Unilever’s NPD blues

Faced with mounting competition in mature markets, Unilever has changed its tactics and opted for a high-profile, high-risk ‘accelerator’ strategy. But, as the launch of Persil Power and Liptonice has shown, the company is struggling to justif

To the City, Unilever is fighting fit. While the rest of the world languished in sick-beds suffering from recessionary flu, the packaged goods giant didn’t even sneeze. Despite last year’s obvious European hiccups, it maintained worldwide profits at a hefty 2.6bn. Its growth prospects couldn’t be better.

Yet this rosy global picture hides a deeper malaise. Van Den Bergh Foods marketing director Simon Turner says: “Unilever has to respond to specific threats in mature markets, particularly Europe and the US.” He says the cumulative factors of a squeeze from retailers, changing consumer tastes, own-label penetration and price competition are familiar to most marketers.

However, one brand consultant, who has worked with Unilever in the past, cites other reasons for its change in strategy: “Unilever had been consistently beaten in new product development by its rivals in the late Eighties, especially in the concentrated detergent sector. It was a case of change or watch the brands die”.

Ever since Lever Brothers bought Pears in 1909, the company has traditionally responded to competitive threats through conventional, low-risk means. Over the past three years, the company has bought 72 businesses worldwide, including Colmans’ food interests, which it purchased from Reckitt last month.

More critically, Unilever has also developed a high-profile, high-risk strategy of taking short-cuts to innovation, and forging links with other companies.

It managed to launch the Power range of detergents across Europe within eight weeks as part of what was known as “Operation Clover”.

The now legendary venture was a disaster of epic proportions. The Power detergents’ “accelerator” formula was found to be defective. Not only did the company waste about 100m on their launch but it cost an additional 57m to wind them down. Lever’s brands suffered disastrous sales losses. It particular, it caused millions of pounds worth of damage to the Persil and Omo brands across Europe.

Procter & Gamble’s Ariel is now the market leader in the UK for the first time ever.

At about the same time, Unilever subsidiary Brooke Bond responded to price competition and declining tea sales by announcing the joint launch, with PepsiCo, of US tea-based soft drink Liptonice.

Last month – a year after its launch – the UK version had to be completely reformulated, repositioned and repackaged for a relaunch. Smith New Court analyst Tim Potter says: “It is arguable whether it is a long-term prospect in the UK.”

Both launches are high profile indications of the failure of Unilever’s npd strategy.

In the past ten years its annual research and development spend has almost doubled. And over the past five years Unilever has been involved in an exhaustive programme of restructuring and rebuilding to respond to the crisis in its core mature markets.

Five years ago, Unilever also introduced a system of regional and product category management to facilitate a rapid response to changes across its markets. It began to allow products to be speedily developed and adapted in each country.

Regional innovation centres have been opened to enable the rapid introduction of new products. They range from hair product centres for Chinese hair in South-East Asia, to health margarine in Bedford.

Turner says one consequence of the new direction is a shift in culture within Unilever: “Innovation managers have become more significant within the company than brand managers.” The centres are intended to bring research and development, brand management, advertising and promotion teams together to speed up the process.

Potter says: “The strategy enables Unilever to switch successful brands rapidly across markets, such as Ragu and Chicken Tonight.”

So far the system has had a number of successes, as with I Can’t Believe It’s Not Butter and Chicken Tonight, brought in from the US, and Jif Mousse Cleaner from Japan.

Unilever has also been moving into new areas. Ten years ago personal products represented five per cent of the group’s operating profit. By 1994 it had risen to 19 per cent. The company has extended its interests into what appear to be un-Unilever areas, such as luxury personal care. It bought Calvin Klein and Elizabeth Arden in 1989.

Unilever’s response to pressure in mature markets has been to move into developing and emerging regions. The East European, Latin American, Indian and Chinese markets have pre-occupied Unilever in recent years. It has spent $200m (126m) in China to form eight joint ventures, such as that with the Shanghai Soap Company, and set up ice cream factories in Beijing and Shanghai.

Such moves have gradually transformed the character of the company. Europe, as a percentage of Unilever’s turnover, has dropped from 62 per cent to 53 per cent, whereas the rest of the world (everywhere outside Europe and the US) has increased from 19 per cent to 27 per cent.

But such solutions have created new problems. In addition to the cost of the reforms, the need to shorten the development time for new products has multiplied expenditure. Rather than drip-feeding established brands with constant advertising and promotional support, it is having to spend millions of pounds more to launch new products.

Advertising and promotional costs have risen enormously since 1988 (see table, page 41). Potter says Unilever’s advertising and promotion to sales ratios will not see an improvement on 11 per cent over the next two years.

To compound matters, many of Unilever’s companies are engaged in intense price competition, which has squeezed margins still further.

Marketing costs will remain high if Unilever continues with its policy of bringing products rapidly to market and if, as is likely, competition remains intense. The firm is increasingly having to restructure to make the savings which will then fund advertising and promotions.

Its promotional spend has also increased because of the addition of a number of premium personal product companies to its portfolio.

In 1994, 1.7bn of the total 3.7bn Unilever advertising and promotion budget was spent on media advertising. The company has tried to claw back some money through reviewing advertising and media arrangements and negotiating knock-down deals with media owners. However, this strategy conflicts with Unilever’s need to improve its creative work.

One source close to the company’s helm says its top executives blame poor advertising executions for a lack of sales success. At the same time as Liptonice’s relaunch, Unilever switched creative work from Ogilvy & Mather to J Walter Thompson.

But it is understood that there is a more fundamental change in strategy taking place. Top Unilever executives are believed to be considering a Coca-Cola style switch of brands out of its four roster agencies – O&M, JWT, McCann-Erickson and Lintas – and into creative hot shops. “They are planning to use the roster agencies as media buying networks and to out-source the creative work,” says the source.

A recent example of this was the switch of Elida Gibbs’ Lynx brand in the UK from SP Lintas to Bartle Bogle Hegarty, last week. Lintas’ media independent, Initiative, retained the media buying, but BBH was awarded the creative work. “We are likely to see many more developments like these over the next six months,” says the source.

Potter says these increases in R&D, advertising and promotional expenditure have constantly forced Unilever to rationalise its business operations. In 15 years, it has cut its UK staff from 100,000 to 25,000. In February 1994, it announced that 7,500 jobs were to be cut worldwide. And, more recently, Brooke Bond and Van den Bergh were merged to cut costs. It is likely that further rationalisation will take place.

The jury is also out on new products such as Chicken Tonight, which are claimed to be examples of the success of the company’s new strategy. Chicken Tonight is suffering severe competition in its home market, the US, and has not proved to be the long-term success in the UK that was ex-pected. The much-vaunted Calvin Klein’s cK one fragrance still has to prove its worth in the US.

Van den Bergh’s much-acclaimed I Can’t Believe It’s Not Butter lost market share in the UK last year to butter brands. It had to be relaunched last month with a new flavour and marketing campaign.

And despite the new “accelerator” innovation strategy, its historic problem of being beaten to market has not gone away.

In food, Kraft Jacobs Suchard beat Unilever into the UK yogurt margarine market last month with the launch of Vitalite Touch of Yogurt.

And Unilever has been slow to launch into the frozen yogurt market. Grand Metropolitan subsidiary Häagen-Dazs launched a frozen yogurt in France in 1991 and then rolled it out across Europe.

Back in January 1993, Unilever signed a second joint venture deal with Europe’s biggest yogurt maker, French-owned BSN, to develop a range of frozen yogurts across Europe. But so far Societé Yaourt et Glace has only launched a yogurt and ice cream dessert, called Yolka, in Spain and France. Yolka came out last year at about the same time as Persil Power and Liptonice. Plans to roll experimental yogurt ice cream, Yolka, into Germany, Italy and the UK, appear to have been frozen.

At first glance, it might appear that Unilever is reversing its strategy. But Unilever chairman Sir Michael Perry said last month that the Persil Power disaster had not undermined the company’s resolve to continue with its “accelerator” strategy. “We have reviewed our internal processes and, across the board, have taken the lessons to heart. One thing has not changed. Our commitment to innovate and produce innovative and superior technologies is as

resolute as ever,” he said.

If this is the case, Unilever will need very deep pockets to accommodate difficulties to come. One Unilever roster agency source says: “There are undoubtedly more Persil Powers and Liptonices on the horizon. Unilever’s pride has been damaged and the men at the top are hell-bent on proving their strategy is right.”

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