Unilever Case Memo. October 22, 2015

Transcription

1 Unilever Case Memo October 22, 2015

2 Context To secure its future in the international tea market, Unilever needs to differentiate the Lipton brand from its competitors around the world. In 2010, Unilever created a Sustainable Living Plan that declared 100% of its tea would be sustainably sourced by This would ensure quality and quantity of its teas in the future. In some countries, Unilever has seen huge financial gain from instituting sustainable practices. In others, the return has been less favourable. Now, Unilever must decide how to introduce sustainable farming practices to the Indian market. There are a number of factors Lipton must consider before creating this plan. Issues Unilever must address the following issues while assessing how to proceed with certification in India: Certification in India must address a sustainability issue that resonates with the Indian consumer and will provide healthy ROI. However, consumers are not willing to pay a premium for sustainable tea. Rainforest Alliance Certification supports a minimum working age of 15 and has banned the use of Paraquat pesticides. This is in conflict with industry standards in India. In India, there were no governmentally sponsored tea cooperatives (such as KTDA in Kenya) and farmers are free to sell to any factory. This will make any type of certification in India challenging. Instead of few large farms, there are many small, independent farms producing tea. This will make any certification complex. Industry must be transformed (by sustainability) in order for Unilever to get the quality and quantity of tea necessary to meet demand. Decision Criteria To analyze Unilever s various options, the following criteria were used. 1. Profit Potential: Will this option result in increased profit now and in the future? Is the cost structure manageable? 2. Alignment with Company Goals: Will this strategy support Unilever s Sustainable Living Plan and achieve 100% sustainable sourcing by 2020? 3. Risk: Does this option pose significant risks to Unilever? 4. Complexity: How complex is this strategy? Will Unilever need to re-create the wheel or are there systems already in place that they can utilize? Assessment of Alternatives Option One: Use Rainforest Alliance (RA) certification in India Obtaining Rainforest Alliance certification for Unilever s Indian tea suppliers would ensure quantity and quality for years to come. Examining Table 1, it is evident that this certification has been successful in various other countries, and Unilever had enjoyed and increase in market share as a result. Projecting the average increase in market share into the Indian tea market as seen in Table 2, it is estimated that Unilever will enjoy an increase in revenue of almost 18M. However, the cost of implementing such a scheme in India is problematic (Exhibit 6). Variable costs per kg of tea purchased will increase by 5%, and because India does not have tea cooperatives that will sponsor the program, fixed costs to train farmers and market the campaign will be significant (Exhibit 5). The expected profit margin would decrease from an estimated 50.71% without a certification, down to 28.30% with Rainforest Alliance. It does not appear that this strategy would be profitable. However, more importantly, even if the strategy were profitable, to accomplish this, there are two important things that would need to be done: change the minimum working age and eliminate the use of pesticides. Each of these would require significant investment with no certainty of success. Accordingly, pursuing certification with Rainforest Alliance is not recommended. Option Two: Do not proceed with any sustainability certification in India As noted above, estimated profit margins without a certification are astounding (Exhibit 5). However, these calculations were done taking into consideration only the changes in fixed and variable costs associated with achieving certification. They did not account for the changing market for tea within India, or the importance of obtaining certification. Unilever has made a commitment to source 100% of its agricultural raw materials sustainable by There would be significant ramifications for deciding to break its commitment. In the short term, shareholder value would take a big hit. In the long term, Unilever will not be able to source the necessary quality and quantity of tea to meet market demand. Therefore, while it is tempting to not implement a certification program due to costs, if Unilever intends to maintain its competitive position in the market, it must take advantage of this opportunity to preserve future productivity of its operations. Accordingly, not proceeding with certification is not recommended. Table 1: Market Share increase after Implementing Rainforest Alliance Location of Successful Campaign Increase in market share after successful campaign Italy 2.00 United Kingdom 1.80 Australian 1.58 Average Increase in Market Share 1.79 Table 2: Increase in Market Share after implementing Rainforest Impact of Alliance campaign in India Indian tea market 1,000,000,000 Revenue before campaign with 30% MS 300,000,000 Revenue after campaign with 31.79% MS 317,900,000

3 Option Three: Use a customized certification in India By creating a customized certification in India, Unilever could guarantee appropriate quality and quantities of tea for the foreseeable future. A customized certification would also allow Unilever to tailor requirements to the current conditions in the country, and would be a way to overcome the restrictions of Rainforests age and pesticide restrictions. Instead of mandating small farms to adopt all of Rainforests criteria at once, Unilever could put farms on an alternative program with the goal of meeting Rainforests criteria as the country grows and the socio-economic landscape changes over time. This is the recommended alternative. Recommendation & Implementation Using the decision-making criteria matrix, Option Three scored the highest. Unilever will create an India-specific certification program called Sustainable Leaf. This program will be modeled off of the RA certification and include the same Ten core principles of sustainable agriculture. However, amendments must be made to the minimum working age and use of pesticides. Although farms will be allowed to continue using pesticides in the short term, protective equipment will be mandatory and farms must participate in a program to reduce and eventually eliminate the use of pesticides all together. Unilever will partner with NGO s to create and facilitate the Sustainable Leaf training programs. However, Unilever will be required to cover most, if not all of the fixed costs of training. The NGO/NGOs will oversee training and roll out of this program to ensure that certification in honest and unbiased. To ensure that the NGO partners are competent to provide accurate, unbiased certification, Unilever will set up a one-time training for them by a major international certification body (ex. DNV, Bureau Veritas). With regards to financial feasibility, Exhibit 5 offers an estimation of profits margins during the first and second year. Of note is the 20.89% profit margin in year one of. This is due to the high costs of training and marketing taken on by Unilever to get the certification process initiated. As time goes on, it is projected that these fixed costs will decrease. Furthermore, by the second year of, if the campaign is successful, Unilever s market share will continue to increase, resulting in more revenues. Accordingly, an estimated 29.63% profit margin will surpass the 28.30% margin expected with using Rainforest in the first year. Table three outlines options for Unilever s pricing strategy, assuming fixed costs of 80M. The tea market in India is very price sensitive, so Unilever must do adequate research before selecting an acceptable strategy. A two-tier system will be used to roll out of sustainable practices. First, the firm will target larger, more financially secure farms. These farms will be more willing to work through the program and may also be able to cover certain costs (ex. The PPE cost) on their own. Second, Unilever will work to train the remaining small farms in India. During the second stage of, Unilever will be able to leverage stories of success during the first round as well as success stories from its experience in Kenya. This should help to convince skeptical farm owners to buy into our program. During the second tier if the program, Unilever will invest 2M in infrastructure like hospitals, schools and company housing. This investment will be the basis for all marketing efforts in India, as traditional western advertisements of sustainability (from purely environmental perspective) may not resonate with consumers. Table 3: Pricing Strategy Breakeven With 10% margin With 20% margin With 30% margin margin 0 10% 20% 30% sales 235,750, ,944, ,687, ,785,714 variable cost 155,750, ,750, ,750, ,750,000 fixed cost 80,000,000 80,000,000 80,000,000 80,000,000 supply 87,500,000 87,500,000 87,500,000 87,500,000 price Unilever will use the following proposition to convey value to its Indian consumers: Lipton believes in creating meaningful value for the communities in which it serves. Our tea is more than just tea. Drinking one small sip creates big change for someone else. Future Considerations & Risks Outlined above is the best option for Unilever based on the available alternatives. However, there are risks associated with this plan. First, consumers may be skeptical of Unilever using a certification that was self-created. To combat this, NGOs will take ownership of certification with their initial training provided by DNV, or Veritas. Second, Tata is also working towards its own certification. To differentiate Lipton, from Tetley, Unilever must focus on marketing the social benefits of Lipton (hospitals, housing, etc). This will be a huge differentiator for the firm.

4 Exhibit 1: Analysis of Environment Bargaining Power of Suppliers: Medium Perishable product needs to be moved quickly and often at a price reduction, if necessary Much of the tea produced by smallholders who have little say in how or what they produce In India, farming practices that would be very challenging to change (ie. use of child labour and pesticides) Porter s Five Forces Bargaining Power of Customers: High Low switching costs for consumers Tea is highly commoditized, compete on price (overall price of tea 35% lower than its peak in 1980 s) 80% of consumers in the US want eco-ethical brands without paying a premium (5% willing to pay premium) Demand for tea growing at 12% per year (demand exceeding supply) Threat of Substitutes: High Many competitors in each different markets Tetley tea is Unilever s number one competitor Threat of New Entrants: Low Lots of competition Commodity like pricing offers little room for profit (Unilever s gross margins have been eroded from 50%- 15% for Unilever) Increasing cost of doing business Intensity of Rivalry: High Many competitors: Tetley, Twinings, Yorkshire, Pickwick, Carmien, etc Competitors are now following Unilever by branding Lipton with their own certification programs Unilever is the tea market leader with 30% market share Exhibit 2: Summary of Successful & Failed Strategies Country Market Buyer Behaviour Marketing for Certification What worked? What did not work? info US 1.5B France 37% share of 430M Italy Australia UK 12% of 230M Lipton 25%, Bushell 13% of 260M PG tips 25% of 990M - 80% wanted ecoethical brands with same cost / quality - Only 5% willing to pay premium - Dislike packaging change - Females above 50 - Young - Upmarket consumers High prices perceived barrier to sustainable consumption - Progressive about environmental policy - Mass market, working class brand for middle aged, middle income - Takes 12 to 18 months to address mental barriers and convey message - National Geographic ads - Sponsored trip for 3 online bloggers to Kenya - Packaging change, certification seal on front - Walmart and Sam's club retail partnerships, point of purchase reinforcement of health / quality benefits - Staggered package change - TV support in , images of African sustainable farms - Competition, sponsored trip to Kenya - Comprehensive mixed media campaign, cost 3M - In store promotion 2009, web and editorial partnership with National Geographic 2010, cost Eco message - TV / print / public relations campaign, cost 1.1 mil - In store promotions - Packaging change, certification seal on front and info on pack slide / flap - Eco message - Brand proposition - Sociability, family, lightheartedness - TV and print campaign, cost 12 mil - Short movie preview in cinemas - DVD in special promotion packs, with tea towel Marketing team projections indicated strong ROI for campaign Marketing team analysis indicated more attention to brand's efforts - Yellow label brand sales increase 10.5% - Market share increase 2% points - No premium for certified tea - Sales increase 11% - Lipton market share increase by 158 basis points - Purchase value rose from 3.11 to Knowledge of sustainable practices - Simple message, infused with humour - Market share increase by 1.8 points - Repeat purchase rate increase to 49% - Sales increased by 6% No significant effect on overall market share (Lipton/Rainforest certified green tea) - Only 10% of marketing spend supported Rainforest Certification message - Staggered package change made it harder for consumers to link ads to product on shelf - No increase in market share or brand perception Perception of quality decreased

5 Exhibit 3: SWOT Analysis of Hindustan Unilever Tea STRENGTHS Strong brand recognition Market leader, 30% share (19% Brooke Bond, 6% Lipton) Subsidiary of world s largest tea producer, Unilever Tea Production, procurement and distribution expertise Experience with worldwide markets & sustainable tea certification OPPORTUNITIES Market growth: 12% increase in sales, 3% increase in volume (2005 to 2010) Price increase in 2010 because demand exceeded production Rising incomes: Increasing share of tea retail through supermarkets/hypermarkets Growth categories: Tea bags (currently only 2%), Green tea (urban markets, perceived health benefits) WEAKNESS Company did not originate in India Bound by overall targets of parent company Unilever THREATS 2/3 of market in Indian sold as unbranded loose black tea, not tea bags Tata Global Beverages (26% market share, ongoing certification) Regional mini competitors: Location specific tailored blends, aggressive price wars Popularity of branded coffee shop chains: Youth view tea as old fashioned beverage Unknown perception of sustainable tea farming Exhibit 4: Decision Making Process Decision Making Matrix Alternatives Profit Potential Alignment Company Goal Risk Complexity Total (weights) Use RA Certification Use another form of certification in India Don't use certification Criteria definition 0 = no profit potential 1 = profit increase potential < 5% 2 = profit increase potential from 5% to 10% 3 = profit increase potential > 10% 0 = no alignment with goal 1 = aligns, does not meet set deadline 2 = full alignment with goals 3 = full alignment with goals 0 = significant risk 1 = major risk 2 = moderate risk 3 = low risk 0 = extremely complex 1 = very complex 2 = moderately complex 3 = Easy Exhibit 5: Comparing the expected margins with Rainforest Alliance, no certification, and year 1 and 2 projections for Sustainable Leaf With Rainforest Alliance No certification Year 1 With Sustainable Lead Year 2 With Sustainable Leaf Global Unilever tea supply (kg) 350,000, ,000, ,000, ,000, Unilever tea supply in India (kg) 87,500,000 87,500,000 87,500,000 87,500,000 Variable cost per kg Total cost of goods 155,750, ,875, ,250, ,500,000 Marketing Costs 10,000, ,000,000 10,000,000 Costs to train employees 200, , ,000 Costs to train farmers 60,000, ,000,000 50,000,000 Costs of infrastructure 2,000, ,000,000 1,000,000 Total costs 227,950, ,875, ,650, ,900,000 Indian tea market 1,000,000,000 1,000,000,000 1,000,000,000 1,000,000,000 Unilever market share Expected sales Expected profit margin 28.30% 50.71% 20.89% 29.63% Exhibit 6: The difference in cost of goods (variable cost) between using Rainforest Alliance and having no certification With Rainforest Alliance Without Certification Tea sold by Unilever globally (kg) 350,000, ,000,000 Market price paid to farmers ( per kg) Price for rainforest name ( per kg) 0.01 Price premium ( per kg) 0.08 Total cost of goods ( per kg) (variable cost) Total price paid to farmers globally 622,615, ,500,000 Overall variable cost of goods increase 0.05