Unilever topped analyst expectations with organic sales growth of 4.9% last quarter and 4.1% for the year, but it's still preparing to unleash zero-based budgeting on marketers in an effort to squeeze more efficiency out of marketing.
Unilever Will 'Zero Base' Marketing Budgets in Belt Tightening Move
The budgeting approach, which has been favored by 3G Capital for such holdings as Kraft Heinz and elsewhere, requires managers to start from scratch to justify marketing and other outlays.
"We will make a further step change in our overheads and brand and marketing efficiencies with the global rollout of zero-based budgeting," said CEO Paul Polman in a presentation to analysts and investors today. Unilever piloted zero-based budgeting in Thailand last year, reducing overall spending across all areas by 2 percentage points as a share of sales.
As of last year, however, Unilever marketing spending was on the rise, up 0.2 percentage points to 15% of sales, or around $8.7 billion, a company record. In absolute terms, its marketing outlay rose nearly 12% from last year, applying current dollar-euro exchange rates to both years.
In further cost-cutting, Unilever will use new "functional models" to reduce costs for internal marketing and other staffing, better aligning headcount costs with where the company generates revenue. The budgeting and staffing moves combined should save Unilever, with more than $58 billion in annual sales, more than $1 billion annually, said Chief Financial Officer Graeme Pitkethly.
The new belt-tightening comes on top of marketing staff reductions launched in late 2013 and an effort to cut agency fees and other creative costs that reduced them to 22% of Unilever marketing spending as of 2014 from a high of more than 30% in 2011.
Mr. Polman sounded a gloomy note on the market forces Unilever faces in the year ahead, which will add to challenges despite plans to launch product initiatives that are expected to sell 20% to 30% better than initiatives from prior years.
"I expect market conditions to be, if anything, more challenging and more volatile than in 2015," Mr. Polman said. "Economic growth is unlikely to improve significantly, and we have seen at the start of this year geopolitical tension which is on the rise. Stock markets are jumpy, not surprisingly, and currencies are volatile. And the impacts of climate change once more are only increasing."
Despite this, and the cost cutting, Unlever's marketing spending won't necessarily decline in the absolute or relative to sales, Mr. Polman said. To continue "outgrowing the market," he said, "we have to continue to invest in our brands."
As Unilever continues to expand personal care as a share of its sales, particularly the $400 million-plus prestige business acquired in the past year, that will help drive up spending as a share of sales, he said.
Personal care might be an even bigger part of the mix if things don't improve for the spreads business Unilever split off as a separate unit last year, and which continued to drag down results this year with a 5% organic sales decline. After a change in top executives for the unit last month, Mr. Polman said, "It is my sincere wish that with the structure we have set up that we see improvements in 2016. If we don't, we will have to think about other things, and we are obviously looking at all options."