UNILEVER

CASE MEMO October 22 2015

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Environmental Context

Increasing global support for sustainable development has created a dynamic challenge for Unilever as it

commits to sourcing 100% of agricultural raw material inputs from sustainable sources by 2020. Through

partnering with the Rainforest Alliance, Unilever adopted a sustainable certification for its tea supply chain

which is highly fragmented and geographically diverse in nature. Unilever must now convince low income tea

producers of the benefits of changing traditional agricultural practices. Concurrently, Unilever is looking to

gain market advantage from its sustainability. As developed markets growth flattens (1-2% annually), Unilever

now looks to expand its position in emerging markets (10% growth annually), where sustainability may not

carry importance to consumers (see Exhibit 1 for a full breakdown of industry forces).

Issues Identification

Accounting for the external environment, Unilever must address the following issues when assessing the

pursuit of the Rainforest Alliance Certification:

Ensuring high quality and well-priced tea offering while stressing the sustainable value proposition

Addressing and overcoming the high costs/ difficulties of certifying producers

Creating a strong and healthy supply chain to meet a geographically fragmented tea supply network

Connecting Indian consumers and producers to the value proposition of sustainability

Ensuring Unilever has the organizational resources and partnerships to execute the certification

process

Decision Criteria The following decision criteria have been set to evaluate the proposed initiatives (ordered by importance):

1) Sustainable Living- Will the proposed option help Unilever maintain its commitment to the

Sustainable Living plan?

2) Economic Viability- Is the proposed option economically viable for Unilever and its partners?

3) Operations Infrastructure- Will this option require Unilever to significantly alter its supply chain?

4) Organization, People and Partners – Will this option require substantial Human Capital and external

partnerships to execute?

5) Market Share Growth- Will the proposed option increase Unilever’s market share?

Alternative Assessments When considering the actions for Unilever to take next, the following options have been assessed (see Exhibit

2 for alternative assessment matrix).

Option 1: Gain the Rainforest Alliance Certification

Obtaining certification for smallholder farms will help Unilever meet its sustainability goals while increasing

the overall production of tea in India. Doing so will also assist the organization in meeting the growing global

demand for tea. With assistance from the Kenyan Tea Development Agency (KTDA), the Rainforest Alliance

certification increased producer tea yields by 5-15% and farmer income by 10-15%. The initial costs of

obtaining certification for smallholders in India would be estimated at €79 million for the base case with an

NPV of -€66 million for Unilever by 2020. Following the first 2 seasons, certificate renewal fees and the costs

of training would be borne by individual farmers. Overall, the increase in farm yields would marginally

compensate for the high upfront costs of certifying these farms. Though this certification offers a straight

forward method of practice, its rigidity presents several problems in the implementation phase due to its strict

adherence to regulations which are not common practice on rural farms in India. Compared to Kenya,

Unilever does not have the same access to government support in India and would require an overhaul of

infrastructure to certify many of these farms which in turn, makes it a less than favorable option. (See Exhibit

3 for full financial breakdown).

Option 2: Use India as a test case for a Unilever developing markets sustainability certification

As the majority of tea growers in India face substantial challenges when trying to comply with the standards of

the Rainforest Alliance, Unilever should explore implementing its own sustainability certification to help these

producers ease into sustainability. This is our recommendation.

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Option 3: Aiding the establishment of a tea co-operative in India

Establishing a co-operative similar to the KTDA in India would benefit both Unilever and smallholders. A

large proportion of India’s tea suppliers are smallholders who independently sell to local tea factories. By

establishing an Indian Tea Development Agency, Unilever would greatly reduce the complexity of its supply

chain and increase its security of supply. Unilever would also be able to increase the speed of diffusing

sustainable farming practices and lower long-term costs which were key success factors in Kenya attributed to

working with the KTDA. Smallholders would benefit from a development agency as it would help them

receive higher prices, better training and other extension services that are currently unavailable. This option

would require Unilever to work closely with local tea factories, smallholders, external consultants and NGOs

to establish appropriate and sustainable guidelines for the new agency. The risks of this plan are that it would

increase supplier power and prices or that local factories and smallholders would not join the co-operative.

The KTDA’s success stems from its strong reputation and large share of production which Unilever may not

be able to recreate in India.

Recommendations and Implementation

Due to the financially intensive nature of gaining accreditation under the Rainforest Alliance, smallholder tea

producers will have difficulties conforming to the stipulations of the Rainforest Alliance. Current smallholder

practices of utilizing the pesticide Paraquat for production along with smallholder reliance on child labor also

pose significant challenges towards gaining accreditation. As such, a Unilever instituted certification presents a

compelling option. While the Unilever standards will not follow as stringent requirements as the Rainforest

Alliance, it will draw on similar environmental practices (see Exhibit 4 for breakdown). By developing a

business case for Indian small holders around the benefits of increasing adherence to sustainable practices,

smallholders will likely be compelled to adopt the certification. This option is similarly compelling to

Unilever as the base case project yields a €1.3 million NPV and 11.3% IRR (see Exhibit 3 for full financial

breakdown). Lastly, with many developing countries accounting for over 70% of the total global tea

production, this intermediate accreditation for sustainability can be brought to other countries, increasing

Unilever’s reputational capital as a socially conscious organization throughout the world and helping ensure it

reaches its sustainability goals by 2020.

To compliment the creation of a Unilever sustainability certification, the organization should engage in an

aggressive marketing initiative to grow its tea market share in India. This can be achieved by mimicking the

campaign used for the Turkish market which emphasized national benefits. Highlighting the domestic,

economic and social value that certified tea creates for local producers beyond purely environmental benefits

will resonate with consumers. As tea is nationally important to the Indian culture, emphasizing these aspects

may also attract younger customers to Unilever’s branded products who currently view tea as old fashioned

which will grow overall market share and maximize the campaign ROI. Based on conservative estimates, if the

marketing campaign is communicated correctly, Unilever’s overall tea market share is expected to grow by

1.8% with an initial expenditure of €9.25 million (see Exhibit 5 for full marketing breakdown).

Risks

There are multiple risks associated with developing a Unilever certification that the organization must take into

account as it implements an intermediate sustainability accreditation

Lack of sufficient human capital resources and internal expertise to properly execute

Research and development and training costs run higher than expected

Failure to gain recognition as a respected accreditation for sustainability

Eventual local government or regulatory interference (red tape, additional costs, etc)

Unforeseen interference from independent accreditation bodies

Marketing efforts failing to resonate with Indian consumers

Future Considerations

By instituting a Unilever starter certification, Indian smallholders will be able work towards achieving a full Rainforest Alliance Certification in the future.

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Exhibit 1: Industry Forces (Porter’s Five Forces)

Exhibit 2: Alternative Assessment Matrix

Alternative Assessment Matrix

Alternatives Sustainable

Living (5)

Economic

Viability (4)

Operational

Capability (3)

Organization,

People and

Partnerships (2)

Market

Share

Growth (1)

Total

Pursuit of

Rainforest

Certification

10 4 4 4 7 93

Unilever

Certification 8 7 6 6 7 105

Establish Indian

Tea Co-op 4 8 8 6 2 90

Note: Scores are calculated via weighted summation

Exhibit 3: Certifications’ Financial Breakdown

Bargaining Power of Suppliers - Medium Bargaining Power of Customers- High

- Highly fragmented supply chain - Extremely low switching costs

- Geographically diverse - Price sensitive

- Security of Supply: India:

- Small supply of Sustainable Tea - 3/4 sold through independent small grocers

- Large supply of regular tea - 1/3 of tea (by volume) branded

- 2/3 of tea (by volume) sold as looseleaf

- Tea bags less than 2% but increasingThreat of Potential Substitutes- Low Threat of New Entrants- Low

- Coffee is the main substitute Limited threat

- Tea still #2 beverage worldwide after water

India:

- Nearly 3x larger than largest competitor (Tata Beverages) India:

- Tata also promoting sustainability model - Tata: 26% market share

- Unilver: 30% market share

Porter’s Five Forces

- Smallholders with little money for expensive sustainability -

must be subsidized by Unilever

- Branded coffee chains increasingly popular, especially with

younger demographicIntensity of Rivalry- High

- Regional tea companies price competitively and focus on local

tastes

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Projections for India

*Based on the fact that 1 hectare can produce 3 tons and assuming the

remaining volume of tea are smallholders with 1 hectare.

**Assuming all farmers are smallholders the price of certification is 4,500 Euros

fo Rainforest / and 500 for Unilever.

***Based on a 25% market share of the 33% branded tea market and

considering tat 75% already certified (800,000 tons produced a year).

****Assuming all farmers are smallholders the price of certification is 4,500

Euros.

Assumptions for the Base Scenario

1) Therefore the cost for the marketing campaign is based on the average size of the three successful campaigns (Australia, U.K. And Italy)

2) We considered a 0.93% cost over the total market size.

The increased market share is an average of the three successful campaings.

One common factor of failure in the marketing campaigns of the U.S. and France was the small investment relative to their market sizes.

Exhibit 3: Certifications’ Financial Breakdown Exhibit 4: Unilever Standards Breakdown

Exhibit 5: Marketing Campaign Projections

Farms* 16,500

Fixed Costs (1st year)

Certification Cost**** 74,250,000

Extra Employers

(3 days of training) 576,000.0

Equipment 495,000.0

Variable Costs (annual)

Premium paid by

Unilever (per Ton.) 72.7

Market Price 2010

(per ton.) 1,536.4

Participation Fee

(per Ton.) 8.1

Annual Tea Volume

India (tons)*** 49,500.0

Developement of

Farmer Training 200,000.0

Total Cost € 79,521,500.00

Cost of Rainforest Certification

Farms* 16,500

Fixed Costs (1st year)

Certification Cost** 8,250,000

Extra Employers

(3 days of training) 576,000.0

Equipment 495,000.0

Variable Costs (annual)

Premium paid by

Unilever (per Ton.) 45.5

Market Price 2010

(per ton.) 1,536.4

Participation Fee

(per Ton.) -

Annual Tea Volume

India (tons)*** 49,500.0

Developement of

Farmer Training 200,000.0

Total Cost € 11,771,000.00

Cost of Unilever Certification

CountryMarket Size

(Million)

Market Share

(%)

Market Share

(Million)

Marketing Campaign

Cost (Million)

Market Share

(increase bps)

Purchase Repeat

(increase bps)

Sales

(increase)

Purchase Value

(increase)

England € 990.00 25% € 247.50 € 12.00 1.80% 5% 6% NA

Australia € 260.00 25% € 65.00 € 1.10 1.58% NA 11% 3.86%

Italy € 285.00 12% € 34.20 € 3.25 2% NA 10.50% NA

France € 430.00 7% € 31.8210% of all marketing

expense0% NA NA NA

U.S. € 1,500.00 NA NA € 0.74 0% NA NA NA

Global Marketing Campaing ROI

1. Agrochemicals and fuels

2. Soils

3. Water

4. Biodiversity

5. Energy

6. Waste

7. Social and human capital

8. Animal welfare

9. Value chain and local economy

10. Training

Ten Indicators of Unilever Sustainable Agriculture Code

CountryMarket Size

(Million)

Market Share

(%)

Market Share

(Million)

Marketing

Campaign Cost

(Million)

Market Share

(increase bps)

Net Sales

Revenue est.

(Million)

India

(current)€ 1,000.00 30.0% € 300.00

India

(best)€ 1,000.00 32.0% € 320.00 € 5.45 2.0% € 14.55

India

(base)€ 1,000.00 31.8% € 317.93 € 9.25 1.8% € 8.68

India

(worst)€ 1,000.00 30% € 300.0 € 9.25 0.0% -€ 9.25

Sc

en

ari

os

Projections for India