Efficiency driver: Unilever is proud of its long heritage, but its finance director is determined that it learns from history and moves with the times—even if that might mean dropping established brands. Rudy Markham tells Cathy Hayward about the group's plans to expand by trimming the fat

Financial Management (UK), May, 2002 by Cathy Hayward

Walk in through the revolving doors of Unilever House at Blackfriars Bridge, London, and you could be forgiven for thinking you're checking into an art deco hotel. The building's fixtures and fittings evoke the Roaring Twenties, when the consumer goods giant was born from the merger of Lever Brothers with Dutch company Margarine Unie. But the plasma screen relaying City news from behind the ornate reception desk is a reminder that the group boasts modern brands such as CK One and Organics alongside institutions such as Marmite and Lipton.

The mix of past and present continues on the directors' floor, where Le Corbusier-style sofas are set alongside works of modern art. From one side of the building the gleaming dome of St Paul's dominates the view; from the other you can see one of the newest structures to grace the capital's skyline, the London Eye.

Rudy Markham, Unilever's financial director, believes that a combination of traditional and modern methods is the key to growing the business. The group achieved double-digit earnings growth last year. Earnings per share before exceptionals and goodwill--Unilever's benchmark profit measure--increased 12.2 per cent, turnover rose 9 per cent to 32 billion [pounds sterling] and profit before tax increased by 33 per cent to 2.3 billion [pounds sterling]. And the business is set for further expansion. The impressive figures are part of Unilever's "Path to growth" restructuring scheme, announced in February 2000, which aims to double the growth rate by 2004.

Markham says that true profitable growth can be achieved only by going back to the company's roots. "Unilever was one of the forefathers of branded goods. That is our heritage and we must focus the business on our core brands," he says.

In 2000 Unilever owned around 1,600 brands, but the executive review that spawned the restructuring programme found that 80 per cent of sales came from 20 per cent of the brands. Markham is now involved with maximising the cash value on all brands, which means selling off those with low growth and low profitability--in 2000 the group disposed of 27 businesses for around 642 million [pounds sterling. By the end of last year the number of brands had fallen to 910.

Over the same period Unilever bought companies worth around 4.5 billion [pounds sterling] in addition to its acquisition of US firm Bestfoods for 14 billion [pounds sterling]. These purchases have been financed entirely by debt, which is Unilever's traditional method. But a high level of gearing takes some getting used to after a period when the group enjoyed no debt and a triple-A credit rating, Markham says.

Although the restructuring scheme is called "Path to growth", a necessary part of it has been a huge downsizing programme alongside the reduction in the number of businesses. Almost 30,000 jobs are set to be cut, of which 23,000 have already been earmarked. Markham is also involved in restructuring the company's supply chain--another key area that the executive review found was constraining the business. A target of 1 billion [pounds sterling] in procurement savings by 2004 was set two years ago and 700 million [pounds sterling] has been clawed back so far.

The reduction in brands has helped to improve supply chain productivity--fewer stock-keeping units mean greater economies of scale, particularly on a regional level. And a steep fall in advertising rates as a result of the world economic downturn has meant a cut in advertising spending as a percentage of sales.

Improving transparency, a subject close to Markham's heart, is a central part of the supply chain restructuring. Unilever sources materials from all over the world and processes them into finished products. Unlike Nike, for instance, which has been criticised for a lack of supply chain transparency, little of this work is subcontracted. "We satisfy ourselves that, where we have significant relationships with them, we encourage suppliers to follow our code of principles," Markham says.

But he acknowledges that there are many cases where the company has no direct link with the original source of production. "We are big buyers of soya and palm oil from Malaysia and Indonesia, yet we don't know which plantation the oil has come from. But we do, with limited exposure to plantations, try to provide best practice in the way in which these plantations are managed."

This transparency extends to Unilever's use of auditors and consultants. For many years the company has had a rule that it will not use its auditors--currently PricewaterhouseCoopers--for consulting purposes. "This is not because we are concerned that there is a conflict of interest, but because we want to avoid a situation where there is a perception of a conflict of interest. As a major organisation you cannot be transparent enough."

It was plain to see that many territories in the Unilever empire suffered in late 2001 and early 2002. When Argentina's economic problems forced a currency devaluation, for example, Unilever had to reduce the balance-sheet value of its assets in that country by 300 million [pounds sterling]. The decline in air travel, duty-free sales and luxury goods spending after 11 September hit the group's perfume business in the US, with sales dropping by 20 per cent. And devaluation in South Africa, economic turbulence in Turkey and Indonesia and the general economic downturn in Europe damaged a number of individual businesses.