Procter vs unilever

Household goods and personal care giants Unilever and Procter & Gamble both revealed sweeping management changes last week. But Unilever needs more to catch up with its US rival, which has made giant strides towards world domination. David Benady reports

As Unilever paraded its new chairman Michael Treschow before the City last week, across the Atlantic Procter & Gamble unveiled its own sweeping management reshuffle (MW last week)Treschow, a former Electrolux boss who is chairman of Ericsson, joins a company that has fallen way behind its aggressive US competitor. P&G has grown into a seemingly unstoppable global juggernaut under chairman and chief executive A G Lafley, and it claims that last week’s restructure further boosts its grip on retail distribution.

A comparison of the two consumer goods companies’ performances over the past ten years will make depressing reading for Treschow, revealing starkly contrasting fortunes.

Both have traditionally battled for supremacy in a number of household goods and personal care categories from laundry detergents to shampoo. However, in recent years their portfolios have diverged. Unilever is bigger in food – where it competes with the likes of Nestlé and Danone – while P&G is more of a rival to L’Oréal as it has expanded its personal care and beauty interests.

But since 1996, Unilever’s turnover has been shrinking, hitting £27bn in 2006 compared to £33.6bn in 1996. On the positive side, operating profits rose to £3.7bn from £2.9bn, reflecting moves to boost margins under former boss Niall Fitzgerald.

During the same ten-year period, P&G has streaked ahead, nearly doubling sales to $68bn (£34.5bn) and almost tripling operating income (profit) to $13.2bn (£6.7bn). Some of this is down to acquisitions, but also strong organic growth.

Indeed, P&G’s management shake-up last week was the latest chapter in the story of its meteoric rise, and was portrayed by the company as completing its integration of the Gillette business, the $57bn (£28.9bn) acquisition it made in 2005.

Global domination
In reality, though, the reshuffle represented something of a U-turn, with the early departure of the three most senior former Gillette executives to join P&G – and coming after assurances from Lafley that they would be important contributors to the company’s future. The path to global domination is never smooth.

But P&G is bulldozing that path into a superhighway. Some believe its superiority can be traced back to its move in the late 1990s towards a global structure put in place by then chief executive Durk Jager. He ensured the company’s profit centres resided in global business units, giving them centralised worldwide control over brands. While they have centrally planned brand development, locally based market development organisations have focused on retailers and customers.

Meanwhile, Unilever struggled with a matrix system – where local markets would often challenge centrally made decisions – until the introduction of its One Unilever strategy in 2005. This decentralised approach may have been more enjoyable for marketers, but it was felt to lead to inefficiency, insubordination and to hinder new product development. It was no match for the military-style discipline of P&G.

As Martin Deboo, consumer goods analyst at Investec, says/ “P&G was earlier to make the decision and execute it. It had a six or seven year start on Unilever.” This is just one of a number of reasons he believes that P&G has performed so strongly. Another, he says, is that P&G has superior scale and leadership positions in its chosen categories. “It has been more ruthless in managing its portfolio and delivering leadership,” he adds.

This ruthlessness can be seen in its recent divestment of its European tissue business – including brands Charmin, Bounty and Tempo – which was sold to Swedish paper giant SCA in March. One observer says this was because the tissue products were third best sellers in their markets so didn’t fit with P&G’s focus on brand leaders. He adds: “Selling to SCA is a clever way of increasing pressure on its other rival Kimberly-Clark, which owns Huggies and is also big in tissues.”

Aside from the odd unsuccessful foray under Lafley, sources say he has transformed the business since taking over from Jager in 2000.

Disruptive changes
Jager was ejected after 18 months of turmoil amid complaints that the centralising changes he put in place were too disruptive. Lafley has reaped the benefits of tighter worldwide control over brands and has added a renewed focus on customer-led product development. P&G has leveraged its powerful position with retailers to carry out shopper research, using ethnographic methods and immersing management in consumer observation. These insights are fed into creating new products.

Its research and development programme has been turned into an open source system called Connect & Develop where inventors are invited to contribute their ideas.

The organic sales growth reaped from these methods has enabled P&G to persuade investors to fund an unprecedented buying spree, snapping up Clairol and Wella and culminating in the Gillette acquisition in 2005. The Gillette deal was funded with a tripling of P&G’s long-term debt to nearly $36bn (£18.2bn) – only possible for a company with strong management credentials.

So last week’s shake-up should be seen in the light of the need to integrate Gillette’s business more closely into P&G’s divisions rather than continuing in separate silos.

Heir apparent?
The reshuffle elevates high-flyer Susan Arnold to president of P&G’s three business units, which are renamed beauty care, health and wellbeing, and household. Gillette’s Duracell battery unit is absorbed by household while Gillette shaving will be managed by beauty care.

Executive Robert McDonald is promoted to chief operating officer, seen as a gateway to the top role should Lafley leave any time soon.

One observer doubts that Arnold would jump at the chance of taking the top job and points out that Jager was chief operating officer – McDonald’s role – when he was promoted to chief executive in 1998.

The reshuffle has ramifications across the world. In Europe, UK vice-president Gianni Ciserani becomes president for the whole of Europe, based in Geneva. His position will be filled by Irwin Lee from P&G China.

But the most dramatic news was the retirement of three ex-Gillette executives, Bruce Cleverly, Mark Leckie and Mary Ann Pesce. A P&G spokesman says: “The departure of each person was an individual choice. They could have had long and successful careers (at P&G) and we hate to see them go. It was their choice.” It suggests to some that it is hard for outside executives to adapt to P&G’s stringent company culture.

Meanwhile, new Unilever chairman Treschow brings with him a reputation as an axe-wielding cost-cutter and Unilever’s 200,000 employees (down from 300,000 a decade ago) will no doubt be anxious to see whether he will live up to his moniker of “Mike the Knife”.

While Unilever’s latest quarterly results show sales rising in Europe, the company has a long way to go if it is ever to get back into serious competition with P&G.

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