Going overboard?

Unilever chief Cescau is taking his axe to top UK food brand Birds Eye as part of his purge on poor performers and promise to boost sales and market share. Worth &£50m in profits, the frozen food brand’s sale is a powerful sign that no business will escape his scrutiny. By David Benady

Unilever chief executive Patrick Cescau has forced irreversible changes through the business during his first year in charge. Appointed as the dual-listed company’s first sole chief executive last February, Cescau has put in place the “One Unilever” strategy designed to give shape to the company’s sprawling, decentralised structure and save some â¬700m (&£480m). Senior management has been pared back by 15%, and control over the food, household and personal care businesses has been merged.

Last week, the cheerful Frenchman announced that sales, profits and market share in 2005 had stabilised, compared with 2004. Sales were up 3.1% to nearly â¬40bn (&£27m), while pre-tax profits increased 28% to â¬4.8bn (&£3.3bn), and he said market share in many categories was steady. “Unilever is a simpler and more agile business, more responsive to customer and consumer needs, with a clear value creation agenda,” he said.

However, increased advertising and promotional spend and spiralling costs ate into margins, which fell 80 basis points in 2005. The results were undoubtedly an improvement on Unilever’s performance under previous chief executive Niall FitzGerald, but the coming year will reveal whether Cescau can build on what he has started.

Avoid the margins

It is one thing to boost sales by pumping millions of pounds into advertising and promotional campaigns – some â¬500m (&£343m) last year. But the challenge for Cescau is to increase sales and market share without undermining profit margins through price cuts and heavy advertising.

Meanwhile, his announcement that Unilever is to sell its European frozen food business – apart from the Italian operation – has left many wondering what this indicates about the company’s future direction.

The foods division is planning a new product aimed at boosting its range of healthy eating foods, currently codenamed Adex (MW last week). But observers believe this move is likely to be part of an attempt to “fill in the gaps” left in its portfolio by the company’s recent brand rationalisation programme, rather than the start of a major product development drive.

Slimming down

The sale of the frozen food business will blow a huge hole in Unilever’s sales, especially in the UK where Birds Eye is the number one food brand, with turnover of &£500m a year and estimated profits of about &£50m. It is the UK’s second biggest supermarket brand after Walkers.

But frozen food has little prospect of long-term growth as it is assailed by competition from chilled foods and discounting by retailers. Cescau describes frozen foods as a “drag” on Unilever’s growth, with sales declining 4.4% last year. As a Unilever spokesman says/ “Our business model is based on sustainable growth. We can’t see a way to get UK frozen food into growth without a huge amount of financial and management resource going into it. That is money better spent elsewhere.”

Some observers believe that Cescau is transforming Birds Eye from a cash cow into a sacrificial cow. “If an economically powerful brand like Birds Eye can go, it sends a message that every business will come under scrutiny. This has been trailed for a long time and there is a degree of Cescau saying ‘we mean business, Unilever is changing’. The sheer scale and size of the Birds Eye sale pays tribute to that fact,” says one observer.

He adds there is a sense of “pour encourager les autres” in the frozen food sell-off, echoing Voltaire’s phrase about the execution of a British admiral for failure, which served as a warning to others.

Indeed, frozen food is by no means the only troublesome category for Unilever. Its Slim-Fast business has been an expensive diversion, though it would be difficult to find a buyer to acquire it at a reasonable price. The spreads and cooking products business declined by nearly 3% last year, while operating margins for beverages were just 1.6% in 2005, compared with an average of 13.4% across the business. If the massively profitable frozen foods business can be put on the chopping block because it has poor growth prospects, other areas must be vulnerable to a similar fate.

A shareholders’ feast

Analysts expect proceeds from the frozen foods sale – which could fetch up to &£1bn – to be handed back to shareholders rather than used to make a big strategic acquisition. However, some of the windfall could be used to fund smaller acquisitions to fill in areas of weakness in the company’s portfolio after its ruthless pruning from 1,600 to 400 brands.

One analyst says Cescau is under pressure to make sure Unilever’s portfolio performs more robustly. Part of the task lies in addressing the right consumer at the right price, and Cescau announced last week that the company is to launch more “value” products to take on retailers’ low-priced own-labels and discount chains in Europe.

Such moves underline the difficulties of Unilever’s position, with intense competition coming from rival multinationals and from the discount and retail sectors. Added to this, the clock is ticking for Cescau. As the analyst says: “He has 12 to 18 months to prove he can turn the company around. If he fails to show that Unilever can grow at a faster pace without too much damage to margin, the pressure will be on.” He points out that a non-executive chairman will be appointed in 2007 to replace Antony Burgmans, and is likely to come from outside Unilever, adding to the pressure on Cescau.

Clean slate

One sign that change is afoot at Unilever was last year’s decision to shift the worldwide Persil/Omo business out of JWT. It signaled that Unilever’s drive to keep the detergents business growing in developing markets.

According to Investec analyst David Lang, one of Unilever’s big challenges is to maintain its growth in the developing markets of South America, India and other Asian countries, particularly in household and personal care products. While overall European sales fell 2.6% last year, they grew 7.2% in the Americas and 6.9 per cent in Asia/Africa.

Procter & Gamble is attempting to make greater in-roads into developing markets and is providing strong competition through its combination with Gillette. “It is all about whether Unilever can reorganise itself to increase its share, and that is particularly down to retaining its dominance in emerging markets and doing a better job in the western hemisphere,” says Lang. “Cescau is doing as good a job as could be expected,” he adds. Selling off frozen foods will allow Unilever’s management to exert greater focus on higher growth areas such as personal care and ice cream. On the other hand it follows the sale of the company’s fragrance business, UCI, last year, and risks making the group’s sales look anorexic. But if a slimmed down Unilever eventually produces fatter profits, and stronger brands in faster-growing categories, Cescau’s mission will be accomplished.

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