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At the end of last week Unilever revealed disappointing full-year results for 2004. Full year group profits fell 37% to £2.8bn from £4.5bn in 2003; turnover fell 6% to £40.4bn from £42.9bn.

The FMCG giant pointed to its underperforming Slimfast and Lipton brands as contributing to the drop in earnings, announced a management shake-up and indicated it would be making price cuts.

The moves sound radical enough, but Unilever has to prove this will be enough to steer the company back to profits growth without damaging the brands it has spent years nurturing.

Competitor strength

When compared with rival companies, Unilever's results appear even more disastrous. Last week Reckitt Benckiser, which owns cleaning brands Flash and Harpic, unveiled fourth quarter revenues up by 7% and by 4% for the year. Procter & Gamble announced in January that its sales and earnings growth was ahead of long-term targets and its purchase of Gillette will strengthen these.

The latest results forced Unilever group chief executive Patrick Cescau to publicly admit that many aspects of Path to Growth, the five-year strategy unveiled in 2000, under which the company reduced its portfolio from 1600 to about 400 brands, were wrong. He said both the company's structure and its advertising and promotional efforts were to blame.

Unilever's problems have been exacerbated by the hard discounting culture across Europe and the strength of own-label goods.

There is great pressure to compete on price. Andy Knowles, partner at design agency Jones Knowles Ritchie, says that the drive to commoditise is unending and unwise. 'The only brands that can resist are those bought unthinkingly. When you price promote, the consumer just buys the cheapest.'

Richard Murray, director at branding consultancy Williams Murray Hamm, believes a price war is not the answer to Unilever's woes. 'It really needs to concentrate on putting the wow back into its brands and creating points of difference.'

Premium pricing

Andrew Saunders, analyst at Numis Corp, believes Unilever is right to sacrifice some elements of pricing to take on the discounters, but it has to result in increased profits, not unit sales. 'From a marketing aspect, it means stepping up advertising and marketing spend for the next 12 months at least,' he adds.

Cescau has admitted Unilever needs to give people a reason to pay a premium for its products. 'We need to spend more time and money differentiating our brands,' he said. He cites the company's Flora margarine as an example of a brand that he believes offers a clear and distinguishable benefit from its competitors.

Increased adspend

Unilever's total UK adspend slipped in 2004 to just over £209m from £217m the previous year, according to Nielsen Media Research.

Last autumn, the company said it was increasing its adspend; however, it has refused to say how much of an increase this has been, even though this would have been a factor in its profits decline.

This year will be Unilever's biggest challenge in its 75-year history.

An increase in adspend and slimmed-down management are designed to return the company to profits growth. However, it cannot be sure whether cutting its prices and increasing its advertising can help stem the profits decline, or know how the Gillette/Procter & Gamble merger will hit its profits.

TIMELINE: UNILEVER 2004/2005 Feb 2004: Unilever unveils a radical logo on 540 of its brands' packaging.

Apr 2004: Birds Eye is given a £20m facelift as Unilever positions it as a supplier of 'real' nutritious food.

Jun 2004: Unilever significantly scales up its global relationship marketing activity, briefing global media director Alan Rutherford to lead the drive.

Sep 2004: Niall Fitzgerald retires as chairman. Chief executive Patrick Cescau replaces him.

Nov 2004: MindShare wins Unilever's £680m pan-European media buying account. Unilever announces it is ditching the Lever Faberge name. The following month, Unilever UK chairman Gavin Neath is named president of The Food and Drink Federation.

Feb 2005: Unilever announces a slump in annual profits and its biggest ever leadership shake-up. Cescau eliminates the executive committee, the home and personal care (HPC) and foods divisions, and 11 business groups. They are replaced by three regional presidents (Europe, Americas, Asia/Africa), two foods and HPC category presidents, a chief financial officer and a chief human resources officer.