Why mayo beat ketchup: Unilever vs Kraft Heinz

Paul Polman, former CEO of Unilever, is a global champion of business and enviro/climate sustainability. His approach is fascinatingly illustrated In a new book, Net Positive, where he details how Unilever successfully saw off a hostile takeover from Kraft Heinz.

He writes….

It’s five years since Unilever successfully saw off a hostile takeover from Kraft Heinz. That dramatic standoff wasn’t about spreadsheets and numbers, it was a battle for the soul of the business.

The companies represented two models at different ends of a spectrum. One serves a handful of owners, maximises shareholder returns and obsesses over cutting costs to raise profits now. The other aspires to thrive, over the long term, by serving all stakeholders and tackling the world’s biggest challenges, from climate change to conflict and inequality.

Five years on and the soul you create for your business feels more important than ever.

Below is the story, taken from my book Net Positive, written with leading sustainability thinker Andrew Winston. The culture and values you foster each day determine your company’s fate when uncertainty comes calling, and they determine your ability to help build a more stable world.

Whether we’re thinking about the role of the private sector in tackling climate change, in bringing peace and stability to Europe and other places dealing with violence and conflict, or in helping the millions of people worldwide at risk of being left behind, every business leader has a simple question to answer: what kind of company do you run?

Not what do you sell or make, but what’s your purpose and how do you deliver it? Are you profiting by creating the world’s problems, or fixing them?

Put another way: is this world better off because your business is in it? If the answer is no, you better hope you never get the same knock at your door that I got in early 2017. 

P.S Just a reminder that I take no income from Net Positive (or anything else these days). Any proceeds to me from the book are reinvested in building the Net Positive movement.

An excerpt from ‘Net Positive: how courageous companies thrive by giving more than they take’

In early 2017, Unilever faced a near-death experience. The company was seven years into its ambitious strategy, the Unilever Sustainable Living Plan (USLP), which made purpose and enriching others’ lives core to the business. It was making good progress on its aggressive goals, including doubling sales while cutting its environmental footprint in half, and helping a billion people improve their health and well-being. With a small handful of other corporate leaders, Unilever was helping redefine what being a good company means.

The strategy was working. After years of low or no growth, revenue was up 33 percent to $60-billion, and the company’s stock had outperformed both its peers and the broader European FTSE index. Unilever is a sprawling, truly global company, connecting with 2.5 billion people every day through one of its three hundred–plus brands, including Axe, Ben & Jerry’s, Clear, Dove, Hellmann’s (mayo), Knorr, Lifebuoy, Omo, Rexona, and Suave. As part of its USLP strategy, the company acquired dozens of new brands, most of them mission-driven companies, and divested of slower moving businesses that didn’t fit the vision.

So, when Alexandre Behring, the chairman of rival Kraft Heinz (best known for its ketchup) came to visit Unilever’s headquarters in London, CEO Paul Polman thought Behring might make an offer on one of the businesses for sale. But the meeting veered in a dramatically different direction. Behring offered to acquire all of Unilever for $143-billion, an 18 percent premium over the market price. Hostile takeovers sometimes come with a smile. But they’re still hostile, and they can destroy the soul of a business built up over a century.

Kraft Heinz had been acquired just two years earlier by Brazilian private equity firm 3G and Berkshire Hathaway, run by legendary investor Warren Buffett. The two investors were working together on this deal as well. 3G had never lost a takeover bid, but that would change over just nine intense days. 3G was well known for slashing expenses to increase short-term margins. A Fortune magazine article described 3G CEO Jorge Paulo Lemann as “the man who eats costs.” The consumer products industry was split between those racing alongside Kraft Heinz to leverage up, cut costs, increase margins, and pay little in taxes . . . and those who, as the Financial Times put it, “recoiled at what they view as a model that ultimately destroys businesses by starving them of investment.”

For companies selling similar products, Kraft Heinz and Unilever could not have had two more different business models. 3G was a perfect example of what shareholder primacy looks like in action. Unilever was intent on operating for the benefit of the many groups of people touched by the company (its stakeholders) in service of a better world. It has a 140-year history of purpose, going back to its original mission of improving hygiene in Victorian England. Today the USLP honors and expands on the company’s roots, and represents one of the most comprehensive integrated business plans in the world. It clearly links sustainable and equitable operations to business performance and growth. The goal of the USLP is financial gain because of sustainability, not despite it – not profits with a side of purpose, but profits through purpose. Over many years, Unilever learned that whenever a focus on purpose was lacking, the company’s performance suffered. So, being swallowed by an organization with an incompatible mission was potentially disastrous strategically and financially.

Unilever executives would have made a lot of money on the deal, but the chasm between 3G’s and Unilever’s strategies and values made the offer unacceptable. The business model was too important to put in the hands of people with no feel for long-term value creation. It was clear what had happened to companies that 3G bought. Organizations doing great work—such as beverage leader SABMiller, through its water and human rights projects in Africa—got squeezed in the 3G cost-cutting vise. A number of escapees from 3G acquisitions had come to Unilever seeking work with a purpose-driven company.

At this pivotal time, Unilever’s leaders were not immune to the appeal of cost control and margin growth. They believed strongly in business performance and efficiency, but also knew that you can’t cut your way to prosperity. Slashing people, R&D, or brand spending, just to give investors a sugar rush of higher margins today, was a recipe for disaster later. Unilever’s leaders believed that by using the business model they knew best, they could unlock more value over the long term than 3G could. They would lean into purpose, continue to invest in the future, and improve the top and bottom lines (which they had done for seven straight years).

It was a stressful time with intense pressure to sell. Paul didn’t want to be the one who handed over a century-old, responsible company to a firm like 3G. Not on my watch. To reject the bid, they needed support from friends, and they needed to move quickly.

The power of unexpected allies

For years, Unilever skeptics had been eager to see the company stumble. Many mainstream investors who preach shareholder primacy found the sustainability thing too hippie. But Unilever’s model was working. At the time of the takeover bid, Unilever’s operating margins were not at the top of the peer pack, but higher than those of competitors Nestlé, Danone, and Mondelez. Its revenue and bottom line were growing faster as well. Unilever consistently delivered 19 percent return on invested capital. It was creating long-term, reliable shareholder value, but as a result of its business model, not as the primary goal.

Still, the premium 3G offered sent a message: current leadership is leaving value on the table in the short term. That impression would normally be enough to ensure a successful bid, but 3G and Unilever’s critics underestimated how strongly the leadership, the board, and unexpected allies cared about the company’s approach to business. Critics had accused the company of spending too much time working with communities, governments, and the United Nations, and not enough on short-term profit-maximizing. But building those alliances paid off in a major way.

NGO and union leaders were among those who lined up in support. John Sauven, the head of Greenpeace UK—an organization that had scaled the headquarter buildings of Unilever, P&G, Nestlé, and many others to protest corporate misdeeds—had grown to trust the company, and he called to see whether he could help. Ron Oswald, the general secretary of the IUF—a federation of unions representing ten million workers in the agricultural and hospitality industries—went public opposing the bid. The IUF was fearful, he says, that Unilever’s model “would be wiped from the face of the earth . . . Kraft Heinz was the epitome of what a company should not be: pure financial engineering.”

Public pressure mounted against the deal. Letters to Unilever’s board urged it, as one investor wrote, “not to fall into the [short-term value] trap of Kraft Heinz.” Some high-profile Unilever supporters contacted Warren Buffett directly to express their displeasure. Still, Unilever execs were unsure that all the support would sway a majority of investors to side with them. The investors had strong incentives to cash in to meet their own quarterly targets (they maximize short-term returns too).

In the end, the substantial momentum opposing the takeover proved decisive. 3G lost support for the deal and had to back off. Unilever had dodged a bullet, thanks in part to the goodwill it had painstakingly earned by investing in partners and working with stakeholders on their net positive journey. If you stand by the world, the world stands by you.

The aftermath

The moment Kraft Heinz’s Behring walked into Unilever HQ, investors faced a test: which model of business will you invest in? The financial outcomes of that decision were substantial. The stock prices of the two consumer giants took off in different directions. Based on total shareholder returns, over the next few years, money put into Unilever yielded four times as much as the same amount invested in Kraft Heinz. Unilever’s subsidiary, Hindustan Unilever, which trades separately on the Indian stock market, is now worth more than all of Kraft Heinz. Across Paul’s full ten-year tenure, shareholders saw returns of nearly 300 percent.

When the financial crisis tied to the 2020 pandemic hit, the relative strength of Unilever’s model became clear. The company was in far better financial shape than 3G, with a stronger balance sheet. Unilever had the lee-way to guarantee jobs for three months for direct and indirect employees. It also allocated €500-million to support its partners, paying some suppliers early and extending credit to customers to help them stay afloat. Meanwhile, Kraft Heinz had to write down $15-billion in 2019, cut its dividend, and its debt was reduced to a “junk” rating before the global lockdown—it had to tap an emergency line of credit.

The point here is not to revel in 3G’s misfortune, but to highlight the differences in business models and outcomes. In a volatile, uncertain, complex, and ambiguous (VUCA) world, resilience is everything. Unilever’s model yielded a strong financial position and deep connections to its employees, communities, business partners, and governments. Those relationships gave it speed. Within days of the lockdowns, Unilever reinvented supply chains to source and ship medical equipment, increasing the production of hand sanitizer, for example, by fourteen thousand times. As billions of people changed their consumption habits overnight, Unilever moved quickly to shift employees between divisions and geographies. It assigned 300 of its 2,000 global procurement managers to focus on emergency supply chains in China. 

Unilever moved faster than its peers because of the trust it had built up with stakeholders over years. 

Even in a gruelling economic environment with so much disruption, Unilever did not sit still on its commitment to a long-term, multistakeholder business model. The company launched aggressive new goals, including carbon neutrality by 2039 and plans to label seventy thousand products with carbon footprint data.

While Unilever did not emerge from the failed takeover unchanged—the leadership team and board stepped up the company’s short-term financial delivery—they remained firmly committed to the purpose-driven strategy. A long-term focus on serving stakeholders was too ingrained, and the value too clear, to retreat. All businesses now face a profound choice: continue pursuing the shareholder-first model that forces shortsighted decisions, hurts business, and endangers our collective well-being . . . or build businesses that grow and prosper over the long haul by serving the world—that is, by giving more than they take.

Source: Paul Polman on LinkedIn