International Entrepreneurship and Management Journal

ISSN: 1757-1938 SJR : 0.847 SNIP : 1.89948

Evaluating the International Business Environment of Unilever

By Ainur Ongdash ( PhD doctor, acting associate professor of chair “Al-Farabi Kazakh National University Department International relations and world economy)

Anargul Rakhmetzhan (Senior Lecturer at Al-Farabi Kazakh National University Department of International Relations )

Ilyasova Gulmira Garipollayevna (Senior Lecturer of the Faculty of International Relations And Economics Al-Farabi Kazakh National University)

Evaluating the International Business Environment of Unilever

1.0  Introduction

Unilever is one of the largest fast moving consumer goods (FMCG) dual listed company, formed in 1929 as a merging of British and Dutch company. It holds the most famous brands in the world providing food, cleaning products to personal care and other consumer based products around the globe. Unilever is listed in FTSE 100 index headquartered in London and Amsterdam. The company’s recent results has been affected by various external environment due to the financial crisis. 

This report is prepared to analyse the different external aspects discussing its developments in the international business environment. By identifying the currency risk of Unilever and its impact on business, different strategies are to be undertaken to mitigate the currency risk with theoretical knowledge. Following this, the report will present the financial analysis considering different financial ratios which will analyse financial position and further development of Unilever also comparison of its annual report to that of competitor. Also, taxation policies are to be discussed which would be the impact on the company due to different national and international tax policies. Lastly, conclusion of the report will be discussed with relevant suggestions and recommendation for the investors.  


Part 1

2.0 Discussing the recent developments due to external Environment in Unilever


2.1 Political Environment

Unilever is influenced by Dutch and British political system. Currently, Britain has a coalition form of government and general election is expected on May 2015 (Taylor-Gooby and stoker, 2011). Similarly, Netherlands has a similar kind of government though they put greater implication for the rightful conduct of business to ease business tendency for existing and new companies. As both countries are founder member of EU, Unilever has a greater advantage in trade flexibility related to business among other member nations and removal of trade barriers make them easier to operate in multiple countries due to political impetus of both nation.   

During the EU meeting in 2012, prime minister of Netherlands urged to leave European union to uplift Dutch local economy (Dutch News, 2014), however it would be the great loss for the multinational companies including Unilever,  operating in Netherlands itself and among Europe. On the other side, UK is trying to pass the referendum on EU membership conflict by 2017 if conservative party wins the election. Due to this political instability, Unilever is trying to build up a mutual relationship so that both countries could remain in the Union (The Guardian, 2014). The political unrest in Middle East countries, Unilever is not able to operate most time of the year resulting the great loss for the company where 53% of their trade and business only comes from developing markets (Unilever, 2014). 

Being one of the largest FMCG brand, Unilever is lobbying with different groups and countries to operate and sell the products more easily.  Unilever has signed Maastricht Treaty in 1990-1991 during Intergovernmental conference, working closely with UNICE (European Employer’s Organisation) to secure the rights of every employees (Corporate Watch, 1996). Unilever uses its goodwill, experiences to interact with nations and their government to change rules some business regulations. They engaged in lobbying rather than being active on politics in Central and South America as toady they gained huge market and support from political ground with their tactical strategy.

2.2 Legal Environment

As Unilever operates more than 190 countries, it means they have to follow the national laws of the country. Being a multinational company, they have to consider every aspects and resources of the country legally ensuring that it won’t affect or change the legal stability of the nation. The significant changes in law has great impact on the business strategy of Unilever. Like anti-discrimination law, disability, sex, race discrimination law must be follow by Unilever. Under the provision of Equality Act 2010, In UK no businesses are allowed to abuse or discriminate any individuals basis of gender, age, religion, disability or any ethnicity, training and selection, promotion (Hyman, Klarsfeld, Ng and Haq, 2012). 

For example, the required age for retirement has been removed in Britain and Netherlands. It means Unilever cannot force their employees to retire once they reach 65. Big companies has to invest large sum for their pensions and other expenses which directly effects business cost (Hanks, 2015). The effect of the nationalization policy in India made many companies leave the country in 1970. Unilever, with higher standard and huge control over market had a fear of knowledge leakage, trademark issues. Company however was able to control over its operation lobbying with government to modify regulations. 

2.3 Economic environment

The rise of multinational companies after Second World War, the economic environment of Unilever was becoming highly competitive in Western Europe. Due to the high uncertainty of macro-economic environment, there was an imbalance and affected micro-economic environment which created fear among consumers. Expensive and branded products were not bought by customers. As the competition grew among companies, Unilever was facing problems in France, Netherlands (Unilever, 2010). Reduced number of customers has an adverse effect on financial structure affecting cash flow, profit margin. However, the demand of household products was seen increasing where Unilever was trying to reach many customers through different ways and their products (Business World, 2013). According to research published in Wall Street Journal Free market economy 2007, countries like Hong Kong, Singapore, Australia, US, UK, Switzerland has a greater advantage for big company like Unilever which has produce wide range of products in competitive prices so that consumers always want to buy goods from same brand. However, Unilever is dominating some markets by exploiting small suppliers and charging higher prices to maximize their product (Hill, 2011).

2.4 Financial Environment of Unilever

Since Unilever was founded in 1929 merging two Dutch and British companies, it has made a tremendous progress in delivering consumer goods in the market whose market is still growing and ahead in 2014. Despite different challenges and competition, company is able to make sales growth by 2.9% with good profit margin. Unilever’s Sustainable Living Plan is helping to grow its economy by 4.9% making one of the most trustworthy performer in the retail industry. The annual turnover of the company was € 48.4 billion in 2014 less by 2.7% than previous year due to the negative impact on foreign currency and exchange rate of 4.6%. Operating margin rose by 0.4% although maintaining the brand image and marketing, investment turnover was 14.8% while overheads was decreased by 0.6% (Unilever, 2015). 


2.5 Impact of recent developments in near future of Unilever Limited

In 2010, Unilever launched Unilever Sustainable Living Plan (USLP) in order to double its size and for sustainable growth to thrive new competitive market improving the profitability growth for brands enabling positive impact on society. Through the continuous development and support from targeted group Unilever has targeted to improve the health and well-being of 1 billion people by 2020, reaching 397 million in 2014. Support from external environment, Unilever is working on reducing hazardous waste in the environment and continue to create significant reduction of CFC and greenhouse gases. The continuous growth and profit of the company will ensure new technology in agricultural industry for sustainable raw materials supply reaching 800,000 farmers with proper help and training around the world. Unilever is planning to create 700,000 women micro entrepreneurs in India for distribution of their products with new commitment to enhance livings of the people (Sustainable living report, 2014). 

3.0     Currency Risk; Its impact and strategy to mitigate currency risk in Unilever

Currency risk is a form of risk that changes price of currency while converting to another currency. It is very important to know the foreign exchange rates and its changes during any financial investment (Investopedia, 2015). Below the impact of currency risk and its strategy to reduce risk is described. 

Euro is the base currency of Unilever. All the incomes that are made around the world are converted into euros. The variation of the exchange rate (euro) in any time in any part of the world determines the currency risk that has been facing by Unilever (Unilever, 2000-2009). Different nations has passed through different type of economic instability having adverse effect on exchange rates which ultimately changes in the rate of euro across the world threatening the progress and profitability of Unilever. Unilever has faced different types of risk that is described by Brealey (2003) and strategy that is described below.

Strategy of Unilever to mitigate currency risk:

Company started to purchase forward contracts for supplies and raw materials while future contracts to hedge against future price fluctuation. In addition, interest rates and long term debts were made secure by fixed rates. Short term investments were made available only at floating interest rate. Unilever used invoice strategy where receivables and payables are only made in euros. Moreover, Unilever reduced their partnerships with suppliers dealing with just few to overcome the exchange rate risk (Unilever, 2001-2006).

Company constantly started changing advertisement, branding, promotional, distributional activities, pricing strategy to manage economic exposure. Unilever used product development strategy to introduce Sunsilk (new product) and knorr stock cubes in low price. They started giving priority to Frontal attacking MNC rather than Envelopment strategic to enhance and grow the market share of the company and gain public support. Also adopted low cost production strategy, where the company shifted production unit to cheaper areas with adequate number of raw material is available in low price (William, 2002-2015).

The risk of an organisation in its equity, liability, assets or income whose value changes resulting the change in exchange rate. Unilever, however calculates through FERS (Foreign Exchange Rate Sensitivity) implying up to 10% fluctuation on exchange rate. NV and PLC provides their corresponding consolidated statement with the numbers of firms that are operating under each of them. Company try to minimise currency risk by borrowing products in local currency considering the local regulations, liquidity and market condition. 

Part 2

4.0 Financial Ratio analysis

Financial analysis is the interpretation and evaluation of financial statements of the company which shows how well the company is performing in the business environment. It assists the investors, creditors, financial groups for decision making and areas needed to improve for the potential investors (Rao, 2011).  

Below financial performance of Unilever is interpreted looking at the financial annual report ending year 2014. Looking at profitability ratio, liquidity ratio and efficiency ratio one can understand the financial structure of Unilever. All values are quoted euros/cent in million.

(Unilever, 2015)

4.1 Profitability ratio:

 It measures the organisation’s ability to generate the profit by controlling expenses looking at different operational areas. The following ratio analysis is done based upon the financial statement above of the year ended 2014. 

Values are quoted in Euro cent in Millions. 

     16.47%               15.09%

Gross profit Margin


 It shows that the company has a gross profit of 16.47% in the year 2014 is increased by 1.38% compare to 2013. Gross profit is increased due to raise in sales without overhead expenses. It shows the Unilever’s ability to operate business in standard condition though little competition has to be faced. 

     11.38%               10.56%

Net profit Margin


It shows the Unilever’s net profit as a return of their sales after deducting all the expenses and bills. The ratio shows net profit per €1of sales.  Net profit has been increased by 0.82% in the year 2014 means company made €0.113 net profit than previous year.  It indicates Unilever’s efficiency on controlling cost to increase in the net profit margin. 

     11.48%               11.56%

Return of Assets (ROA)


 It expresses as the efficiency of the management of using its assets in order to generate profit. The above figure shows 11.48% return on profit from the total assets of Unilever in 2014 which is less by 0.08% than previous year. The more ROA, the better company is performing to generate more earning from its assets. 


4.2 Liquidity Ratio:

Liquidity ratio helps to determine the company’s ability to pay off the debts, bills, payrolls, taxes. It includes current ratio, quick ratio, operating cash flow ratio, inventory turnover, trade receivables.

 :1 :1            0.62 :1                :1 0.69 :1

Current Ratio


Generally current ratio of 2:1 is taken as a good factor which means business will have €2 value of current assets for €1 current liability.  The current ratio of Unilever is 0.62 in 2014 comparing to 0.69 in 2013 which is below that 1, this means company may have difficulties in paying bills and other expenses in time due to less liquidity cash in year 2014. Though it does not mean the company is in difficult position. Unilever should work under the working capital assigned and use the resources wisely in order to increase the flow of cash.  

 :1 :1    0.41 :1                   :1 0.46 :1

Acid test Ratio


Ratio of 0.75:1 or greater is considered effective. It is interpreted as the ability of the company to use its immediate assets like cash, securities to pay current liability. The above figure of Unilever is considered as very low in 2014 where company struggles to pay the current liabilities in time. It can be increased if the company purchase assets in reliable time, strictly following the payment and debt collection policies. Raising the capital effort and recovery from inventory turnover. 

  :1            0.10      0.13

Cash Ratio


Cash ratio above 1.0 is preferred where the company would be able to pay their current liabilities in time. The figure above shows that Unilever has very bad cash ratio in year 2013 where the company was not be able to pay their current liabilities on time and even worse in 2014. Unilever has enough cash and equivalent to pay off only 10% of its current liabilities.  But companies do not plan to keep cash that means they have an investment to generate profit. Although to recovery from such condition Unilever should imply credit time limits for customers and for account receivables. 

4.3 Efficiency Ratio:

It is used to analyse company’s ability to mobilize its assets and liability internally. It is calculated by the turnover of receivables, payables. Efficiency ratio is meaningful in comparing the similar companies to identify business performance and who has better management in the improvement of their profitability. 

 ×365 days×365 days 37.89  days ×365days 35.41 days

Trade Receivables Ratio


 It is an activity of the company’s effectiveness in order to extend credits and collect debts from the clients. Lower the ratio, it takes longer time to collect receivables. This ratio indicates the time that debtors will take to pay bills. In 2013, debtors had 35 days to pay their debt whereas in 2014 it is increased to 38 days. The company gets liquidity cash earlier if trade receivable ratio is less. Since it will take longer than in 2014 than 2013 to receive cash from debtors.    It shows company need to review its credit policy in order to collect credit sales on time.

Return on Capital Employed (ROCE)

 ×100%×100% 28.11% ×100% 18.70%

Interpretation: ROCE helps in measuring profitability of the organisation in percentage of the capital employed. From the analysis above, the return of capital employed is higher in 2014 compared to that of 2013. It means Unilever is generating more earning per Cent of the capital invested in the year 2014 than 2015. Lower value of ROCE means return of capital is low. i.e., profit is low. It indicates that, reduction of operating cost helped to increase in operating profit eventually increase in ROCE. 

5.0 Compare earnings per share and gearing ratio of Unilever to that of Reckitt Benckiser

Reckitt Benckiser (rb) is a consumer goods based company, headquarter in Slough, Berkshire UK listed in FTSE 100 which is one of the main competitor of Unilever in today’s international market (Reckitt Benckiser, 2015). 

 Below Earnings per share and Gearing Ratio is compared looking at the recent annual report of both companies. 

5.1 Earnings per Share

It is defined as the amount of net income earned per share and profit is distributed according to the amount of each share of stock at the end of the year. It is an important variable to determine the share’s price and used to calculate price to earnings valuation ratio (Investopedia, 2015).

Formula Unilever 2014Reckitt Benckiser 2014

From the above table, it shows that in 2014, shareholders of Unilever earned 1.91 euro per share. It is the stake of company’s profit that is allocated to each share of common stock. As compared to its competitor Reckitt Benckiser on same year’s annual report, its EPS is 4.41 per share which is higher than that of Unilever. So, Reckitt Benckiser is performing well in the market with higher profitability where investors prefer to invest their capital to generate more profit. 

5.2 Gearing Ratio

 According to John Ogilvie (2009), it analyse the company’s long term debt ratio compared to its equity capital. Company with higher gearing ratio is considered more vulnerable regardless of higher sales or profit. Lower gearing ratio is measured as a financial strength of the company. 

Formula Unilever 2014Reckitt Benckiser 2014

From the above table it shows that, Unilever is in vulnerable position according to its gearing ratio 2014 as it compared to its competitor Reckitt Benckiser. As higher the gearing ratio, the company has to pay more to their creditors. The higher gearing ratio of Unilever indicates a great deal of leverage. The company is using its profit to pay their debt and to continue their business. Since, higher gearing ratio might lead the company to bankruptcy where company has to arrange the payments for debt repayment. Though, Reckitt Benckiser has gearing ratio of 0.49 which is considered a good financial position means low risk to investors and lenders. The company would be able to pay their debt easily and more investors could be attracted due to less leverage. 

6.0 Impacts of National and International Tax policies in Unilever

Taxation is defined as a process where charges (an amount of money) is imposed to the companies or individual by the government in exchange for the protection and other general advantages that is levied on the materials product or services, as collected revenue called tax. In International business, taxes varies according to taxation policies that country is imposing on its national market and international market. 

According to the report published in Daily Mail (2010), Unilever which is 19thlargest company operating in UK and across the world, made an estimated profit of €5 billion that year ended up paying €1.2 billion as corporate tax (Steiner, 2010). The different tax policies in different countries has a huge impact on the financial environment of Unilever. In 2010, Paul Polman chief executive of Unilever threatened to pull out the company due to the rising tax in UK. Currently, Unilever is levied 28% tax on its profit in UK, due to which the company is losing its competitiveness and difficult to plan ahead according to Paul Polman. Though in Ireland and Germany, corporate tax is just 12.5% and 15% respectively due to which company is able to make huge profit while providing quality goods and products to the customers at the same time. 

Unilever has greater impact on the local economy of the country as a study by Oxfam in Indonesia suggests that Indonesian government received 26% of the total value of businesses only from Unilever in the year 2003. Whereas is South Africa government collected R4 billion as tax revenue equivalent to 0.9% of total government revenue in 2008 (Unilever, 2013). 

7.0 Conclusion

Being one of the largest multinational company, it has strong capability to prosper and create bigger face values to its products. From this report, it can be concluded that Unilever has global impact where company have to study different political, legal, economic environment of the country to succeed. Looking at the financial report, Unilever is not doing quite well in 2014 comparing to previous years. Both shareholders, investors, employees, managers should discuss about the potential financial growth to compete with its competitor. However, the strong brand image and product quality is playing significant role and has strong threshold to thrive business in future. Sustainable plans ensures the development and desirable outcome for stakeholders and attract potential investors with great revenue turnover and profit bringing the long term benefits overall. 


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