Hacking Unilever: Vulnerabilities in Innovation & Organization

A selection of Unilever's iconic brands A selection of Unilever's iconic brands

Part I of our vulnerability assessment of Unilever, one of the world’s largest CPG companies, in light of its recent ‘troubles,’ criticisms from shareholders, and stake buildup by activist investor Nelson Peltz.

Why Unilever? We believe it is a beautiful case study in corporate susceptibility, making this a timely post.

A selection of Unilever's iconic brands
A selection of Unilever’s iconic brands


Hacking The House

This post and its planned follow-up are a vulnerability assessment for Unilever, albeit short. Think of The Strategist as the safecracker brought in to test the safe in the house, the one where you keep the things dear to you, for weaknesses.

A closer parallel is ethical hacking. Instead of finding the weak spots in your cyberinfrastructure, it’s about finding the vulnerabilities of your organization’s structure, culture, and strategy. It’s one of our specialties, an offering under our Design to Grow program at the Leverage.

You should know that I was an employee of Unilever between October 2015 and May 2021. The analysis comes from publicly available data, and I write it as an ethical grey hat.

Because this post is a good faith account by someone playing the devil’s advocate, it is critical of Unilever. Sridhar Ramanathan lists the phrase ‘let me play the devil’s advocate’ at number ten on his ‘How to kill a good idea’ list. And I agree wholeheartedly although, from personal experience, I would put it at number one. It was the favorite refrain of my former boss at the company.

But in the present case, it does the opposite. By actively seeking weaknesses in their house, real or perceived, organizations can seek proactive and sincere solutions for underlying issues and take a nuanced stand on corporate principles of record before others (read: competitors, shareholders, activist investors, et cetera) shove them down their throats. Only then can one affect changes needed to build a growing, future-fit enterprise.

With these disclaimers in mind, let’s start hacking the house.


Unilever’s Troubles

When your company’s share price jumps 5.7% in its biggest intraday gain in a year and a half after news breaks of an activist investor’s (read: Nelson Peltz) stake, the chances are that managerial economic performance has left the shareholders wanting.

Terry Smith represents one such shareholder for Unilever through his eponymous Fundsmith Equity Fund.

The Ballad of Terry Smith

The outspoken man behind the UK’s most significant equity fund isn’t out to make a quick buck.
Terry has been clear as day about his investment strategy and has the numbers to prove it —

  1. Buy good companies
  2. Don’t overpay
  3. Do nothing


‘Do Nothing’ is rare in the wheeling-dealing world of equity markets. Terry famously declared to his shareholders in 2011, a year after he established his fund —

We remain critical of attempts to measure investment performance over short periods of time. Even a calendar year is too short for this purpose — it is the time it takes the
Earth to go around the Sun and has no natural link to the investment or business cycle.

Terry Smith, Annual Letter to Shareholders, 2011

If that doesn’t scream strategic investing, I don’t know what does.

Ten years later, Fundsmith continues to have low turnover in stocks. It sticks with the equities in its portfolio that continue to reflect the first pillar of Terry’s strategy — buy “good companies.”

“We continue to pursue a policy of trying to run our winners,” Terry declared in the 2021 edition of his widely respected annual letter to Fundsmith’s shareholders.

No Nonsense Investing

The brevity of Terry’s process makes him brutal on bullshit. He has little patience for corporate yarn more characteristic of US-based corporations than European companies like Unilever.

He might let it slide if the underlying performance of your company is robust and the fundamentals remain strong. But, as Unilever has found out in the past weeks, he will call you out, disdainfully, I might add, if you are slipping.

And Unilever has been slipping.

Terry Smith v/s Unilever

Unilever was the worst performer among Fundsmith’s CPG stocks over the last two years. In his letter to Fundsmith shareholders in January 2022, Terry Smith called out Unilever’s management for the poor showing.

The Purpose of Mayo

Unilever seems to be labouring under the weight of a management
which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business. 

The most obvious manifestation of this is the public spat it has become embroiled in over the refusal to supply Ben & Jerry’s ice cream in the West Bank. However, we think there are far more ludicrous examples which illustrate the problem. 

A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert — salads and sandwiches). 

Although Unilever had by far the worst performance of our consumer staples stocks during the pandemic we continue to hold the shares because we think that its strong brands and distribution will triumph in the end.

The Strategist’s Take

Many observers have called out Terry over what appears to be his ‘attack’ on Unilever’s penchant for sustainability. That interpretation is at once naive and scandalous. The quip on mayo makes for a good soundbite. But there’s a lot more going on here.

A long-term investor like Terry knows the importance of staying in black when it comes to ESG. Penalties and taxes on corporations failing to meet such requirements (e.g., plastics in the EU and sugar in Latin America) are only going to go up with time. From that perspective, a focus on sustainability does pay, or, more accurately, save.

It’s the lack of balance between purpose and profit that he calls out, quite clearly I must add, in his lament. It’s not about the Mayo and should be read for what it is saying between the lines.

As he elaborates in his more acerbic follow-up from January 20, 2022, Unilever has been less than forthcoming to its shareholders on several matters over the past decade or so. These things tend to pile on with time.

You take that frustration, the frequency of Unilever’s missteps, and the size of Terry’s holding in the company and you start getting an accurate picture.

Context in Numbers

Unilever is a truly global business.

Its Daily Active User (DAU) count is 2.5 billion — that’s over 30% of the world’s population, spread in nearly 190 countries! This consumer pedigree, supported by a network of 25 million retailers worldwide (read: strong distribution), comes with a business that goes back to 1860 (read: resilience).

As of January 2022, Unilever has three verticals — Beauty & Personal Care, Home Care, and Food & Refreshment. Turnover stood a little less than 51 Million Euros in 2020. Of nearly 400 brands that Unilever currently owns, thirteen have sales of over a billion euros each.

These numbers scream scale. But that enormous scale can sometimes come with dis-economies and sluggishness that no amount of ‘word mongering‘ on agility can thwart. And therein lie a lot of Unilever’s woes. But first, let’s take a quick look at the symptoms of what’s going on at the company.

Unilever: Market Performance

The table below shows how much an investment made in Unilever in November 2010 is worth today vis-à-vis investments in its competitors.

Value of a November 2010 Investment in Unilever, Today
Value of a November 2010 Investment in Unilever, Today | Source


Here’s an equally sad demonstration of Unilever’s EPS since 2010.

Unilever’s Nominal EPS Shows A Luke Warm Progress | Source: Unilever’s Annual Reports


EPS has been sluggish, barring the outliers in 2017 and 2018 when buybacks and disposals triggered by the ill-fated Kraft Heinz bid propped it. It may go up in 2021 due to a share buyback worth €3 Billion in market value.

The same may turn out to be true for 2022, assuming the completion of CVC Capital’s acquisition of Unilever’s tea business. But the underlying performance leaves you wanting for consistent gains.

Now you might prefer to judge your “investments by what is happening in their financial statements than by the share price,” à la serious investors like Terry Smith or Warren Buffet. But, like them, you know that ten years is a long time, long enough for the market performance to mirror managerial performance. The lowdown on the latter comes next.

Unilever: Managerial Performance

Here’s the return on capital employed by Unilever since 2010.

ROCE or EBIT per Euro of (Total Assets less Current Liabilities) | Source: Unilever’s Annual Reports


If you hover over the annotations, you will find the drivers behind sudden jumps in the chart above. The underlying performance, however, raises concerns. Unilever now employs 1.3× more capital to earn what it earned back in 2010 on a nominal basis. And the Euro’s value has eroded in the last decade.

Sluggish EPS and falling ROCE make for a bad marriage. But things get worse when you add a falling USG to that mix. See the chart below.

Unilever’s Declining Sales Growth | Source: Unilever’s Annual Reports


These figures help put Terry’s recent acerbic attacks in perspective. After all, he characterized the first pillar of his investment strategy, “buy good companies,” thus —

Consistently high returns on capital are one sign we look for when seeking companies to invest in. Another is a source of growth — high returns are not much use if the business is not able to grow and deploy more capital at these high rates.

Terry Smith, Annual Letter to Shareholders, 2019

As the numbers show, Unilever isn’t doing well on either metric. The business remains grossly undervalued and suboptimal and has been so for a long time. That makes it a juicy target for activist investors. It wasn’t a surprise when I learned about Trian’s stake in Unilever in the middle of this analysis. Unilever has had a bull’s eye on its back for a very long time.

A View on Underlying Issues

There are three distinct themes to look at when forming a view on the underlying issues at Unilever —

  • Innovation or specifically the lack thereof
  • Organization or specifically structural bloat and insular culture
  • Direction or Unilever’s strategy and its fit for growth


Issues in these themes may or may not exist, but optics may suggest otherwise to an outside observer. Remember that this is a vulnerability assessment. We will consider the first two themes in this post and relegate the third to a follow-up piece on The Strategist.

So what’s going on and how to fix some of it? Let’s ponder.


Depression in Brand Innovation

Unilever’s R&D expenditure as a percentage of its turnover has declined consistently over the last decade. See chart below.

R&D Intensity at 3 of top 4 Global CPG Companies | Source: Annual Reports


While top competitors like P&G and Nestle are also in R&D hell, they still spend more on R&D than Unilever.

One could argue that R&D intensity is not necessarily a determinant of innovation (though there’s enough literature out there suggesting otherwise). After all, a lack of innovation from its most prominent players mars the CPG industry despite the R&D spending (though I would still argue that a lower than critical R&D intensity is driving that).

The last time a category-building innovation came along in CPG was way back in 2012 when P&G launched Tide Pods. And please don’t cite vegan meats and ‘just add water’ soaps and detergents as these are old ideas. Since then, most innovations have been claims-based (read: free from this and free from that) or ESG driven. These are areas that smaller companies, local brands, and upstarts increasingly dominate.

Aging Brands at Unilever

However, even with what Unilever spends, it hasn’t built a market-leading brand of its own in a long time. As the graphic below shows, most Unilever brands (at least the most recognizable ones) were born before the turn of the century.

A selection of Unilever's recognizable brands with their launch years. Company's biggest brands are very old.
Most Recognizable Unilever Brands are Old | Source: Leverage Analysis

Of the brands that came after 2000, only two came up in-house — Love, Beauty & Planet (launched in 2018) and its sister brand Love, Home & Planet (2019). Rest are all acquisitions with an average brand age of 14 years. These optics call into question Unilever’s internal brand innovation and brand-building capabilities of late.

As for M&A, it is a legitimate route to growth. Unilever built its stable of brands on the back of acquisitions. Some of its oldest brands, e.g., Pears, Vaseline, Pond’s, Wall’s, and Hellman’s, were acquired. But without a penchant for groundbreaking innovation in-house, even groundbreaking acquisitions will falter sooner or later—more on Unilever’s M&A activity in our follow-up post.

Why Brand Ageism?

To be clear, aging brands aren’t necessarily a source of concern.

Alan Jope correctly called Unilever’s ‘portfolio of leading category and brand position’ one of its differentiating strengths in his presentation to investors last year. 81% of Unilever brands were #1 or #2 in their respective markets in FY2020. 50% of Unilever’s turnover came from its thirteen billion-euro brands, of which Magnum is the youngest. It came along in 1988/89.

Many of these brands have seen enormous odds — world war(s), the Great Depression, the Cold War, the Great Inflation, the Internet, and the GFC — and survived. Some date back to the Long Depression of 1873—1896! There’s resilience here; people tend to fall back to old established brands in times of great uncertainty.

But brand age can also make for complacency, sacred cows, war stories, and sluggishness. Even more dangerous are consumers’ apathy and stereotyping. Innovation and reinvention are crucial to survive and prosper, but it’s challenging to reinvent and stay relevant.

You may disagree, but there’s a reason why P&G decided in recent years to shed 105 brands to focus on 65 profitable ones (of which 22 are billion-dollar bands). Or why only 13 of Unilever’s 400 brands have billion euro sales, the youngest of which is 34 years old.

And the whole argument around CPG brands requiring long years to grow makes no sense. That would mean the €16 billion M&A capital Unilever deployed between 2015 and 2020 will payoff in 2030?

New, Small, and Local

New brands that work are nimble, unafraid to experiment with their image. They can be infectious in infusing their energy and concepts in older ones (that’s one reason why many CPG companies try to grow via M&A).

Such brands are often small, local, and digital natives. That gives them degrees of freedom (and consumer proximity) not available to old, large brands locked in their established brand image. That’s the combination gaining traction across the strategic CPG markets.

Consider China, for example, where insurgent brands contributed 40% of the CPG growth between 2019 and 2021. Moreover, the local insurgents have made inroads into organic growth.

The Rise of Insurgent Local Brands in China
The Rise of Insurgent Local Brands in China


In the US, small (< $150 million in revenue) and medium (< $750 million in revenue) brands contributed 45% sales growth in CPG between 2016 and 2020. See chart below.

The Rise of Small and Mid-sized CPG Brands in the US
The Rise of Small and Mid-sized CPG Brands in the US

Even for large CPG companies, ‘all of their organic volume growth and almost 90 percent of their overall value growth came from small and medium-sized brands.’

New, Small, Local is also the mantra in India, where 2020 and 2021 have been transformative in terms of consumer behavior. See, for example, #1 and #2.

I chose China, India, and the US because one of Unilever’s five strategic choices is to ‘accelerate in USA, India, China and key growth markets.’ But other markets are likely seeing a similar surge (here’s an example).

What does this mean for Unilever?

Perspectives on Solutions

Here are some considerations for Unilever —

  • Stop cutting down on R&D intensity (and no the answer isn’t supplementing internal research with external partners — that’s admirable and should be done but that’s not the solution)
  • Separate Research (on new products) from Development (of iterative improvements). Monitor the spend on each and check disproportionate Development spend.
  • Test new ideas with new(er) Brands and infuse successful ones into older propositions. Subject the ideas to a different set of KPIs. The answer isn’t in ‘x-year’ paybacks but in number of prototypes tested; ideas killed; or brands/products launched/tinkered with.
  • 50% of the turnover comes from 387 small and mid-sized brands with average revenue €65 million. That’s a strength. Identify hero brands that could suit the New, Small, and Local mantra from among that crop. Cross-pollinate brands geographically. E.g., no one knows Conimex in India but they care about spices in that country.
  • In order to utilize existing small brands, stop divesting viable businesses instead of fixing them.
  • Look inside. Love, Beauty & Planet is a wonderful case study in how a new brand can originate with passionate intrapreneurs. Other examples of lightening fast idea-to-launch exist. Why not build on them?
  • Unilever foundry — $50M invested is laughable. That’s 0.1% of the company’s annual turnover invested over how many years? Set targets for investments and geographies that aren’t silly. The same goes for Unilever Ventures.
  • Review the innovation process — there’s a definite resource allocation issue. But is organization structure also stifling innovation and brand building? Is it discouraging external partners from bringing ideas to Unilever? How will the new structure ensure faster innovation?


Ultimately, organization structure will be crucial to the success of any initiative — innovation or otherwise. The current setup leaves enough by way of a target for activists like Peltz. Let’s take a look.


Bloat At Unilever

In its January 25 press release, Unilever announced a simplification of its organization.

The company will move away from its current matrix structure and will be organised around five distinct Business Groups: Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream. Each Business Group will be fully responsible and accountable for their strategy, growth, and profit delivery globally.

[...]

To enable Unilever to benefit from its scale and global capabilities, the five Business Groups will be supported by Unilever Business Operations, which will provide the technology, systems, and processes to drive operational excellence across the business. A lean Unilever Corporate Centre will continue to set Unilever’s overall strategy.

[...]

Reginaldo Ecclissato, Chief Supply Chain Officer, will lead the Supply Chain and Unilever Business Operations as Chief Business Operations Officer.

Observations On Simplification

The reorganization is looking a lot like P&G‘s with its Sector Business Units (five SBUs as of 2021) supported by Global Business Services (GBS) and “a very small corporate group with best-in-class functional expertise.” It’s a conglomerate without separate listings on the stock exchange (that may come later). Unilever says the reorganization will cull about 1,500 management roles worldwide.

I assume that the Performance Management Units (PMUs) proposed under the geographical reorganization in 2019—2020 (see page 40) will go hand in hand with the new Business Groups. Again, much like P&G’s Market Operations or the Lafley-era Market Development Organizations. The earlier reorganization is consistent with Unilever’s retreat from Aggregation (and its continued emphasis on Adaptation) — moving from eight clusters to fifteen PMUs for local focus.

Here are my observations on the latest reshuffle —

  • The reorganization panders to Nelson Peltz. Alan Jope said that the “new organisational model has been developed over the last year”, but really it smells like they cooked it after July or August 2021.
  • The split from three divisions to five Business Groups is in line with Unilever’s retreat from Aggregation as a lever of global strategy since 2012.
  • Giving global strategy and P&L responsibilities to the Business Groups prepares the company for future spin-offs and disposals — e.g., Foods business (now called Nutrition)
  • Combining Supply Chain with newly created Unilever Business Operations opens the company to Arbitrage opportunities beyond IT , Payroll, and facilities management. I wouldn’t be surprised to see a Nike – Apollo like setup in certain geographies in the future.
  • The reorganization is an acknowledgement of a bloated management — role reduction represents 15% senior management and 5% junior management roles.
  • There’s more headroom for right sizing Unilever than the press release lets on. More on that in a bit. Let’s dive into some questions on simplification.

Questions on Simplification

The questions below are relevant as the details on the new structure are scant.

  • How will the Business Groups interact with the PMUs? Will they get control of regional and local sales and marketing organizations and other non-arbitrage functions?
  • Will the regional leaders get control and responsibility of the geographical P&L so that those with consumer- and customer- proximity are responsible for growth and profit?
  • What degrees of freedom will the regional leaders have over the shared services (i.e. Corporate Center and Unilever Business Operations) they need and want? Will they have control over corresponding cost allocations?
  • How will the new structure incentivize ‘New, Small, and Local’? What will be the interplay between top-down plans and bottom-up initiatives?
  • What mechanisms will be put in place so that the different regions ‘talk’ with each other? Ditto for different Business Groups?

I am sure shareholders like Terry Smith and Nelson Peltz will have similar queries, and it’s essential to answer them. Otherwise, it’s more of the same where the buck doesn’t stop anywhere, or it stops everywhere.

Next, we turn our attention to productivity at Unilever and right-sizing the company.

Productivity at Unilever

The chart below speaks for itself.

Turnover per Employee for Four CPG Majors


Nestlé and Kraft Heinz represent two extremes of productivity among Food companies — the two companies’ product portfolios are different, as are their operating models.

Unilever is unique among these companies — its product portfolio is like Frankenstein’s Monster, built from the other three. On a 2020 turnover basis, 62% of Unilever resembles P&G, while the balance looks like a portmanteau of Kraft Heinz and Nestlé.

Right Sizing Unilever

The insight above gives us a way to identify the ideal range of employees. Assuming Unilever to be a patchwork quilt* built from P&G and Nestlé, we get an estimate of 116,583 employees.

*Take Unilever’s combined turnover in Beauty & Personal Care and Home Care divisions and divide it by P&G’s employee productivity. Do the same for Foods & Refreshment business with Nestlé’s employee productivity.

Apply the same treatment assuming Unilever to be a combination of P&G and Kraft Heinz, and we get an estimate of 81,137 employees.

Unilever had 150,000 employees in 2020, representing an excess of 33,000 to 69,000 employees. The calculation ignores Unilever’s exposure to emerging markets, where productivity and automation are lower than in developed markets where the other three companies have a more substantial presence. One also ignores product portfolio differences when accepting these estimates.

My argument is that there is headroom to optimize headcount despite these differences. These are big numbers.

Perspectives on Solutions

Here are some considerations for Unilever —

Better Ways To Downsize

Should Unilever pursue a pink slip policy to deal with the bloat?

It may have to IF the shareholder pressure is unbearable — which it may be in the coming months with Nelson Peltz showing up on the scene. If such eventuality becomes inevitable, Unilever can opt for solutions aligned with its credo. Some examples —

  • The Dutch Way
    • When the company downsized positions in The Netherlands in 2017, it fired complete teams and encouraged all those fired to reapply for the downsized teams anew.
    • Instead of picking people to cut, it chose to give everybody a chance to reapply for the new positions.
    • It is likely that the above is a legal requirement in the Netherlands (all sorts of feel good things happen in that country).
    • But it gives a template (albeit time consuming) for downsizing fairly elsewhere.
  • Network Effect
    • When Better.com CEO Vishal Garg fired 900 staff en masse over a Zoom call, several company employees activated their professional network to help those leaving find employment.
    • While that was a personal prerogative, Unilever can choose to set an example by building formal mechanisms to help those it asks to leave.

Alternative Operating Models

Such models are highly contextual and have had varying degrees of success. Disposal of assets often accompanies these models. Here are some examples —

  • Volume Aggregation
    • Making up for revenues lost to overestimated (and therefore underwhelming) growth by contract manufacturing for others.
    • It helps prevent idling of assets and the workforce in a manufacturing setup.
    • It can work well in cases of brand disposals where Unilever may continue to retain manufacturing capabilities
    • Unilever can also choose to support CPG startups in manufacturing while improving its output per employee
  • Clauses for Causes
    • Models like asset sell and leaseback where a contract condition involves the buyer retaining a proportion of the seller’s workforce to service demand.
    • Models like discounted asset sale where a contract condition involves the buyer retaining a proportion of the seller’s workforce.
    • Such models work well with disposing tangible (e.g., manufacturing units) as well as intangible (e.g., brands) assets

Upskilling, Not Downsizing

Unilever can also consider alternatives that involve training the employees otherwise marked for termination. With a clear growth strategy, the company can upskill the right employees and earmark them to sustain future growth instead of handing them exit letters.

Unfortunately, that approach requires breathing room that may no longer be available to the company. Despite the wake-up call in Feb 2017 from the Kraft Heinz bid, it remained gun shy, and that lethargy may come back to haunt Unilever.

Investments in upskilling and automation will be needed either way to improve productivity, whether by shrinkage, growth, or a combination thereof. Arbitrage by way of outsourcing locally or producing/servicing in low-cost regimes, by way of wages and cost of capital, will play a part.

Some Questions on Right Sizing

Any future downsizing or productivity improvement will require combining these approaches and more. But will shareholders give the company the runway it might need to implement the best solution? That hinges on answers to two questions —

  • Does Unilever have a clear strategy for the future?
  • Will it have the trust of its shareholders?


We will return to these questions in the follow-up to this post, looking at the third theme on Direction. For now, let’s take a look at insularity in Unilever’s organization.


An Insular Organization?

Organizational insularity takes on three distinct forms —

  • Shutting out Shareholders
  • Inbred Leadership
  • Internal Silos


Let’s look at how Unilever fares on these three dimensions.

Incommunicado: Shutting Out Shareholders

Allow me to recount some instances of the company going incommunicado with its investors or simply not reading the room with shareholders. Here we go —

The Kraft Heinz Bid

  • The bid came out on February 17, 2017 and was withdrawn mere two days later. The entire episode unfolded over a weekend.
  • It valued Unilever at 24 times its earnings at the time and at an 18% premium to its share price (which is similar even today, painfully so) on February 16, 2017. There’s a reason why Unilever shares climbed 13% when the bid was revealed.
  • True, the two companies remain fundamentally incompatible in terms of strategic priorities. The deal would have overleveraged the joint entity, raising questions about Unilever’s credit-worthiness. But that’s assuming Unilever would have accepted its terms ‘as-is’.
  • May be it was a good deal, may be not. May be a better deal was possible, may be not. But good corporate governance suggests presenting shareholders with a choice and arming them with the knowledge to take an informed decision. Unfortunately that wasn’t to be.
  • Unilever management didn’t see it fit to consult the shareholders on the fundamentals of the bid or its underlying analysis. It didn’t give a choice to the investors.
  • The legitimate questions that the bid raised about Unilever’s operational performance remain answered. For e.g., the question of productivity which we looked at in the previous sections.

Going Dutch

  • It took a shareholder revolt for Unilever to scrap its planned unification (from dual Anglo-Dutch structure) and move to Rotterdam back in 2018. The company has since unified into a single PLC and moved to London.
  • As you will see below, the company’s Investor Relations team did reach out to some shareholders on the matter, albeit to seek help with other, protesting, shareholders.
  • Clearly that wasn’t enough. Paul Polman, then the CEO, departed after a month and a half. And despite denials from the Board, the departure felt like the aftermath of the failed Dutch move.
  • Better consultations would have helped Unilever read the room with its significant shareholders and avoid a potential embarrassment. That was not to be. Unilever would repeat the missteps three years later with its GSK bid.

The Fundsmith Debacle

  • I will let Terry Smith elaborate this one. Here’s an excerpt from a letter he wrote on January 20, 2022 —
"[...] the company did not even attempt to contact us for the first eight years we were shareholders. We have always assumed that one job of the investor relations team was to keep in touch with the largest shareholders and especially one with the characteristics of Fundsmith – a long term investor who has never sold a share. It wasn’t as if the investor relations team didn’t know about us. They managed to make contact easily enough when they were struggling with the attempted move to Holland. It is never a good start if the first time you hear from someone it’s because they need a favour."
  • Terry’s fund is now the 13th largest shareholder (10th largest by some accounts) in Unilever. I wonder if other investors have felt similarly cut-off (see next section). But it doesn’t matter really. You just need to piss off one no-nonsense shareholder to project an image. Unilever seems to have done just that.


All of the above instances are from the Paul Polman era. Maybe things have changed under Alan Jope, as Terry Smith suggests. But he also adds that the management still has a ways to go.

He claims that Unilever consulted his team on the ill-fated GSK bid, unlike the Polman era. But some things haven’t changed. Here’s what Terry said about Unilever clarifying the fundamentals of the GSK bid —

"Instead we were faced with a statement that the bid worked based on financial metrics including the all-important return on capital. However, getting management to discuss what that number was, was like a dentist pulling a back tooth. This was all the more puzzling given that GSK is a listed company and the profits and cash flow of the Consumer division can be established from its segmental reporting. So investor communications may have become more frequent under the current executive team but there is still some way to go on openness in our view."

Let me close this section with another instance from the Alan Jope era.

Inaction Makes for Resolutions

Every two to three years, the Access to Nutrition Initiative releases its independent assessment of the nutritional performance of products marketed by the world’s 25 most significant foods and beverages companies.

The 2021 assessment found that despite all the verbiage around SDGs and sustainability in Unilever’s corporate filings, the company lags behind several competitors regarding the percentage of foods sales from healthier products. See chart below (Unilever is nineteenth from top).

Unilever lags in terms of Sales Weighted Proportion of Healthy Products Sold by Top 25 F&B Companies
Sales Weighted Proportion of Healthy Products Sold by Companies (excludes Beverages) | Source: ATNI


The leaderboard above uses the Health Star Rating system to compare the companies’ offerings. By contrast, based on an internal metric, Unilever reported that 61 percent of its food and drink sales were from healthy products in 2020.

Now I haven’t read the source report from ATNI cover to cover. Still, a cursory glance makes me uncomfortable with its methodology (e.g., different products, different geographical coverage of companies, et cetera).

But that didn’t stop small institutional shareholders of Unilever like Castlefield, EQ Investors, and Polden Puckham Charitable Foundation from questioning Unilever’s internal metric. They submitted a question to the Unilever board at the May 2021 AGM to develop a long-term plan to ensure Unilever derives most of its future sales from healthier products.

ESG activist ShareAction coordinated the collaboration among these investors. It’s a benign ask and a genuine ask. However, ShareAction suggests that ‘the company has not made any significant commitments or progress since.’

So this year, they coordinated with not three but eleven institutional investors (cumulative AUM worth $215 billion!). They added a hundred retail investors to that group for good measure. And that question is now a resolution that’s likely to be voted on in this year’s AGM.

A simplistic take suggests that the resolution may help Unilever double down on purpose in an apparent rebuke to Terry Smith. But as I said before, Terry’s critique is not about purpose alone. What’s more, the news of the resolution couldn’t have come at a worse time than January 20, 2022, around the same time as the Fundsmith reprimand, the GSK folly, and the Trian stake. Optics!

Here’s the coverage between the sources, long and short —

  • Unilever Faces New Attack From Investors Over Health Credentials | Bloomberg
  • Investors round on Unilever’s ‘health blind spot’ in fresh wave of attacks | City A.M.
  • Unilever faces shareholder heat on health impacts | ShareAction


Constructive consultations last year would have helped the company in a time of rising regulations in a sector that represents ~40% of the business. Richard Williams, EVP Investor Relations, and his team have work to do for sure.

No Mix, No Fix: Inbred Leadership

There’s another dimension of cultural insularity wherein an organization promotes internally, forming an increasingly inbred leadership and lacking in diverse external experience.

Deep ‘in-organization’ experience isn’t unheard of among CPG leaders, and it is not necessarily a liability. Indeed seasoned executives with long internal tenures bring experience to the table. But so do seasoned outsiders. Long tenures can indicate mutual loyalty between the company and the employee and nurturing culture. But it can also mean comfort zones and ennui.

An organization with a low proportion of external talent at the top is more likely to reject outsiders, ignore outside perspectives, and suppress new ways of thinking. The Einstellung effect, groupthink, island mentality are all corporate realities, and history is replete with companies that suffered decline due to inbred leadership.

Diversity of external experience at the top can revitalize companies by bringing in the necessary antidote. So, how diverse is Unilever’s leadership? Let’s consider the top brass.

Unilever Leadership Executive

The likely Unilever Leadership Executive (ULE) on April 01, 2022, will have an average (and continuous) Unilever experience of 22 years!

Average Unilever Experience in the company's Leadership Executive
Average Unilever Experience in the Unilever Leadership Executive | Source: Leverage Analysis


That is, on April 01, 2022, an average ULE member would have been with the company since the turn of the century! That’s a significant lack of experience, overall or recent, outside the company.

Of the thirteen executives (last supper comparisons will become inevitable) in the ULE, only five have ANY experience outside the company. I am discounting Sanjiv Mehta’s work at Union Carbide before joining HUL in 1992.

Of these five, only four have been with the company for less than five years (see dark blue textboxes in the portrait above). Thankfully these four have significant external experience in CPG at P&G, Revlon, Colgate-Palmolive, and Consumer Healthcare divisions of GSK and Reckitt Benckiser. They will have an important role to play in the next several quarters.

Unilever’s Market Leadership

The situation worsens with Unilever’s Global Markets Executive (GME). GME is the collective leadership of its fifteen regional Performance Management Units (PMUs) and its international arm (Unilever International).

As of Q3 2021, an average member of the GME had been with Unilever continuously for at least 25 years!

Average Unilever Experience in the company's Global Markets Executive
Average Unilever Experience in the Unilever Global Markets Executive | Source: Leverage Analysis


Only three of sixteen regional leaders have been with Unilever for less than twenty years (see dark blue textboxes in the portrait above). These three leaders and two other executives with less than twenty-four years with Unilever bring experience from P&G, Coca-cola, Nestlé, Revlon, Chanel, and Colgate-Palmolive.

Silver Linings of Diversity

Has the lack of diverse external experience among the top brass been a factor at Unilever? Maybe, maybe not. But the optics of its leadership are suspect. External observers tend to look at such facts dimly when the going gets tough. Nelson Peltz made it a point to address a similar lack of outsiders at P&G during his 2017 proxy battle. I haven’t even begun on the lack of gender diversity in the ULE and the GME.

The organization likely has significant external diversity at other levels of its hierarchy. For example, some very distinguished business leaders in Unilever’s Supply Chain organization are rank outsiders. Victoria Cuthbert, the EVP of Beauty and Personal Care Supply Chain, is an example. So is Michelle Grose, the Global VP of Logistics and Fulfillment.

Please note that an outsider, Paul Polman, led Unilever between 2009 and 2019. So there’s a history of some diversity at the top in the recent past.

In the coming days, it will be necessary for the company to highlight these external credentials and, more importantly, demonstrate a real commitment to accepting outside perspectives. More on that later.

Pockets of Excellence or Internal Silos?

The third dimension of insularity is when departments and functions in a company become silos instead of interconnected pockets of excellence. Your organization is breeding silos if —

  • important supply chain projects in strategic markets and product categories take over a year to develop BOSCARDS because the matrix honchos can’t come to terms;
  • several vital restructuring/expansion projects in strategic markets and categories undergo redo because the local teams lacked the rigor but didn’t want to use global capabilities;
  • analysts start and end their careers in your company doing the exact same project, with the exact same brief within a span of five years because nothing’s changing;
  • local adaptation to brand takes forever because the global team overseeing it wouldn’t want to tinker with the image but is happy to leave money (and sustainability) on the table;
  • common sense (and plastic reducing) efforts in packaging don’t get traction with local teams because the idea wasn’t ‘invented there’;
  • global teams have to gain backdoor access to information on project progress because local teams aren’t interested in sharing details;
  • projects take forever because and require dirty escalation because interdepartmental trust is lacking;


I hope things have changed in the nine months since May 2021. Maybe the reorganization from January 25, 2022, will prove fit for the purpose.

Perspectives on Solutions

Here are some considerations for Unilever —

Involving Shareholders

  • Revitalize investor relations by putting in a proactive team that meets with crucial shareholders every quarter or two with or without an agenda. The investor relations strategy has to go beyond quarterly calls, AGMs, and CAGNY conferences.
  • Nurture champions from among the your largest and smallest stakeholders. Identify the detractors and hear them out. It’s less chess and more counseling, both ways.
  • Do NOT ignore those who are in this for the long term.
  • Remake the board to bring in Directors who have skin in the game.

Diversifying the Leadership

  • One way to do that is to set targets for external hiring at all levels of organization.
  • Other is to setup alliances with adjacent industries and non-competing peers to foster exchange, both short- and long-term, of professionals.
  • A third is to encourage business leaders to take sabbaticals to overhaul their thought process using science-based outbound programs.

Connecting Pockets of Excellence

Ah! So much has been said about this topic all over the world. Let me leave you with two generalizations (hard to comment on a black box otherwise) —

  • Align incentives with the behaviors you want in the organization.
  • KILL the matrix, for real. It’s time may come in the next cycle but for now it must go. Make the reorganization matter.

What Now?

A firm the size of Unilever — with more than 150,000 employees and sales of £42 billion a year – is more of an empire than a mere company. Inertia is a natural characteristic of such monoliths – and it is an enemy. It requires someone at the top to insist that this natural tendency to inertia be resisted.

That’s The Guardian from February 2000. The Guardian mentions over 250,000 employees and sales of £27 billion a year in the original piece. I have changed the numbers (in bold) to reflect Unilever at the end of 2020.

It tells you how much Unilever has changed and, if the implications of the analysis in this post are correct, how much it hasn’t. It is at once a statement of hope and despair. I will save the parallels for the follow-up to this post, where we will focus on the third theme of Unilever’s vulnerability — its Direction or Strategy.

However, we have moved the needle in understanding the weak spots even without such considerations. There’s enough here to stimulate some serious thinking before someone else does it for the company.

And there’s enough to do, even if it is merely about projecting the appropriate strengths. Recent debacles, deep-seated issues, and Nelson Peltz suggest that Unilever must do more than project strength. Terry Smith aptly summarized it in his post mortem of Unilever’s failed GSK bid —

We believe the Unilever management – or someone else if they don’t want the job – should surely focus on getting the operating performance of the existing business to the level it should be before taking on any more challenges.

For now, I have nothing more to add.

Sincerely,
Arvind