MOS Unilever Phase2 Final

8/14/2019 MOS Unilever Phase2 Final

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Unilever Lipton The Jebel Ali TeaPlant in Dubai

The Making of Strategy

MM/2007-xxxx This case was written by Kyoko Ogura, Julian Petrescu, Zhanfu Yu and Alan Zeller, all are INSEAD MBA09J. It isintended to be used as a basis for class discussion rather than to illustrate either effective or ineffectivehandling of an administrative situation.

Copyright © 2007 INSEAD

N.B.: TO ORDER COPIES OF INSEAD CASES, SEE DETAILS ON BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION.

Finance support from Capgemini is gratefully acknowledged.



INTRODUCTION Tea is the most popular drink in the world. The journey from the myriadproducers to the four main manufacturers and sellers is a long one, andnot all fare equally well along the path. In this seemingly settled industry,

some prosper and some don’t.

Unilever is a dominant worldwide player in the tea manufacturingindustry, like in many other FCMG segments. Faced with uneven marketsin each of the sectors it operates in, Unilever has to constantly re-adjustand re-prioritize its investment to ensure across the board growth – noteasy for such a hefty organization.

This paper deals with a decision that Unilever had to make in regards toits premier brand Lipton: it was already enjoying a leading, and growing,position in the otherwise flat tea market. However, changes inconsumption patterns worldwide and the emergence of areas with

different dynamics in terms of consumptions were afoot, and the questionbecame if the company should keep on doing what it was doing wellenough already, or invest and expand geographically in order to capturepotential future growth; specifically, should the company establish (andfurther on, expand) a tea processing plant in the Middle East.

COMPANY

Unilever is a multi-national corporation, formed of Anglo-Dutch parentagethat owns many of the world's consumer product brands in foods,beverages, cleaning agents and personal care products. Unilever

employed 174,000 people and had worldwide revenue of €40.5 billion in2008.

Unilever is a dual-listed company consisting of Unilever NV in Rotterdam,Netherlands and Unilever PLC in London, England. This arrangement issimilar to that of Reed Elsevier, and that of Royal Dutch Shell prior to theirunified structure. Both Unilever companies have the same directors andeffectively operate as a single business. The current non-executiveChairman of Unilever N.V. and PLC is Michael Treschow while Paul Polmanis Group Chief Executive.

Unilever's main competitors include Procter & Gamble, Nestlé, Kraft Foods,Mars, Reckitt Benckiser and Henkel.

Brief company history

Unilever was created in 1930 by the merger of British soapmaker LeverBrothers and Dutch margarine producer Margarine Unie, a logical mergeras palm oil was a major raw material for both margarines and soaps andcould be imported more efficiently in larger quantities.

In the 1930’s the business of Unilever grew and new ventures werelaunched in Latin America. In 1972 Unilever purchased A&W Restaurants'

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Canadian division but sold its shares through a management buyout toformer A&W Food Services of Canada CEO Jeffrey Mooney in July 1995. By1980 soap and edible fats contributed just 40% of profits, compared withan original 90%. In 1984 the company bought the brand Brooke Bond(maker of PG Tips tea).

In 1987 Unilever strengthened its position in the world skin care market byacquiring Chesebrough-Ponds, the maker of Ragú, Pond's, Aqua-Net, CutexNail Polish, and Vaseline. In 1989 Unilever bought Calvin Klein Cosmetics,Fabergé, and Elizabeth Arden, but the latter was later sold (in 2000) to FFIFragrances.

In 1996 Unilever purchased Helene Curtis Industries, giving the company"a powerful new presence in the United Statesshampoo and deodorantmarket". The purchase brought Unilever the Suave and Finesse hair-careproduct brands and Degree deodorant brand.

In 2000 the company absorbed the American business Best Foods,

strengthening its presence in North America and extending its portfolio of foods brands. In a single day in April 2000, it bought, ironically, both Ben& Jerry's, known for its calorie-rich ice creams, and Slim Fast.

The company is fully multinational with operating companies and factorieson every continent (except Antarctica) and research laboratories atColworth and Port Sunlight in England; Vlaardingen in the Netherlands; Trumbull, Connecticut, and Englewood Cliffs, New Jersey in the UnitedStates; Bangalore in India (see also Hindustan Unilever Limited); Pakistan;and Shanghai in China.

Operations and brands

Unilever owns more than 400 brands as a result of acquisitions, however,the company focuses on what are called the"billion-dollar brands", 13 brands (Axe/Lynx,Blue Band, Dove, Flora/Becel, Heartbrand icecreams, Hellmann’s, Knorr, Lipton, Lux, Omo,Rexona, Sunsilk and Surf) which each achieveannual sales in excess of €1 billion. Unilever'stop 25 brands account for more than 70% of

sales. The brands fall almost entirely into two categories: Food andBeverages, and Home and Personal Care.

Lipton is the world’s leading teamanufacturer, both in the leaf andready-to-drink segments. It was startedlate in the 19th century by Sir ThomasLipton in Scotland, and quickly grew itsretail presence all over Great Britain.

The underlying concept was to make tea an affordable drink for everyone.In time, the grocery and the tea businesses separated, the latter being

acquired by Unilever in several phases between 1938 and 1972.

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INDUSTRY

Tea is one of the most popular drinks in the world in terms of consumption, equaling all of the other manufactured drinks (includingcoffee and alcohol) put together. Although its origins go back in timemany centuries (it is said that the second Emperor of China, Shen Nung,discovered tea when tea leaves landed in his cup of hot water; later, thetea traveled, with Buddhism, to Japan, from where it was taken muchlater, in the 17th century, to Europe and North America by the Dutch1), themodern tea industry was pioneered in the 19th century by British plantersin the Assam and Bengal regions of India, and in Ceylon (Sri Lanka). Bythe early 20th century, tea was being cultivated in Indonesia and Kenya.Currently, the world production is over 3.5 million tones.

The manufacturing process consists of converting tea shoots into dryblack tea; the fresh green leaves are plucked, dried, treated (rolled if theywill be used ‘loose’, or shredded if they will be packaged in tea bags; thetea bag concept was discovered by accident early in the 20th century). The

treatment gives the leaves their black color. The tea leaves are then driedand, for bagged tea, sorted, a process which causes them to lose some of the flavors (hence, the usually better taste of loose tea).

Lesser processed teas are called ‘white’ (which have a sweet taste) or‘green’ (which have a ‘grassy’ taste) teas. Their taste is closer to that of fresh tea, have lower caffeine and higher antioxidant properties. There areother variants of tea, such as oolong, which have undergone processingbetween that of white and black tea. The most popular tea, and the onethat has undergone the most processing and oxidation, is the black tea,the highest in caffeine. It is used to make ‘English’ tea and iced tea2.

The top tea manufacturers in the world, controlling 80% of the worldmarket, are Unilever, Cadbury Schweppes, Tata Tea and Twining. Unileverand Twining have seen their market share grow almost continuously3.

THE ISSUE

Preparing for future growth

The mid-90’s were a challenging time for Unilever as a whole; also the teaproducers in general were facing a stagnating worldwide market, withshifts in consumption patterns (e.g. declining consumption in the ex-USSRstates and others as soft drinks became popular; growth in the MiddleEast, where tea was/is by far the most popular drink, with the highest per-capita consumption worldwide, and the population was growing at anaverage 2.7% a year). At the same time, the regional trends in teademand were becoming clearer (the Middle Easter consumers usuallyprefer low grown4 teas, usually of Sri Lankan origin, which is not popular inthe UK). However, Lipton managed to keep growing its market share, as1http://www.2basnob.com/tea-history-timeline.html

2http://www.teaindustry.com/typesoftea.htm3http://www.maketradefair.com/assets/english/TeaMarket.pdf 4http://www.impratea.com/learn_about_tea/types_of_tea.htm

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http://www.2basnob.com/tea-history-timeline.html

http://www.teaindustry.com/typesoftea.htm

http://www.maketradefair.com/assets/english/TeaMarket.pdf

http://www.impratea.com/learn_about_tea/types_of_tea.htm















the marketplace was getting more concentrated and favoring theincumbent player, so for Unilever’s tea product line (with the Lipton YellowLabel the most popular tea brand in the world, and Lipton Ice Tea the mostpopular ready-to-drink tea brand; its estimated share of the world’s blacktea market was 15%), this was a time of growth and opportunity.

Trigger: Even so, the perceived shifts in the market, especially thedifferent potential growth of the various regions as tea consumers,prompted Jeff Fraser, the head of Central Asia and Middle East BusinessGroup, to evaluate the building of a tea processing plant closer to thegrowth markets than the plant in the UK which had hitherto been theglobal supplier.

Lipton had been sourcing its teas from India, Sri Lanka, and Kenya, andprocessing them in the UK for worldwide distribution. In the new context,with the Middle East an attractive market for tea, it made sense to locatea processing plant in the area, closer to the consumers, and alsoconveniently located closer to the suppliers.

Framing: Several factors informed Jeff’s decision. The Middle East was agrowth area, not only because of its population (and disposable income)growth, but also because the local market still favored ‘loose’ teas asopposed to bagged tea; local consumers liked to sit down in the hot teashops and enjoy their drink at a leisure pace, while socializing. However,as the pace of the lifestyle in the region increased, similar to the rest of the world, the shift to bagged tea over the long run was easy to envision –for the same drink to be enjoyed in the car, in the office, or over a lunchmeeting, it would have to be bagged and not loose. This type of changewas not likely to happen in the already settled European or North

American markets; therefore it made sense to open a plant in the MiddleEast where the future growth was.

An idea that had been floating around Unilever at that time was veryappropriate for this situation – “leverage the company’s global strengthbut execute for the local market”. Jeff’s adaptation was to use the worldmarket leader Lipton tea brand and give it a local footprint in the MiddleEast market by opening a local processing plant. Paraphrasing, this can beexpressed as follows: “We have to be in the local market; the growth is inthe Middle East, so we have to be there; in the Middle East, Dubai has an

excellent infrastructure in the guise of the Jebel Ali Free Zone (JAFZA

5

)which is near the 9th largest port in the world, with great warehousing anddistribution facilities.”

Alternatives: the options discussed were keeping the existing set-up inplace, with most of the processing done in the UK, or opening the plant inDubai. Maintaining the existing situation would have involved no costs, ina rather comfortable situation for Lipton, which was only one of the twotea manufacturers worldwide whose market share was growing. Openingthe plant in the Middle East was a significant investment, but one with apositive NPV as determined by Unilever’s rigorous CAPEX process.

5http://www.jafza.ae/en/Page 5 of 9

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Selection: it appears that Jeff led the decision-making process in order tocapture future potential growth in a growing market (the Middle East),even if Lipton was enjoying a favorable position at the point in time. TheCAPEX process was followed to ensure the adequate fundamentals werecorrect, but the estimates of the market’s future were the main drivers forthe decision.

ANALYSIS

Context for strategy-making

It seems quite clear that the decision to open the plant (and later, thedecision to expand it) were done in a period of growth for Lipton.Focusing on future growth and flexible responsiveness to local markets arethe objective factors in the marketplace that affected Lipton’s strategy-making process.

Methodology

The company has its own internal methodology to determine theoutcomes of strategic choices, but we do not know the specific details. The matrix organization of Unilever implies that the category managerand the country manager have both to agree on major decisions affectingproducts.

Duration

The decision to open the plant was taken around circa 1994. So it tookabout 4 years until the opening of the plant in 1998.

Most important factor in strategy-making in a growthcontext

In a growth context, especially when the company is taking the leadingposition in a growing market, for new strategy making, we think the mostimportant thing is how to frame the situation and thus to guarantee thatthe new strategy can effectively help the company strengthen its leadingposition sustainably under the dynamic competition. This implies a

comprehensive communication effort with the key management teams inthe company to make sure all the key members have solid commonagreement on the direction that the firm is heading to, on the competitorsthat the firm is facing in different perspective and also on the resourcesthat the firm further needs to achieve the growth. It is possible that thefirm will re-organize some of its internal resources to perform moreefficiently in front of competitions, thus the relative impacted party shouldfully understand the big picture, support the change and quickly adaptthemselves into the new situation. Only in this way, the leading firm caneffectively leverage all its resources to achieve further growth efficiently

and doesn’t create any chances for the competitors to outperform it.

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Recommendation for strategy-making in a growth context

Our recommendation for strategy makers in such situation would be todraw a bigger picture about the firm’s situation and internal resourcesthus to make sure that the strategy not only meet certain specificbusiness needs, but also provides a sustainable development opportunityto all related parts within the company. Especially for firms with globaloperations, their different regional markets are in different development

stages and competitional landscapes. To address certain regions’ growthneeds means potential changes to the company’s internal organizationstructures and resource allocations. It is important for the seniormanagement team to have the overall picture in mind and think severalsteps ahead to make sure all the related parties of the new strategy stillhave clear direction for their future development. This implies that theframing of the situation will be very important step during the strategymaking process.

FINAL QUESTIONNAIRE AND INTERVIEW NOTES

1. What were the reasons for selecting Dubai as the plantlocation?

The market for tea in the Middle East is significant. Lipton owns 70% of this market. The tea is sourced from India, Sri Lanka, and Kenya, butbefore the Dubai plant was opened, it was processed in England. The ideabehind opening the plant was to keep the tea close to the market, reducefreight costs, bring a fresh product to consumers, and facilitate innovationresponding to local demands by being in the region.

2. What were the reasons for expanding the Dubai plant?

The market has 300 million consumers, and it has been growing since theplant was opened. These consumers have disposable income. 40% of thetea market prefers tea in bags, while the majority 60% still prefers the‘loose’ tea leaves. Therefore there is a lot of potential for growth, hencethe plant expansion decision. It should be noted that bagged tea is threetimes as profitable as loose tea.

3. Who made the decision to open the plant/to expand the plant?

The build decision was taken by the business group president for CentralAsia and the Middle East for the tea category. The expansion decision(once the plant is built, all Capex decisions) was taken at a lower level.

4. Is there any formal procedure to initiate/approve/implementoperation improvement?

The Capex processes are well documented – the business case behind itmust be well supported.

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5. From black to green tea: who made the decision, and whatcaused it; how about other new products (can you introduce themyourself or they must be approved)

Black tea is still predominant. Green tea is only 7-8% of the market, soLipton moved into this market following extensive market research, whilemaintaining its dedication to black tea. Green tea is popular with womenbecause it is not combined with milk (as black tea), and thus it appearsmore healthy to this category of consumers; any such innovation is a jointeffort between the brand development team (which innovates, and is apart of the global category leadership) and the country organization(which executes, and whose chairman will have to sign it off).

6. Describe T Junction (the new project on tea retailing) and yourinvolvement

T Junction was an experiment in building an upmarket brand in tea. CouldLipton achieve in tea what Starbucks achieved in coffee? It was not very

successful (although hearsay from INSEAD colleagues from the regionsuggested otherwise), probably because traditional (hot) tea shops in theMiddle East are targeted at a ‘lower’ end consumer, so it was hard tocreate an upper end market. Ultimately, the ‘DNA’ of Lipton, as a retailbrand, does not match that of Starbucks, a ‘walk in’ experience that ismore accurately replicated in the Middle East by the hot tea shops.

7. How did the innovation like double chamber bag come out?

Speaking of innovation, some of it is done globally (e.g. the double bag)and some locally (the foil packaging); thus, Lipton (and Unilever) is neither

‘mindlessly global’ nor ‘hopelessly local’ as it manages to strike a balancebetween these two extremes. They need to respond to the local marketbut also leverage the global strength of the multinational corporation. Thisrepresents a change from a decade ago, when most innovation was donelocally which led to an unsustainable proliferation of initiatives. Now,innovation is mostly global, but with local execution

8. How much autonomy and input do you have with the parentcompany? Did this relationship change over time?

The plant has a relative autonomy as global brand decisions are made atthe headquarter level but local adaptations are decided locally to reactquicker. The plant in Dubai gained more autonomy with its expansion andsuccesses. It is now a flagship plant for Unilever, often used as abenchmark and an example.

9. Was there something that was done in the Dubai plant that wasnot foreseen, and how would you do that now?

The consensus is that the decision to open the plant was the right decision at the right time.

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MOS Unilever Phase2 Final