Nipped by Upstarts, Unilever Decides To Imitate Them -- WSJ

01/03/18 02:47 AM EST

Global giant targets local 'ankle biters' with copycat ice cream, clove-oil toothpaste

By Saabira Chaudhuri 

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (January 3, 2018).

The world's biggest brands are under siege from an army of insurgents. Unilever PLC, the maker of Dove soap and Hellmann's mayonnaise, is fighting back with guerrilla tactics of its own.

The Anglo-Dutch packaged-goods giant resorted to a marketing prank last year to try to outflank new competitors of its TreSemmé and Suave shampoos. In July, it launched a copycat high-protein, low-sugar ice cream after a startup usurped its brand, Breyers, as America's favorite pint. And in India, executives sought out Ayurvedic doctors to help whip up a turmeric face wash and a clove-oil toothpaste to compete with a celebrity yogi's line.

"We have to match them in terms of insight, speed and the ability, frankly, not to be 110% sure all the time that what you've got is going to work," said Unilever Chief Financial Officer Graeme Pitkethly, who is helping to spearhead the company's globe-spanning reorganization to respond to the new, local competition.

The success of that effort is far from assured. The world's biggest brands are facing a broad-based revolt among shoppers, threatening a business model that has served them, and their investors, for decades. Consumers in rich countries once embraced the consistency, convenience and affordability of their offerings, from disposable razors to ready-to-boil ravioli. In other parts of the world, a growing middle class clamored for many of the same trusted, Western brands.

Investors loved these standbys, too, for their dependable if modest growth. Consumers needed these home, personal-care and food staples in good times and bad, the thinking went. In past sales downturns, companies ratcheted up research and development -- rolling out "new and improved" versions -- and tapped their vast marketing budgets.

Today, that isn't good enough. Shoppers have gravitated in droves toward smaller, niche or locally made products. In many cases, they are seeking out healthy alternatives and more natural ingredients. Manufacturing costs have fallen, allowing small players to seize quickly on trends. Social media and e-commerce have made marketing and distribution easier.

"Basically there are no entry barriers," says Peter Ter Kulve, a 20-year Unilever veteran tapped as its "chief transformation officer" to lead the counterattack.

More than a decade ago, he said, Unilever centralized decision making, believing consumers in similar income brackets, from Miami to Mumbai, would be drawn to the same global brands. Instead, "the more things globalize, the more people want to affiliate with everything that is local," he said. "This has led to unbelievable fragmentation."

The global market share of the top 15 beauty and personal-care companies fell to 51.8% in 2016 from 52.5% in 2011, according to Euromonitor. Meanwhile, the share of the next 85 grew to 19.8% from 18.1%.

The stakes are especially high for Unilever. The company was formed in 1929, when a British soap maker founded in the Victorian era combined forces with a slightly older Dutch margarine producer. Today, it remains a global giant in two of the consumer-goods sectors hardest hit by changing consumer tastes and the rise of smaller entrants: home and personal-care products like kitchen cleaners and Q-tips, and packaged food like tea and soup.

Some of the world's biggest investors say these big brands are doomed if they don't change radically. In December, veteran activist investor Nelson Peltz won a highly public battle for a board seat at Procter & Gamble Co., maker of Gillette razors and Tide detergent. He is pushing for a massive overhaul at the Cincinnati giant to retool its approach to selling consumer goods around the world. P&G says the same big brands that have powered it through past decades remain relevant today and just need to be presented in different ways, using different media.

Switzerland-based Nestlé SA, the world's biggest packaged-food company, has an activist investor of its own in American billionaire Dan Loeb. Nestlé's new CEO, Mark Schneider, has been snapping up small, local brands -- such as Sweet Earth, a vegan line of frozen food -- to cushion falling sales of its older brands like Lean Cuisine and Stouffer's. "Thirty, 40 years ago being global almost automatically meant 'this is cool,'" Mr. Schneider said in September. "These days the head-start belongs to a lot of the local things."

The S&P 500 consumer-staples index, which includes companies that make both personal-care products and food, was up 10.46% in 2017, gaining ground at just over half the rate of the broader S&P 500.

Early last year, Unilever found itself in the crosshairs, too, after Kraft Heinz Co. launched a surprise $143 billion takeover bid. Unilever Chief Executive Paul Polman fended off the approach, but executives were shaken by the unwelcome bid.

Unilever shares rallied in February following Kraft's approach and kept rising most of the year as Mr. Polman announced a share buyback and the sale of the company's spreads business, among other moves, and raised its dividend. Its stock price sank after a dire third-quarter sales report in October, but was still up 37% for the year.

Mr. Pitkethly, the CFO, unveiled in 2016 what he called the company's biggest shake-up in a decade, pushing more decision-making to local executives and giving them more say over how and when to launch new products. The company is also cutting costs.

Unilever says the changes have helped speed up its reactions to new threats and opportunities. The death of Thailand's king in October 2016 triggered a year-long period of mourning there. Unilever's Thai unit launched Breeze Black, a detergent formulated for black clothes, in 12 weeks -- about a quarter of the usual launch time for a new product.

The company increased the number of products it launched for local markets by over 50% in 2017. At the same time it has scaled back the number of global launches but increased their size, rolling out pints of Magnum ice cream and a Dove variant for babies across 20 markets in one year. The restructuring "enables us to be more global, more local," said home-care head Nitin Paranjpe.

Critics, though, say the restructuring hasn't gone far enough.

"We think big incumbents -- however well managed -- are going to continue to struggle against the depredations of the 'ankle-biters'," said RBC analyst James Edwardes Jones.

There have been missteps. Local teams have on occasion hustled to push out new products -- without some of the time-consuming market research of the past -- and have been disappointed. Unilever's India unit rushed out a masala mix in 75-gram zip-lock pouches under its popular Knorr brand, only to discover that Indians prefer the 50-gram and 100-gram cartons competitors offered. The new mix also didn't account for variations in how people in different regions of India use spices.

Unilever says such mistakes pay off. "It's better to experiment in a couple of markets and learn by doing, improving, iterating with consumers, and then when it works try to roll it out to other places," Mr. Ter Kulve said.

In some other key battles, Unilever is being outfoxed. Halo Top, a privately held low-sugar, high-protein ice cream, exploded from a kitchen experiment seven years ago to become a household name. When the Los Angeles-based brand became America's best-selling ice-cream pint last year, executives at Unilever's premium brand, Ben & Jerry's, were stunned.

"It's all they talked about," said a former Ben & Jerry's executive, referring to former colleagues.

Marketing of the multibillion-dollar brand is still built around its founders, Ben Cohen and Jerry Greenfield, who sold the higher-priced, natural-ingredients ice cream to Unilever in 2000. Because of that branding, Unilever felt Ben & Jerry's couldn't take a run directly at Halo Top, whose magic ingredient and sweetening agent is sugar alcohol, the former executive said.

Instead, Unilever turned to its lower-priced Breyers brand, and rolled out an answer over the summer: Breyers Delights uses sugar alcohol, too, and mimics Halo Top's packaging -- splashing its calorie and protein content in big numbers on the front of cartons. But the new product hasn't yet done much to shore up Breyers' position.

Mr. Pitkethly in October estimated Halo Top had about 5% of the overall U.S. ice- cream market, 1.5% of which it stole from Unilever. He expects a pickup for the companies' brands this year but says Unilever's reaction to Halo Top is still "not quick enough."

Halo Top's 38-year-old CEO Justin Woolverton says he has seen the "copycat brands" from Unilever and Nestlé -- which launched new high-protein, low-calorie variants under its Skinny Cow brand -- but is focused on raising brand awareness and getting into more stores. "We are very, very differentiated from old- school brands," he said. "We understand social media out there because we are a younger company."

Unilever wasn't supposed to have this kind of problem. It sells products in 190 countries, making most of its revenue from emerging markets where its roots stretch back to colonial days. Over the decades, it has worked to tweak its biggest global brands to account for regional tastes. In Indonesia, for example, it says its Sunsilk shampoo is formulated for hijab-wearing women who complained about oily and sweaty scalps.

(MORE TO FOLLOW) Dow Jones Newswires

January 03, 2018 02:47 ET (07:47 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.