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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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I confirm that I have today submitted 2 hard copies of my dissertation and 1electronic version in PDF format (floppy disc, CD or by e-mail).
Dissertation format
I confirm that the dissertation is in the format outlined in the Dissertation Notes forstudents. In particular, it:
is 1.5 or double-spaced on both sides of A4 paper has margins of at least 3cm (left) and 2cm (right) has pages numbered consecutively includes:
o title page
o an abstracto Table of contentso
a fully detailed bibliography
I understand that my dissertation may be placed on the University Library catalogueon line and accessed by staff and students after I have finished the programme.
Plagiarism
I am aware of the universitys policy on plagiarism, and I certify that thisdissertation is my own work.
I hereby authorise the department to undertake any steps to check the veracity
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i
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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ii
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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iii
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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Chapter 2The Economic Outlook UNILEVER
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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
6
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
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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/7/31/2019 Thesis for Reference
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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.htm7/31/2019 Thesis for Reference
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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
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Chapter 2The Economic Outlook UNILEVER
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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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Chapter 2The Economic Outlook UNILEVER
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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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Chapter 2The Economic Outlook UNILEVER
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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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Chapter 2The Economic Outlook UNILEVER
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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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Chapter 3Industry Analysis UNILEVER
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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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Chapter 3Industry Analysis UNILEVER
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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
33Deloitte (2009) Industry Outlook - Consumer Products
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 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
49Lynch, R. (2006) International acquisition and other Growth strategies: Some lessons from the Food and
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
65Lynch, R. (2006) International acquisition and other Growth strategies: Some lessons from the Food and
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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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
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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
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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
78Deloitte (2009) Industry Outlook - Consumer Products
79 Unilever Annual Report and Accounts, 2007
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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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Chapter 5Company Analysis UNILEVER
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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