core of its

crisis. The UK economy has been hit hard by the crisis, facing a long and difficult

period to come, with the relatively slow pace of recovery.

2.5 Conclusion

In conclusion, the macroeconomic outlook is dominated by the recession that spread

throughout the world and in nearly every aspect of the global economy. The prospect for

the economy from the late period of 2009 is better with the likelihood of modest

2009 2010 2011 2012 2013

GDP growth rate (%) -3.9 0.2 1.9 2.4 2.6

Inflation rate (%)

- CPI 1.6 1.5 1.5 1.8 2- RPI -1.3 1.7 2.3 2.9 2.5

Claimant unemployment (mn) 1.74 2.27 2.23 2.09 1.91


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recovery, and in line with this prediction, the economy may recover to its level prior to

the crisis in around 2014.

Unilever is a multinational group, so different trends from different economic areas can

partly offset each other. However, with the main part of the companys turnover being

contributed by advance economies, as analysed in the following chapters, the impact of

the deep recession in those economies on Unilever will be significant.


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Chapter 3Industry Analysis UNILEVER

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CHAPTER 3 - INDUSTRY ANALYSIS

3.1 Introduction

Industry analysis provides a detailed picture about the external business environment of

firms and plays an important role in the fundamental analysis because the profitability

of certain industries differs systematically and predictably over time, and this has a

significant influence on firms profitability26.

With this point of view, the chapter will examine the outlook of Unilevers industry,

with particular focus on applying the Porter Five Forces model.

3.2 Industry overview

Unilever has two main categories of products which are Food and Beverage, and

Personal care and Home care. In accordance with the classifications of Unilevers

listing markets27, the firms industry is Food producer.

However, if the wide range of Unilevers products is taken into account, the firm is

operating in the Consumer products sector, which consists of three principle segments:

brewery; food and beverage; and household and personal care28.

The following industry analysis will combine the two classification forms. The industry

to be analysed will be the Consumer products industry, with more focus on the

subsector of Food and Beverage. This is also in line with the contributions to sales from

26Palepu, K.G., Healy, P.M., Bernard, V.L. and Peek, E. (2007) Business and Analysis and Valuation (IFRS

edn), Thomson Learning, London, Chapter 2, pp. 4327

London Stock Exchange, NYSE, Euronext28 Ernst&Young (2008) Consumer products industry and working capital management, pp.1


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these products, and the development strategies of Unilever, which will be examined in

following chapters.

3.2.1 Global industry overview

The Consumer products industry has the highly desirable feature of being non-cyclical,

where firms would not experience a significant downturn during a recession, but also

would not experience a strong increase during an economic expansion.

However, due to the profound effect of aggregate economic events, the industry will not

be immune to whatever is happening in the macro-economy. The collapse of housing

prices, the dramatic drop in market capitalization in stock markets, the rising

unemployment rates, and the difficult business environment have negatively impacted

on the wealth of consumers. This combined with the tighter credit conditions, the

dramatic fall in confidence, and the strong likelihood of a deeper economic downturn

has resulted in consumer spending reducing significantly. Moreover, the spending

patterns of consumers have also changed with the recession. Namely, price and value is

becoming the central issue for consumption decision making29. As a result, firms have

to deal with decreasing demand, as well as the cost-cutting pressure which leads to

lower margins. Cost reduction has emerged as the top priority for businesses in 2009, as

the key area to protect and improve trading performance30.

As the deep recession in many economies is expected to last for a long period, many

firms are responding to the situation by focusing on growth in emerging markets,

29Deloitte (2009) Industry Outlook - Consumer Products

30In the last few months alone, more than 12 of the leading Consumer products companies in the Fortune 500

have announced cost reduction programs, from Coca Cola to Procter&Gamble.

Ernst&Young (2009) Driving sustainable enterprise cost reduction within the consumer products sector, pp. 2


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mergers and acquisitions, and product innovations. These will be the growth drivers of

the industry in the coming period.

Supply chain management is also one of the main issues in the industry at the moment.

Global sourcing and market expansion, consumer safety and quality concerns, and

changing consumer preferences are making the task of supply chain management more

and more complicated. Of which, the issue of food safety has become particularly

prominent following the recent contaminated milk scandal in China and e-coli related

recalls in the US. This issue is very important to brands reputation, and is attracting

more and more concerns from firms managers31.

Moreover, greening and sustainability issues also have great effects on the industry.

Consumers are paying more and more attention to brands sustainability and social

responsibility initiatives32. For many companies, green products sales have grown faster

than overall sales, therefore, consumer products companies can take advantage of this

available growth field, through implementing product innovations and appropriate

marketing campaigns.

In conclusion, most consumer products companies face a difficult time ahead, or at least

a period of no growth as the recession persists. Nevertheless, if firms can track and

anticipate changing consumers needs with appropriate brands, products and services,

there are still opportunities for the successful business.

31In the 2008 CIES Top of Mind Survey of Food Retailers and Manufacturers, food safety rose from eighth to

second place in the rank of senior executives priorities, and has maintained its position in the recent 2009 survey.

Deloitte (2009) Industry Outlook - Consumer Products32

The Retail Forward Intelligence System study in March 2008

Deloitte (2009) Industry Outlook - Consumer Products


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3.2.2 Geographical industry overview

The markets for the industry can be divided into three geographic segments with

different characteristics:

The United States

- The worlds biggest

economy, account for

32 percent of Unilever

2008 turnover

- In the prolonged

recession, to ultimately

recover by the start of

2010 but with a slow

GDP growth rate, and

even slower rate for

consumer spending

- The stronghold of

P&G and with the

presence of all famous

corporations: Nestle,

Kraft, Unilever, Mars

- The mature market

in the downturn - sign

for shifting focus for

future growth towards

other market segments

Emerging economies

- Raising the importance in the worlds economy with the fast growing populations, the

continuing economic growth trend and increasing living standards

- Suffering from the contagion of the recession which started from advanced economies,

due to the slump of both foreign trade and financial investments. However, GDP only

moderately decreased and will recover soon by its internal strengths, e.g. China with huge

domestic demand, India with strong growth in middle-class consumers

- The growing markets - the current best place to invest, with the rising presences of all

iants: Nestle P&G Unilever

Euro zone and other

advanced economies

- Represent a

significant proportion

of the global consumer

spending, and

contributed 32 percentof Unilever turnover in

2008.

- Consumer spending

has also exhibited a

downward trend, as the

phenomenon spreads

from the US

- Experiences the long

existence of giants in

the industry, also the

home markets of

Nestle, Unilever,

Danone

- The mature market in

the downturn, not the

favourable places for

continuing investing


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3.3 Porter Five Forces analysis

3.3.1 Rivalry among existing firms

The consumer products can be considered to be in the stabilization and mature stage of

its industry life cycle. The industry has so far experienced a moderate growth rate, of

which the largest subsector - Food and Beverage - is the most mature one with slow

growth33.

This is the industry that experiences fierce competition from a large number of world-

class multinational groups, including Nestle, Pocter&Gamble, Kraft, Danone and

Unilever, as well as small private players with local operations.

Consumer products can be described as having low differentiation and low switching

costs. The substantial differentiation, which may only exist, is between branded and

private label products, through quality differences. However, the quality gap is now

closing and can be considered to be near zero in many categories 34 . Consumer

spending patterns are also changing with less discrimination between private labels and

branded products. This is the basis for the expectation that the current recession will

caused a notable shift of consumer purchasing into cheaper private label brands.

Economies of scale play a very important role in the industry, which allows firms to

reduce costs, secure the supply of inputs, establish wide distribution chains to build up

market segments and create innovative products with advance technology. As cost


34Ernst&Young (2009) Driving sustainable enterprise cost reduction within the consumer products sector,

pp. 3


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reduction has currently been the top ranking concerns among firms in the industry,

large-scale firms can have significant competitive advantage over smaller ones.

In the industry, there will still be two main competitive strategies: cost reduction and

product differentiation. While cost reduction faces margin pressure and volatility in

inputs prices, firms might try to differentiate products and persuade customers that their

products are safer, of higher quality, or tastier, to make it worth paying the higher

prices.

3.3.2 Threat of new entrance

Economies of scale offer existing firms in the industry a great deal of advantage over

new entrants. Of which, existing large scale firms can enjoy the cost advantage which is

the very important competitive advantage in the current economic situation. Investing in

large capacity will be a significant challenge for new entrants, especially in the current

tightened credit market.

R&D can provide significant competitive advantages for firms over cost reduction,

differentiation and innovation. However, R&D capacities have to be developed over

time, creating substantial barriers for new entrants, unless they have sufficient financial

resources to invest in R&D at the beginning or collaboration with other R&D facilities.

Consumers spending decisions are affected by their habits and brands loyalties which

are related to their quality perception. Existing brands have already had their quality

assurance evaluation and have set their standards. Advertising can help new brands

become more familiar with customers, but their qualities need time to prove and this

creates the advantage for first movers in the industry.


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Furthermore, new entrants in the consumer products industry also face difficulties in

building up their suppliers and distributors network. Existing firms have already had

long lasting, or even exclusive arrangements with suppliers of cheap raw materials.

Besides, while new entrants finds it difficult to obtain supermarkets shelf-space for

their products, existing firms products have already been in good l ocations and have

been exposed through other distribution channels as well.

Therefore, the threat of new entrants in the industry is not significant, because there

have been significant barriers developed to deter new entry which have been built up

through economies of scale, first mover advantage, and relationship with suppliers and

distributors.

3.3.3 Bargaining power of buyers

In the Consumer products industry, the bargaining power of buyers is increasing over

time. This is because the industrys products are not differentiated substantially, and

there are also no switching costs. These characteristics have made buyers become highly

sensitive to prices. Moreover, there are various firms operating in the industry, from

world-class brands to private labels, providing buyers with a wide range of choices.

Buyers can be considered to include product retailers and the final consumers. In the

case of retailers, such as supermarkets, volumes of sales are large and have great

influence on the total revenue of firms. Large distributors, such as Tesco, Wal-mart and

Morrison, have the power to set consumer prices and determine the assortment of goods

to be sold, therefore, they have significant bargaining power. Moreover, there is also a

substantial threat for firms from the fact that large supermarkets are producing more and

more own-brand-products with much cheaper prices, replacing other brands on the


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front-shelves. This makes distributors become more independent and have more power

to bargain in relation to prices.

The end-users of the industrys products are customers, who are free to switch between

brands. Given the fierce competition, firms have to adopt the shopper-centric perception.

The volume of sales from each individual customer is small, but their trend of shopping

is really vital to firms. Cost reduction is considered to be the popular tactic during the

current difficult economic situation, when shoppers are becoming more and more price-

oriented.

3.3.4 Bargaining power of suppliers

In the consumer products industry, especially in the food and beverage subsector, raw

materials account for a major proportion of production costs. The raw materials are

often from less advanced agriculture countries in Asia, Africa, and South America,

which normally highly depend on manufacturers, and so having less bargaining power.

However, from the experience of the commodity price spike in 2008, manufacturers

have awakened to the need for securing the supply sources. Underlying trends such as

volatile price fluctuation in the current deep recession, population growth, and climate

changes have created great threats for the security of raw material inputs.

3.3.5 Threat of substitutes

There is no substitute for consumer products in general. The products of the industry are

indispensable for the daily needs of customers; therefore, they cannot be replaced by

other products.


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However, if taking into account the characteristic that products manufactured by firms

in the industry are in the form of packaged products, their substitutes will be fresh or

unpacked products. In advanced economies, the threat from these substitutes is not

significant due to the tradition of buying products in supermarkets or stores offering a

wide range of packaged products. The practice in other less advance countries is not the

same, particularly considering the popularity of shopping in open markets with fresh and

unpacked products. This is the characteristic that multinational firms have to take into

account when considering entrance into such markets.

3.4 Conclusion

In conclusion, the Consumer products industry is a mature, highly consolidated industry

characterised by the fierce competition and the fast movement of participants to deal

with the continuously changes of the environment and consumption behaviours. The

current economic conditions are not favourable for all industries, including the

Consumer products industry. However, in such a difficult situation, firms still manage to

explore the opportunity for growth, by focusing on their expansion to emerging markets,

innovation and cost reduction. Unilever is one of the leading firms implementing these

strategies. With the high profile and the strength built up through the groups long

history of establishment and development, Unilever has positioned it well to overcome

this hard time.


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Chapter 4Literature Review UNILEVER

22

CHAPTER 4 - LITERATURE REVIEW

4.1 Introduction

Mergers and Acquisitions (M&A) have gained popularity in nearly every sector in the

global economy. M&A experienced a high wave of transactions from 2003, and

especially in 2006 when global M&A transactions were at an all-time record level of

$3.79 trillion35 . Their popularity still exists even in the current difficult economic

condition36. The Food and Beverage sector is not an exception, in which M&A has been

said to be one of the main growth drivers, with increasing numbers of acquisition cases

over the years, including the participation of giant firms such as Nestle, Unilever, Mars,

and Procter&Gamble.

From this viewpoint, the Literature Review will focus on the topic ofMergers and

Acquisitions in the Food and Beverage sector - Benefits and Prospects. The chapter

will begin with outlining the general knowledge about M&A, before analysing the

M&A activities in the Food and Beverage sector.

35Harry, G., Barkema (2008) Toward unlocking the full potential of acquisitions: The role of organizational

restructuring,Academy of Management Journal, 51:4, 69636

Richey, Jr., Kiessling, Tokman and Dalela (2008) Market growth through mergers and acquis itions: The roleof the relationship marketing manager in sustaining performance, Industry Marketing Management, 37, 394-406


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4.2 Mergers and Acquisitions

4.2.1 Definition and classification

Business combination is the bringing together of separate enterprises into one

economic entity, as a result of one enterprise obtaining control over the net assets and

operations of another37

M&A is a form of business combinations, in which one entity (the acquirer) obtains

control over the net assets and operation of another (the acquiree) in exchange for the

transfer of assets, incurrence of liabilities, or insurance of equity38

M&A can be classified based on the relatedness of firms business activities. This

classification form is particularly useful for the purpose of analysing different

transactions. Under this classification, there are three basic types of M&A39:

Horizontal M&Ais the first type, in which both the acquirer and acquired companies are

in the same kind of business, and usually are competitors.

Vertical M&Ainvolves firms at different steps of the production process. If the acquirer

purchases a target that is ahead of it in the production process, it is called backward

integration. Meanwhile, a purchase of a firm that is further down in the chain represents

forward integration.

37Epstein, B.J., Jermakowicz, E.K. (2008)IFRS 2008 Interpretation and Application of International Financial

Reporting Standards (electronic version), John Wiley & Son Inc, New Jersey, pp.40238

Epstein, B.J., Jermakowicz, E.K. (2008)IFRS 2008 Interpretation and Application of International FinancialReporting Standards (electronic version), John Wiley & Son Inc, New Jersey, pp.40239

Ross, Westerfield, Jaffe and Jordan (2008) Modern Financial Management(8th

International edn), McGraw-Hill, New York, pp. 814


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Conglomerate M&A is the situation where the acquiring and acquired firms are not

related to each others businesses, and are normally undertaken for the purpose of

diversification.

4.2.2 Motivations

There are a variety of motivations for M&A. The most common motivation for M&A is

to achieve Synergy, which is defined as the difference between the value of the

combined firm (VAB) and the sum of the values of separate firms (V A and VB)40:

The main sources of Synergy are growth, cost reduction, revenue enhancement.

Moreover, there are also other sources creating synergies for M&A, such as capturing

tax gains, diversification. Those sources will be examined in detail in the following parts

in the context of the Food and Beverage sector.

4.3 Mergers and Acquisitions in the Food and Beverage sector - Benefits and

Prospects

Food and Beverage is a mature sector, in which the structure and performance have been

significantly impacted by M&A activities

41

. In this sector, the technology is relatively

mature, the competition is intense and the market growth in various segments is

substantially below the annual rate of 5 percent42. The slow growth rates, together with

40Ross, Westerfield, Jaffe and Jordan (2008) Modern Financial Management(8

thInternational edn), McGraw-

Hill, New York, pp. 81441

Adelaja, Nayga Jr. and Farooq (1999) Predicting Mergers and Acquisitions in the Food Industry,Agribusiness, 15:1, 1-2342

Ramsay, B. (2000) The global food industry: Conclusion and implication, Financial Times Retail andConsumer, London, pp.193-210


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the increasing competition, and the rising bargaining power of distributors, created

strong waves of M&A in the Food and Beverage industry, which can be seen in 2000

with the $10.5 billion acquisition of Pillsbury by General Mills, $19 billion acquisition

of Nabisco by Phillip Morris, $12.4 billion deal of Quaker Oats by PepsiCo, and the

prominent acquisition of Bestfoods worth $21.4 billion by Unilever43. In this industry,

M&A has always been used actively as one of the key engines for growth.

4.3.1 Forms of Mergers and Acquisition

In the Food and Beverage industry, M&A have been implemented in various directions,

including horizontal, vertical or conglomerate.

According to Weston and Chiu (1996) 44 , prior to 1980s was the period of

diversification, when firms rushed to use M&A to diversify their portfolio, combining

both food and beverage products as well as non-related ones. Following the 1980s was

the period of contrast direction, as the correction of the earlier trend, with firms ceasing

acquiring non related products into their portfolio, and even divesting those products

due to impractical benefits.

Food and Beverage companies are now focusing M&A on sharpening their core

products and rationalising their portfolio. Unilever is concentrating on its 400 core

brands, assisting those brands with further M&A of relating products while divesting

other non-core brands. Nestle is also concentrating M&A on its strengths in baby

products, ice cream, pet foods45. The current trend in the industry is the use of M&A in

43Thompson and Strickland (2002) Strategic Management: Concepts and Cases, 13

thEdition, McGraw-Hill,

New York, pp. 47644

Weston and Chiu (1996) Growth strategies in the food industry,Business Economics, 31:1, 21-2845

Bolling, C. and Gehlhar, M. (2005) New Directions in Global Food Markets, Economic Research Services/USDA, Chapter 5, 62-73


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virtually every case to support the existing core products portfolios, either nationally or

internationally46.

4.3.2 Benefits and Prospects

4.3.2.1 Motivations and Benefits of Mergers and Acquisitions

As with the general M&A motivation, M&A in the Food and Beverage industry also

bases around synergy as the sources of value creation. As such, synergy, and its various

sources, will be examined in the Food and Beverage cases as followed:

Growth

Companies can grow through investing internally, which is called organic growth, or

through buying resources externally to achieve external growth. M&A is the typical

external growth strategy, and is especially common in mature industries like Food and

Beverage where internal growth faces great difficulties from increasing competition and

restricted capacity.

Bolling and Gehhar (2005) 47 found that firms in the Food and Beverage industry,

uncommonly, used the introduction of new products and brands as a strategy for

expansion. Firms typically expand through M&A, and this strategy had been employed

by most of the largest firms when they entered new markets in recent years. Firms are

generally seeking targets to expand production lines and to broaden geographic scope,

especially into international markets48. Multinational firms as Unilever, P&G and Nestle

46Lynch, R. (2006) International acquisition and other Growth strategies: Some lessons from the Food and

Drink Industry, Thunderbird International Business Review, 48:5, 605-62247

Bolling,C. and Gehlhar,M. (2005) New Directions in Global Food Markets, Economic Research Services/USDA, Chapter 5, 62-7348Weston and Chiu (1996) Growth strategies in the food industry,Business Economics, Vol. 31, No.1, 21-28


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have long been involved in international expansion to broaden market reach, increase

manufacturing facilities and secure materials sources, and M&A is their popular

strategic tool to achieve those targets.

According to Lynch (2006)49 , M&A was the most widely used form of expansion

among firms in the industry, both for international and national sales growth50. This is

because in this mature market, the time and cost involved in creating organic growth

may not deliver targeted growth quickly enough to meet short-term shareholder

pressures. The authors conclusions were also consistent with previous researches,

indicating that companies which pursued M&A, such as Nestle, Unilever, Phillip Morris

and Heinz had achieved higher sales growth rates than the normal rates offering by this

mature sector to firms that only grew organically51.

Cost reduction

M&A can take advantage of economies of scale, as the combined firm can perform a

function more efficiently than two separate firms, by reducing duplicate functions and

excess capacities, sharing technologies and R&D facilities, and by reducing the general

and administration costs52. This results in a lower cost per unit of production and an


Drink Industry, Thunderbird International Business Review, Vol. 48, No. 5, 605-622

The research based on 400 listing announcements made by medium and large-sized firms in the FinancialTimes Food Business during 1998-2001, and examined in depth 35 leading firms in the sector from 1985 to2001.50

There are six main strategies for international expansion, including acquisitions, joint ventures, alliances,licensing or franchise operations, developing wholly owned subsidiaries, and using agents or distributors.

Lasserre, P. (2003) Global strategic management, Palgrave Macmillan, Houndmills51

Ramsay, B. (2000) The global food industry: Conclusion and implication, Financial Times Retail andConsumer, London, pp.193-21052

Palepu, K.G., Healy, P.M., Bernard, V.L. and Peek, E. (2007) Business and Analysis and Valuation (IFRSedn), Thomson Learning, London, pp.435


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improvement in competitive position. Moreover, the combination of complementary

resources can help firms improve the usage of existing resources of the two partners.

As in the food and drink industry, the common patterns of M&A in recent years are the

acquisitions of multinational giants over smaller, but valuable, firms. The notable

examples are the acquisitions of Ben&Jerrys, Bestfoods and Slimfast by Unilever;

Jenny Craig by Nestle; and Walkers Crisps by PepsiCo.

Austin and Leonard (2008)53 found that large acquiring firms have brought the huge

economic and organisational resources to smaller acquired firms whose pace of growth

were often constrained by the scarcity of resources. Namely, the general managerial

prowess in planning and execution, the capital access, the capability to scale operations

into larger markets, which are brought by large and successful businesses, can create

dramatic increases in the scale of the smaller parties. These are essential resources

helping small brands to reach the sufficient scale to be more profitable, to strengthen

their business operations, and therefore, to become more competitive.

The authors found that while the purchase of Ben&Jerrys offered Unilever the leading

position in the US super-premium ice cream markets, Unilever also offered Ben&Jerrys

operation greater efficiencies. Unilever used its operating expertise and infrastructure to

rationalise Ben&Jerrys manufacturing and distribution systems, therefore, helping

Ben&Jerrys enjoy significant cost savings and also reduce its environmental footprint.

Moreover, while Ben&Jerrys previously efforts to expand into the European market

were not very successful, Unilevers presence and capabilities in this market have

enabled Ben&Jerrys to gain significant success in Europe. In return, Ben&Jerrys,

53Austin, J. and Leonard, B. (2008) Can the virtuous mouse and the wealthy elephant live happily ever after,

California Management Review, Vol. 51, No. 1, 77-101


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having the highest percentage sales growth rate in Unilevers portfolio, have

significantly improved Unilevers position in Europe.

The authors concluded that through M&A, the production cost of the acquired firms

may be reduced and, therefore, higher margins and profits can be achieved. This effect

can be achieved through reducing redundancies, through economies of scale in

production, distribution or other costs, through increasing efficiencies using the

expertise of the acquirer, or through supply chain economies resulting from greater

scale.

Moreover, in the case of vertical M&A, better coordination between phases of the

production process also helps firms to reduce costs. Vertical integration can help create

efficiencies by reducing the transaction costs associated between phases of production,

assuring supplies or markets for the production, diversifying risk from the uncertainty of

the market, and capturing economies of scale54

.

Revenue enhancement55

M&A can make a significant contribution to firms abilities to increase revenue. Firstly,

M&A can helps firms to reduce the number of competitors and gain more influence on

market prices, especially through horizontal M&A in a concentrated industry with few

competitors, or vertical M&A of strategic input sources or important distribution

networks. Revenue can also be enhanced if M&A is used for the purposes of acquiring

54Bhuyan (2002) Impact of Vertical Mergers on Industry Profitability: An Empirical Evaluation, Review of

Industrial Organisation, Kluwer Academic Publishers, pp. 61-7955

Ross, Westerfield, Jaffe and Jordan (2008) Modern Financial Management(8th

International edn), McGraw-Hill, New York, pp. 815


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strategic capacities and competences that the acquirer lacks, for example, strong R&D

capacity, needed material sources or intellectual capital.

According to Grimpe (2007)56, one of the major motivations for firms to carry out M&A

is to gain access to technology knowledge and to increase new product innovation.

However, given the dominance of the acquirer, more changes have typically occurred in

the target than in the acquirer. Nevertheless, firms with advanced technologies are

normally the attractive targets for M&A, and in this case, acquirers can take great

advantages from those targets. According to Barney (1991)

57

and Graebner (2004)

58

, the

knowledge resources that were acquired are used to complement the acquirers existing

resources and they, together, create the basis for implementing strategies to improve

innovative capabilities and competitiveness of acquirers.

M&A can especially be used to improve the reputation of firms, by using the social

value of acquirees brands. Lynch (2006)59

found that a social brand, which represents a

distinctive value to customers, becomes an attractive target for large firms. The

distinctiveness and special connection with customers of such valuable brands can stem

from the high quality, taste, functionality and, moreover, from their additional intrinsic

social benefits such as environmental sustainable, socially progressive, natural organic,

better the community. Through M&A, large companies tried to incorporate these social

values into their operations. For instance, through the acquisition of Ben&Jerrys,

56Grimpe (2007) Successful Products Development after Firm Acquisitions: The Role of Research and

Development, The Journal of Product Innovation Management, Vol. 24, 614-62857

Barney, Jay B. (1991) Firm resources and Sustained Competitive Advantage, Journal of Management, Vol.17, No.1, 99-12058

Graebner, Melissa (2004) Momentum and Serendipity: How Acquired Leaders Create Value in theIntegration of Technology Firms, Strategic Management Journal, Vol. 25, No. 7, 51-7759

Lynch, R. (2006) International acquisition and other Growth strategies: Some lessons from the Food andDrink Industry, Thunderbird International Business Review, Vol. 48, No. 5, 605-622


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besides taking the leading position in the US super-premium ice cream market, Unilever

also aimed at absorbing the deep value of Ben&Jerrys, which has excellent quality,

fun and social dimension, into its ice-cream category world-wide

60

.

Moreover, there are also vertical downstream-processing acquisitions in the Food and

Beverage industry61. According to Bolling and Gehlhar (2005)62, the benefit of the

vertical M&A to firms in the industry is the link it can create between the primary

production and the final consumers. For firms undertaking vertical M&A, this will

enable them to tailor products to match specific markets, and the changing consumption

patterns from the very primary stages of the production process. Moreover, firms also

can enhance product quality though higher control over the raw products, while

reducing the transaction costs. This is the structure that has successfully propelled the

New Zealand dairy sector, as well as Unilevers tea and oil businesses so far.

Firms also have other motivations for M&A, for instance, taxation factors have a

significant influence on M&A63. Although successful M&A have to be based on sound

business strategies, firms can use M&A to take advantage from tax losses, when tax

payment is reduced by combining the losses of the M&A partners, therefore, the

acquired firms are worth more than their prices64. Moreover, in developing economies,

and particularly in Asia-Pacific and North America, governments often use tax

60Austin, J. and Leonard, B. (2008) Can the virtuous mouse and the wealthy elephant live happily ever after,

California Management Review, Vol. 51, No. 1, 77-10161

Fischer and Schronberg (2007) Assessing the Competitiveness Situation of EU Food and DrinkManufacturing Industry: An Index Based Approach,Agribusiness, Vol. 23, No. 4, 473-49562

Bolling,C. and Gehlhar,M. (2005) New Directions in Global Food Markets, Economic Research Services/USDA, Chapter 5, 62-7363

Weston and Chiu (1996) Growth strategies in the food industry,Business Economics, 31:1, 21-2864

Stevenson (2009) Economy forces advisors to change to keep up, International Tax Review, Vol. 20, No. 2,12-33


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exemptions or other reliefs to stimulate foreign investment, under which M&A will

create more benefits for firms.

4.3.2.2 Prospects for Mergers and Acquisitions

Having a great deal of benefits, M&A will still be the key future growth driver in the

Food and Beverage industry. This is because the industry is mature, with a high level of

consolidation and fewer opportunities for growth, and so far M&A has been the popular

and practical choice65.

Moreover, the patterns and attributes of various geographical and product markets are

very different to each other, and in the progress of moving between markets, M&A is

considered to be a wise choice.

In terms of geographical markets, as Western European, American and Japanese

markets are becoming more and more saturated with moderate growth in consumer

incomes and populations, firms are moving rapidly to emerging markets for higher

growth, as well as for diversification against economic downturn other than only staying

in individual markets66. In this progress, using M&A helps firms reduce time and risk in

entering new markets.

From the viewpoint of products ranges, firms are increasingly attempting to take

advantage of their existing strengths (Lynch, 2006 and Bolling, Gehlhar, 2005). Firms

with extensive expertise in certain products, which include inherent technological and

marketing advantages, are proceeding with M&A deals to support their core profit


Drink Industry, Thunderbird International Business Review, 48:5, 605-62266

Bolling and Gehlhar (2005) New Directions in Global Food Markets, Economic Research Services/ USDA,Chapter 5, 62-73


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making products. In order to achieve these objectives, both horizontal and vertical M&A

can be used, to secure the focused products categories. This strategy is consistent with

the case of Unilever with the focus on ice cream and nutrition products.

In the current downturn of the global economy, the role of M&A is considered to be

larger, as researches have stressed the suitability of this corporate strategy in this

environment. Companies with sufficient capital resources can take advantage of the

current difficulties, by acquiring other firm and create the business shapes which ensure

that they can weather the storm and emerge strongly as the crisis pass. According to

Wan and Yiu (2009)67, such an economic jolt offers lucrative opportunities for firms,

and if firms can recognise opportunistic M&A deals, they would enjoy great benefits.

Previous studies focusing on period of economic difficulty also found results consistent

with this view; that the active firms which can take advantage of abundant M&A

opportunities will experience better improvements in future performance68. M&A in

these conditions offers firms lucrative opportunities to deepen their existing resource

bases and obtain substantially different resources and capabilities, and be more likely to

change and to survive69.

However, the current drought in the capital market makes such strategies less practical,

as only firms with sufficient capital raising abilities can take advantage of the

opportunistic deals. The capital difficulties have reduced the M&A activities in almost

all markets from the middle of 2008, including the Food and Beverage sector. However,

67Wan, W.P. and Yiu, W.D. (2009) From crisis to opportunity: Environmental Jolt, Corporate Acquisitions,

and Firms Performance, Strategic Management Journal, Vol.30, 791-80168

Burton, G.D., Ahlstrom, D. and Wan, J.C.C. (2003) Turnaround in East Asia firms: evidence from ethnicoverseas Chinese Communities, Strategic Management Journal, 24:6, 519-54069

Karim, S., Mitchell, W. (2000) Path-dependent and path-breaking change: reconfiguring business resourcesfollowing acquisition in the US medical sector, Strategic Management Journal, Vol.21, 1061-1081


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due to the strategic role of M&A in the sector, M&A still have good prospects, and will

likely regain their high popularity once the credit markets recover.

4.4 Implications for Unilever

M&A have long been one of the traditional business activities of Unilever, and the

company can be considered as the most prominent successful case of using such

corporate strategies in the Food and Beverage sector. According to Jones and Miskell

(2005) 70 , Unilever had been created and has grown through M&A rather than

organically.

Established through the merger of the Dutch and the British companies in 1930 71 ,

Unilever has continuously used M&A to expand its products range world-wide.

The period of 1970s and 1980s saw the dramatic diversification of Unilever beyond its

main food and household products, into chemicals, advertising, packaging, market

research, and equipment. However, the 21st century has experienced the significant

change in the pattern of M&A being used by Unilever. In 2000, Unilever launched the

Path to Growth initiative to reduce its portfolio from 1600 brands to 400 core brands,

which accounted for 85 percent of the firms revenue at that time, and were determined

to be the growth drivers for Unilever. In this strategy, Unilever paid special attention to

food and beverage products. After the historic acquisition of Bestfoods in 2000 for

$21.4 billion, which is the largest ever undertaken acquisition by Unilever, the Food

70Jones and Miskell (2005) European integration and corporate restructuring: the strategy of Unilever, c.1957 -

c.1990,Economics History Society 2005, Blackwell Publishing, 113-13971 The Dutch firm was Margarine Unie, and the UK firm was Lever Brothers


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35

division72was established to implement the groups Food focus strategy. With a series

of prominent acquisitions including Slimfast, Ben&Jerrys and a number of other M&A

deals, the Food division now accounts for more than half of Unilevers revenue.

Although the five year Path to Growth strategy did not create the targeted annual

growth rate of 5-6% for Unilever during the implementation period 73, it had added

significant value to Unilever, from the high expertise of Bestfoods, the social icon of

Ben&Jerrys, the strong nutrition profile of SlimFast, which are effectively supporting

the core strengths of Unilever.

At the present, Unilever has still continued using M&A for supporting core strengths of

the group, with the latest development being the acquisition of Romanian ice cream

business -FrieslandCampina - into its portfolio, further strengthening its leading position

in the global ice cream market74.

4.5 Conclusion

M&A is the important corporate issue to firms in the Food and Beverage industry,

because of its benefits and its role in the future development of the industry. Various

literatures have shown that M&A can create great benefits for firms, including growth

contribution, revenue enhancement, cost reduction and other lucrative results. These

characteristics make M&A attractive and necessary for firms in the increasingly fierce

competition and difficult economic environment. Having enjoyed substantial benefits

from M&A, from the early establishment and through various different patterns of

72Unilevers Foods division is known as Unilever Bestfoods

73Patrick Cescau CEO (2007), Unilever Investor Seminar 2007

74 Fame, , accessed on 27/07/2009
https://fame.bvdep.com/https://fame.bvdep.com/


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implementing this corporate strategy, Unilever is considered as the prominent successful

case of using M&A in the Food and Beverage industry.


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Chapter 5Company Analysis UNILEVER

37

CHAPTER 5 - COMPANY ANALYSIS

5.1 Introduction

Company analysis is one of the main parts of the fundamental analysis, providing the in-

depth knowledge about firms strategies and performance, and building up the

foundation for the following forecasting and valuation processes. In line with this

purpose, the company analysis of Unilever will firstly provide an understanding about

the firms strategies and then its performance in the context of these strategies. The

SWOT analysis technique is also used to give the summarised picture regarding the

firm.

5.2 Strategy and corporate governance analysis

5.2.1 Strategy analysis

At the corporate level, Unilever has always directed its strategies to achieve the

competitive advantage in every of itsbusiness units market75. Previously, Unilever built

up its business in a highly autonomous way, with its own portfolio priorities and all the

resources it needed, to develop the business in whatever way it saw fit76. With the

increasingly globalised competitive landscape, in which global scale and strategically

driven allocation of resources determine the business success, the management board

realised the need for focusing resources on Unilevers real strengths. By implementing

the Path to Growth strategy from 2000, Unilever has successful consolidated its over-

75

Johnson, Scholes and Whittington (2008) Exploring Corporate Strategy Text and Case (8th

edn), PrenticeHall, Edinburgh, pp. 22476 Patrick Cescau CEO (2007), Unilever Investor Seminar 2007


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diversified portfolio into 400 core brands with sustainable competitive advantage, which

can help Unilever compete better locally by drawing on its global position, as A Truly

Multi-local Multinational

77

Starting from 2004, the mission Adding Vitality to Life is still being implemented, as

the roadmap for the development of the group - making the reshaped portfolio work

harder. With this mission, Unilever is determined to exploit the highly potential

uncovered growth space - Vitality - within the current core portfolio.

Help people feel good, look good and get more out of life

That is the way Unilever differentiates its products from other brands in the Consumer

products industry, which has decreasing differentiation and mostly depends on price-

base competition strategy. Moreover, Unilever continues using the advantages from

well-known global brands, marketing skills and technology to differentiate their

products in the global competition, providing customers with Unique products with

proven benefits. This is the great competitive advantage, because differentiation is

considered as the key for competitive advantage in the sector from now on78.

Unilever also uses the price-based competition strategy, drawing down the costs by

using its strong supply chain, including its own raw material sources and applying

achievements from its strong R&D facilities. Moreover, with the slogan Growing as

One79, the One Unilever program has improved the management structure, reducing the

overhead costs and increasing the efficiency in resources allocation within the groups

77Unilever Annual Report and Accounts, 2000, 2001, 2002, 2003


79 Unilever Annual Report and Accounts, 2007


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39

global portfolio. This helps Unilever save costs and focus resources in higher margins

products, therefore, increasing the business performance.

The differentiation, and especially the cost-reduction capabilities, offers Unilever a great

deal of competitive advantages in the D&E strategy of the group. This is the

abbreviation for the firms current international strategy - expanding operations in

developing and emerging markets80. The One Unilever program introduced in 2006 also

helps the group coordinate effectively its geographically dispersed operations around the

world within its global strategy

81

.

Moreover, organic growth is determined to be the main growth strategy for the group,

as Unilever focusing on unlocking the potential to achieve the global leadership position

within the existing portfolio of categories, brands and geographies. M&A is used as the

means to accelerate this growth strategy, through helping the group fill in a geographical

gap or weakness in priority categories, with an example of this being the Foods category

in Asia82.

Unilevers current strategies focus on exploiting the core strengths of the group, with the

main use of organic growth. These are the consequences of the active process of

developing, implementing and adjusting strategies of the groups management boards.

80Asia, Africa and Central and Eastern Europe (AACEE) markets

Unilever Annual Report and Accounts, 200881

Johnson, Scholes and Whittington (2008) Exploring Corporate Strategy - Text and Case (8th

edn), PrenticeHall, Edinburgh, pp. 30682 Patrick Cescau CEO (2007), Unilever Investor Seminar 2007


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5.2.2 Corporate governance analysis

Unilever NV and PLC are the two parents of the Unilever Group, and together with the

group, they operate as a single economic entity. Under the Equalisation Agreement, the

Anglo-Dutch group operates under united management boards with the same Directors

and the same Chairman for the effectively cooperation between NV and PLC in all

areas, ensuring that all the group companies act accordingly83.

Unilever has long pursued the tradition of developing home-grown managers; therefore

its managers must have in-depth knowledge about the firm as well as expertises relating

to its businesses. The high experienced management boards have contributed

significantly to the success of Unilever so far.

The most notable recent development is the retirement of former CEO Patrick Cescau,

and the consequence appointment of Paul Polman. While Patrick Cescau had made

outstanding contributions to Unilever as the founder of the Path to Growth strategy

and had 35 years working at Unilever, Paul Polman is the former top executive of P&G

and Nestle, joined Unilever from October 2008, and became the first CEO from outside

the group. This may create certain changes to the group in the coming period.

In conclusion, the corporate governance of Unilever is transparent with positive sign

from high experience managers. The wide operation range and the complexity of a giant

multinational group have made Unilevers management become the worlds most

83Unilever Annual Report and Account 2008, pp. 44: The Boards are one-tier boards which comprise Executive

Directors and the majorities are independent non-executive Directors.


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difficult corporate-management job84 and the great performance achieved by the group

so far has reflected the success of its management boards.

5.3 Financial analysis

Financial analysis is the important step to evaluate the past, the trend, the current

position, as well as the prospects of the firms performance. Consistent with these

purposes, the financial analysis of Unilever will be conducted using the two principle

analytical tools: ratio analysis and cash flow analysis85.

5.3.1 Ratio analysis

5.3.1.1 Overall profitability:

Profitability ratios are the most important ratios while analysing the particular firm. In

the case of Unilever, the set of profitability ratios shows a mixed picture.

84Goeffrey Jones (2005) Unilever: Transformation and Tradition, Oxford University Press, Oxford

85Palepu, K.G., Healy, P.M., Bernard, V.L., and Peek, E. (2007) Business and Analysis and Valuation (IFRS

edn), Thomson Learning, London, pp. 196


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While gross profit margin and operating profit margin experienced a moderate

fluctuation through time, the pretax has enjoyed a steady increase. Anyway, all of

Unilevers profit margins have always stayed higher than the industry average

86

:

In recent years, cost of goods sold has risen with much higher rate than the revenue

growth rate, creating the decreases in Unilevers gross margin from 2007. Especially in

2008, while revenue increased only 0.84%, cost of goods sold climbed up by as much as

3.81%, driving the gross profit margin down to 47.33%, which was 2.3% lower than

2007. This is because of the rising commodity prices by the middle of 2008 that

increased the production costs significantly, while competition restrained the ability to

raise goods prices. In 2008, Unilever had already changed its pricing policy to meet with

the rising cost. As a result, sales growth was primarily driven by price changes while

volume was flat.

With the improved costs control under the One Unilever program, costs such as general

and administrative overheads have been driven down, helping Unilever generate the

increasing operating, pretax as well as net profit margins. In particular, the operating

margin has benefited from the increasing credits from business disposal activities,

enjoying smooth growth throughout the period, staying much higher than the industry

averages over the 2004-2008 periods.

86 Appendix 2, pp. 67


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The pretax margin also benefits from the interest reduction in the current economic

situation, driving down Unilevers financial costs, partly offsetting the contrary effect

from the 16.13 percent increase in debt in 2008. Moreover, the investment income is

still in the rising trend, and significantly contributes to the rising pretax margin. This is

because of Unilevers focus on investing in assets in developing markets like India87.

Joint ventures, associate and other non-current investment also contribute the increasing

profits for the group, and those investments are mainly in Unilevers newly expanded

markets where the impacts of the crisis are still limited and there is still high potential

growth.

M&A also created the moderate difference between profiles of pretax and net profit

margin through profits from discontinued operations, with the prominent case in recent

years being the disposal of the majority of Unilevers European frozen food business in

2006. Finally, net profit margin has still managed to go upward, outperforming the

industry, offering a bright prospective for the future performance of Unilever.

In recent years Unilever saw the decrease in assets, which is largely due to the higher

value of business disposals compared to acquisitions, and the reduced value of pension

87Unilever Annual Report and Account 2008, Note 11, pp. 101


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assets due to the current financial crisis. Moreover, goodwill and indefinite-lived

intangible assets, which account for approximately 45 percent of total assets, are

subjected to annual impairment review, creating a significant reduction in Unilevers

balance sheet value. These characteristics, combined with the slight increases in return,

have increased ROA and operating ROA for the group. This is also the common

phenomenon for other composited profitability ratios such as ROE, ROCE; the small

rise in return can create the significant rise in the ratios due to the decreases in the

balance sheet denominators. However, those ratios are still higher the average levels of

Unilevers competitors88.

5.3.1.2 Investment management

The ratios being analysed in this part relate to asset turnover, which reflect the

effectiveness of the firms asset management to generate revenue.

Working capital management

88 Appendix 2, pp. 67


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Those ratios reflect how efficiently Unilever has utilised its working capital. To a

consumer products manufacturer like Unilever, those ratios lie at the heart of the

operations.

It can be seen that the inventory management has been improved through time, with the

increasing inventory turnover, and therefore, the shorter inventory holding period. The

inventory turnover of Unilever is now slightly lower than the average level of direct

competitors, which was 5.73 in 200889. This is the result of the One Unilever program

launched in 2006, helping Unilever coordinate its supply chain more efficiently through

the centralisation of regional supply chain management.

Receivable turnover has increased over the period, resulting in a decrease in the days of

receivables. Unilevers receivables turnover is higher than the industry average

90

,

reflecting that the credit and collection policies of the firm are relatively more stringent.

Given the growing power of retailers and the increasing competition in the industry,

there is the high possibility of sales being lost to competitors offering more lenient

89Appendix 2: Conducted from the ratios of Nestle, P&G, Danone, Colgate-Palmolive, Kraft and Campbell

Soup - Thomson One Banker90

Appendix 2: The average Days of receivables of the in

Documents

Thesis for Reference