27th May 2001
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Lower garment exports hurt economy

The downturn in industrial ex ports in the first quarter of this year is a matter of concern. Despite the rosy picture of the economy that continues to be painted at various seminars, fundamental weaknesses in the economy are reflected in the hard statistics of the economy. The unsatisfactory performance of our industrial exports is one such indicator. Industrial exports that grew by 21 percent last year have been stagnant in the first quarter of this year. In fact in the first quarter of this year industrial exports declined marginally. The expected growth in industrial exports did not materialise.

Total industrial exports for the first quarter of this year was US$ 967.5 million, one million less than last year. In the recent past the country has relied heavily on a good industrial export performance to keep the economy afloat. Last year's export growth of nearly 20 percent was achieved by an industrial export growth of 21 percent supplemented by an agricultural export growth of 6 percent.

The stagnant export performance of the first quarter is particularly disconcerting as the earnings from the country's main export, garments, have in fact declined. In the first quarter of this year garment exports declined by as much as 2.8 percent. This contrasts with a 23 percent growth in garment exports last year. The fall in garment exports by about US$20 million was the main cause for the drop in total industrial exports. In fact the lesser industrial exports grew, but could not offset the decline in the garment exports fully.

Rubber based manufactured goods, ceramics and other industrial exports have fared well growing by 16 percent in the first quarter. The export performance of garments during the year has been erratic. There was a sharp fall in garment exports in January when exports decreased by as much as US 51 million or 25 percent.

It recovered in February and declined in March by as much as 6.4 per cent. There appears to be serious problems in the garments industry that cast some doubt about this year's garment exports recording a significant growth. This in turn implies poor industrial export growth and total export growth as garment exports contribute significantly to our exports. The causes for the poor performance in garments must be explored and corrective measures taken.

Is it due to the unsatisfactory law and order situation that we commented on last week? Are garment factories closing down owing to intimidation, violence and destruction of factories? Is the country losing its competitive edge in garment manufacture? Are entrepreneurs, local and foreign, moving out to countries where labour rates are lower, work ethics better and productivity higher? Is there a problem in the distribution of quotas? Whatever be the problem, the early signs of a setback to the garments industry must be looked into and resolved.

There is a need to look into the issues of the garment industry from a long- term perspective as well. It is well known that countries in East and South East Asia which first entered garment exports have largely bowed out of the industry when their wage rates increased and countries with lower wages entered the market. This phenomenon may be effecting us as well. In addition we must view the development of the industry in relation to the impending lifting of the quota system under the Multi-Fiber Agreement (MFA) which lapses in just four year's time. There is a need to shift garment exports to non-quota items. Some of this has happened owing to an industry response to the evolving global market conditions. Maybe there is more to be done. 

These are also issues that the current downturn in the industry should provoke us to examine and formulate an action plan. The garment export industry has become far too important to the economy to ignore the signs of a poor export performance this year. There are both short-term issues and problems to be resolved as well as a need to look at what changes the industry must make to cope with both the economic changes within the economy and the global outlook for textile and garments exports.

Unilever rewrites the recipes

The consumer products giant is reshaping its products line and absorbing big acquisitions in a bid to woo investors

By contrast, in an emerging market like India, only 8 percent of city dwellers have a washing machine, and most of the rest of the country cleans its clothes in buckets. So the local unit, Hindustan Lever, sends teams to entertain crowds in small villages by rubbing mud into fabrics and then showing that Unilever's local brand, Rin Shakti, cleans better than the bar of hand soap most Indians use for all of their cleaning purposes. The company also plans to pay for village water wells and splash them with its logos. The new wells will include private washing areas so that women will have a chance to undress when they clean, resulting in 20 percent more soap used per wash, figures Aart Weijburg, head of soaps at Hindustan. "The motto is: 'Get your saris off, ladies,"' Weijburg says.

Check out Unilever's Web site and you're served a rare bit of corporate humility on the introductory page: "You probably know most of our brands, but you might not know much about the company behind them."

Sadly for the Dutch-British company, it's not just consumers who don't know or care what's going on at the world's biggest food and soap maker. Investors haven't shown much interest in the company's stock either. Since the start of 1999, Unilever's euro-denominated shares, traded in Amsterdam, have lost 17.6 percent, closing at 6o.60 euros ($57.45) on January 5. The company's sterling-denominated shares, traded in London, have lost 21.9 percent over the same period, closing at 523 pence ($7.86) on January 5.

Though Unilever shares did rise during the second half of 2000, the euro-denominated shares' 23 percent gain for the year did not match Nestle SA's 35 percent or Groupe Danone SA's 37 percent rise. 

Investors have been slow to warm to Unilever stock - in part because of the company's low-margin businesses and slow sales growth. Unilever had sales of £31.59 billion for the first nine months of 2000, with a net profit of £1.98 billion. That's a return of 6.3 percent compared with Nestle's 7.2 percent return during the first half of the year. Unilever sales rose 3 percent in the first nine months compared with its Swiss rival's 9.5 percent gain.

Investors have also failed to embrace Unilever because the company's leaders - Antony Burgmans, chairman of the Dutch half of the company, and Niall FitzGerald, chairman of the British half - have sent out mixed signals: They said in September 1999 that they would scrap 1,200 of their 1,600 brands and fire 25,000 employees - about ten percent of the workforce. Then in 2000, they went on the biggest acquisition spree in the company's history, spending $27 billion to buy U.S. food companies, Bestfoods, Ben & Jerry's Homemade Inc., and Slim-Fast Foods Co.

To convince investors that all of the reshuffling will work, the chairmen promised 6 percent growth in sales once the deadwood has been eliminated, and they said operating profit as a percentage of sales should grow to 15 percent by 2004 from 10.5 percent in 1999. They said that having fewer brands also means the company can close 100 of its 385 factories, bringing £1.5 billion in annual savings by 2004. They expect to take £5 billion in charges for the five-year reorganisation.

The various moves have not impressed many industry experts. "These old-economy companies feel they have to keep shuffling brands and making acquisitions to keep attracting Wall Street's attention," says John Grace, executive director of Interbrand, a brand consulting firm in New York. "Otherwise, they feel ignored."

Burgmans and FitzGerald say they are frustrated by Unilever's stock performance because no other company can match Unilever's range of popular food and household brands. Worldwide, Unilever claims leadership in tea, margarine, olive oil, mustard, ice cream and hand soap. "Our share price was like a scorecard, and our shareholders were saying, 'Hey, we don't think you're doing good enough,"' says Burgmans.

He and FitzGerald are now gambling that the way to win over consumers - and investors - is to focus their marketing muscle and research money on their 400 best-selling brands. They say growing global wealth is making consumers increasingly selective. So the company has abandoned the old strategy of flooding the market with products in a bid to meet every shopper's budget and taste; Unilever hopes to focus on market leaders instead.

Picking the surviving brands was easy: They're the ones that generated 77 percent of sales and 94 percent of profit in 1999. Their sales have grown 4.6 percent in 1998 and 1999 -twice the rate of the entire company. Many are global names such as Lipton tea and Sunlight soap, which have been around since the late 1800s. About 175 are "local jewels" - brands that sell well in their regions but aren't known elsewhere. If the same product has two or more names, then each of the names is counted among the 400 brands Unilever is keeping. Acquisitions were needed to fill gaps in food categories like ice cream and soups - areas in which Unilever lacked premium brands, the chairmen say.

"We want to concentrate on a smaller number of brands. But that's not just about cutting; it's about making sure you have the best brands," says Irish-born FitzGerald, speaking at Unilever's 1930s-era London headquarters that overlooks the Thames. In a separate interview at the company's glass and steel headquarters in Rotterdam, Burgmans also defended the brand cutback: "Sixteen hundred brands was profitable ten years ago, but it isn't now. Retailers demand more turnover per square metre, and customers demand better and more-convenient products."

Even after the brand focus, Unilever will bear little resemblance to the original business, born in 1930, when British soap maker Lever Brothers teamed with Margarine Unie, a Dutch margarine cartel. To resolve a conflict over where to put the main office, the partners remained separate entities. The company still maintains two headquarters, with Unilever Plc based in London and Unilever NV's head office in Rotterdam.

The chairman of the British company is vice chairman of the Dutch company, whose chairman is vice chairman of the London-based company. Otherwise, the boards of both Plc and NV are the same. While some of the businesses are owned by Plc and some by NV, all of them are run as if they had one owner. Both chairmen oversee the entire company and must agree on all major decisions.

They present a united front to the public, though there are occasional glimpses of differing styles, such as during the courtship of Bestfoods. FitzGerald revealed a hard line, commenting about a possible hostile bid. Burgmans, meanwhile, spoke of patience and the value of the transaction to both companies.

The only disagreement they'll talk about is that FitzGerald supports soccer team Manchester United, while Burgmans roots for Feyenoord, the team of his native Rotterdam. Burgmans, 53, who sports wavy hair and scruffy loafers, is a wildlife enthusiast who goes on safari in Africa once a year. FitzGerald, 55, who favours cufflinks and wing tips, spends his free time with organisations such as the Confederation of British Industry and the U.S. Business Council, arguing in favour of Britain's adopting the euro.

Unilever has been shuffling its product lines for decades. By the time FitzGerald joined Unilever in 1967 and Burgmans came aboard in 1973, the company had expanded into a full range of food and cleaning products, as Unilever sought to control all aspects of its business - from raw materials like chemicals to packaging, to shipping. In the late 1980s, as a growing service industry began to offer cheaper alternatives, Unilever began divesting non-consumer activities. The process took ten years. In 1997, a year after he became co-chairman, FitzGerald unloaded one of the last vestiges of the old regime by selling the chemical unit for $8 billion.

At the time, new chief executives were taking over at Nestle and Danone, Unilever's main European rivals. Nestle's Peter Brabeck-Letmathe, then 52, and Danones Franck Riboud, then 41, each focused on lifting profits and share prices. Unilever kept pace, taking restructuring charges of £472 million in 1996 to close some of its European food factories and upgrade others. It has taken restructuring charges every year since.

Besides the chemical unit, Unilever sold £600 million of businesses in 1997, £660 million in 1998, and £136 million in 1999, exiting from canned fish and professional hair sprays in Britain, meat and cheese products in Latin America, and coffee in Australia. All of those disposals came with a cost: growth. In euros, Unilever's sales were just 22 percent more in 1999 than in 1990; in U.S. dollar terms, they rose just 8 percent.

Burgmans and FitzGerald aren't getting out of any product categories in their latest reorganisation. Unilever already did that in 1996, when it decided it didn't have a hope of becoming a world leader in hair care products sold in salons, makeup, snack foods, meats, coffee, canned fish, pancake mixes, or baked goods such as cookies. So it unloaded certain brands ranging from Helene Curtis shampoo to Mrs. Butterworth's syrup. It decided to zero in on soups, sauces, tea, oils and margarines, ice cream, frozen foods, household cleaners, laundry detergents, deodorants, hand and body soap, and retail products for skin, hair, and teeth.

Unilever is now refining the choices it made in 1996 by focusing on its leading brands within those categories, many of which are premium names that command higher prices, such as Bertolli olive oil, Maille mustard and Calvin Klein perfume. More brands may be cut in the future. "We will review them every year, and if they are not No.1 or No.2, out!" Burgmans says, slapping a table, the only furniture in his corner office other than a simple wooden desk with neatly stacked piles of paper. "There's nothing magical about 400. It could be 350."

Burgmans has been pushing for shorter product lists and more-targeted marketing since he was head of European ice cream and frozen foods from 1994 to 1999. During that time, he cut the number of ice cream brands in Europe to 10 from 31. Now there are six main brands that receive 88 percent of the advertising budget - instead of 1996's 60 percent. Globally, Unilever spent 13 percent of sales - or £5.3 billion - on advertising last year. Spread out over 1,600 brands, that's an average of £3.3 million per brand. By 2004 the company expects to be spending 15 percent, says Financial Officer Rudy Markham. Credit Suisse First Boston expects Unilever sales to reach £63.5 billion by 2004. Divided up 400 ways, that's £23.75 million per brand. By comparison, Danone spends about 5 percent of its sales on advertising to support its main brands. Nestle won't disclose its ad spending.

Some products will continue to have different names in different countries, but almost everything else will be standardised to cut costs. Unilever plans to extend some brands, such as sticking the Vaseline name on new hair and skin products that follows the success of the Dove brand, which went to $800 million in sales of bar soap, shower gels, liquid soaps and deodorants in 75 countries in 1999 from $350 million in sales of bar soap in 13 countries in 1991.

Nothing's sacred in Unilever's shakeout The brand that enabled Unilever to enter the Polish market ten years ago - Pollena detergent - is being phased out in favour of the global Surf line. Since Polish consumers aspire to West European living standards they can't always afford, local chairman Cees't Hart is narrowing his attention to the market for midprice products He's slashing prices on top brands such as Lipton and adding more expensive lines to low-cost brands.

At a sparkling new Carrefour superstore in Warsaw, for example, the price for a box of 20 of the new pyramid-shaped Lipton tea hags, which used to be five zlotys ($1.22), is now Zl3.49.

To compete with the hundreds of rival brands filling the tea aisle - some priced below a single zloty for 20 sachets - Unilever introduced the Saga brand in 1996 as an inexpensive loose-leaf tea. Now it sells Saga in pricier, round sachets designed to fit the traditional Polish tea glass. The main point: Tea bags deliver profit margins of 40 percent compared with 30 percent for loose tea.

In India National Chairman Mavinder Singh Banga is taking the opposite approach. As he cuts back to 36 brands from 100, he's favouring premium brands and the cheapest lines over those in the middle to match the stark divide between rich and poor in his country. Banga's goal is to double sales to $4 billion within five years.

Unilever varies its sales tactics in the 150 countries in which it sells, taking into account the local lifestyles. Washing machine ownership is more than 90 percent in most European countries, for example, and consumers want convenience. So Unilever introduced detergent tablets in May 1998. Sales of single-dose tablets combining stain-removing agents and whiteners have grown into an annual £1- billion business in Europe. The tablets are now being rolled out in the U.S.

By contrast, in an emerging market like India, only 8 percent of city dwellers have a washing machine, and most of the rest of the country cleans its clothes in buckets. So the local unit, Hindustan Lever, sends teams to entertain crowds in small villages by rubbing mud into fabrics and then showing that Unilever's local brand, Rin Shakti, cleans better than the bar of hand soap most Indians use for all of their cleaning purposes. 

The company also plans to pay for village water wells and splash them with its logos. The new wells will include private washing areas so that women will have a chance to undress when they clean, resulting in 20 percent more soap used per wash, figures Aart Weijburg, head of soaps at Hindustan. "The motto is: 'Get your saris off, ladies,"' Weijburg says.

In wealthier countries, Unilever is finding that consumers are willing to pay more for foods that promise better health. In 1999 Unilever introduced its cholesterol-cutting margarine, called Take Control, in the U.S., and the following year, it began marketing the margarine in Europe as Pro-Active. The company won't give sales figures, but investor relations head Howard Green told analysts on a December 20 call that Pro-Active helped sales of Unilever's spreads rise almost ten percent in the fourth quarter in Europe, even as overall demand for margarine declined.

As they planned the latest product streamlining, say Unilever's chairmen, they realised they didn't have enough fast-growing food brands. While sales of Unilever's personal care products have grown 67 percent since 1990, food sales have gained just 20 percent. They went after Ben & Jerry's because Unilever, though it is the world's biggest ice cream company, lacked a high-margin premium brand.

On April l2, 2000, the same day Unilever announced the $326-million purchase of Ben & Jerry's, it also agreed to pay $2.3 billion for privately owned Slim-Fast. Sales of the latter's weight loss drinks are growing 20 percent a year in the U.S., and Unilever now wants to roll them out in Europe. One out of every ten Europeans is obese, according to the European Association for the Study of Obesity. That's half the U.S. rate but three times what it was 20 years ago.

Just one week later, Unilever got the ball rolling on the largest acquisition in the food industry in a decade: On April 20 FitzGerald and Burgmans called Bestfoods CEO Charles Shoemate and said they wanted to meet to discuss a $64-a-share offer for the company; Bestfoods shares were trading at about $50 at the time. Shoemate declined a meeting, and two weeks later, his board rejected an improved, $66-a-share offer.

Unilever kept at it. "There was no company available with such strong brands in areas that we knew well," says FitzGerald. Bestfoods' Knorr brand would instantly replace Lipton as Unilever's best-selling brand, boosting overall sales of sauces, soups, and bouillon to £5.5 billion from £3 billion. The Hellmann's line would make Unilever a global leader in mayonnaise and salad dressing, increasing sales to £2.5 billion from £1.5 billion.

FitzGerald says he'd been tracking Bestfoods since the mid-l990s, but it was too expensive then. By April 2000, Bestfoods shares had fallen about 28 percent from their l999 highs amid a general decline among U.S. food stocks. The drop at Bestfoods slashed the company's market value by about $4 billion to about $12 billion. When Unilever offered Shoemate $72 a share on May 30, he agreed to meet. They hammered out details in New York during the first weekend in June, and Bestfoods' board on June 6 approved a $73-a-share offer. The $24.3 billion Unilever paid for Bestfoods - 14 times earnings before interest, taxes, and write-downs - was in line with other food purchases in 2000, such as PepsiCo Inc.'s $l3.5-billion planned purchase of Quaker Oats Co. and Philip Morris Cos: $l8.9-billion purchase of Nabisco Holdings Corp.

Some investors say the purchases will overextend Unilever's management. Says Charles Mills, a food analyst at Credit Suisse First Boston in London: "Whittling down brands is an arduous, time-consuming, and expensive operation. Taking on those acquisitions in these circumstances is an awful lot to ask of a business."

Many analysts say Unilever was doing too much even before the Bestfoods acquisition. "At a minimum, they should separate food from the rest so they can get more of a focus," says Harry Milling, a consumer goods analyst at Morningstar Inc. in Chicago. 

"It would mean the end of 70 years of history, but it would also mean better returns for shareholders."

Unilever's leaders reject the criticism. "There is no problem having 400 brands, as long as they are leaders," says Burgmans. "Why should I eradicate leading brands?" He and FitzGerald say no more big takeovers are planned for a while, and they stress that the next four years will be devoted to eliminating the 1,200 brands and delivering the promised savings and sales gains. They may not have much choice. Unilevers ability to spend is limited because nett debt jumped to £25 billion from £1.8 billion after the Bestfoods purchase. 

That prompted Standard & Poor's Ratings Services to drop the company's long-term-debt rating four notches to A+ from AAA. So with an acquisition financed by debt unlikely, FitzGerald and Burgmans will have to find some other way to get investors' attention.

Courtesy : Bloomberg Magazine

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