Unilever South Africa (ULSA), a subsidiary of Unilever PLC, has been operating in South Africa for more than 100 years. It ranks among that country’s “Top Forty” companies, and in 2005 it generated about R8.5 billion (US$ 1.35 billion) in sales of branded food, home, and personal care products, while employing more than 4,000 workers and managers.
The central purpose of this report, written by Ethan B. Kapstein, Professor of Sustainable Development at INSEAD, is to assess Unilever’s “economic footprint” in South Africa. It builds on an earlier study jointly undertaken by Unilever Indonesia and Oxfam GB and Novib (Oxfam Netherlands), which focused on Unilever’s role in poverty reduction.
The present report is broader in scope and focuses on Unilever’s impact throughout the South African economy and its specific role as an agent for improving the human and competitive capacity of the country that will enable it to compete more effectively in the global marketplace. In doing so, it responds to concerns sometimes voiced by national governments about the benefits that foreign direct investment brings to their economy.
Methodology
In measuring the economic footprint of an enterprise, its “direct” (or “first-round”), “indirect” (“second-round”) and “induced” (“third-round”) effects must all be taken into account. But how can the “economic footprint” of a single firm be measured?
This report draws mainly upon South Africa’s Input-Output (I-O) tables and Social Accounting Matrices (SAMs) in order to generate macro-data on such economic effects as job creation and labor income.
The report also makes somewhat more implicit use of economic (or social) rate of return (ERR) models, which focus upon the “opportunity cost” of a company’s operations, or the question of what would happen if the company disappeared from the economic scene.
Unilever South Africa’s (ULSA) Direct or “First Round” Economic Impact
(the effects of ULSA’s operations in terms of the number of jobs it creates, its investments in plant and equipment, its turnover, and taxes paid, and its economic effects on its immediate suppliers including retailers)
+
ULSA’s Indirect or “Second Round” Impact
(the effects of ULSA’s expenditures on its suppliers’ suppliers)
+
ULSA’s Induced or “Third Round” Impact
(the effects generated by the consumption decisions of ULSA’s employees, its suppliers’ employees, and its suppliers’ suppliers’ employees)
=
ULSA’s Total Economic Impact on the South African economy
Unilever’s impact on the South African economy
Unilever South Africa’s direct impacts are those felt by its 3,000 suppliers and their 20,000 employees due to the company’s purchases of goods and services from them; its indirect impacts are those felt by its suppliers’ suppliers owing to the orders they receive; and its induced impacts incorporate the overall demand for goods and services made by the employees of ULSA, its suppliers, and its suppliers’ suppliers based on their consumption expenditures out of wages paid.
The analysis shows that, in 2005, ULSA and its employees were directly or indirectly responsible for generating output of more than R32 billion (US$ 5 billion) and, in the process, supporting approximately 100,000 jobs throughout the South African economy.
This means that for every job directly based at ULSA, another 22 workers depended upon the company for some part of their livelihood. In total this represents 0.8% of total South African employment.
The report shows that the majority of these jobs are located in the retail trade sector of the economy, i.e., the network of distributors, wholesalers and retailers that ULSA depends on to get its products to the consumer.
The ongoing modernization of the retail trade sector raises the potential that the number of traditional retail outlets may diminish over time, along with the jobs and incomes they support.
Similarly, many of the jobs that are associated with ULSA are located throughout the company’s supply chain, which suggests that maintaining the competitiveness of South African suppliers is also essential from the perspective of employment and income generation.
ULSA sources from more than 3,000 suppliers and half of its R4.5 billion (US$ 700 million) purchasing expenditure goes to those in South Africa.
ULSA is responsible for a number of other important economic effects as well. The direct, indirect, and induced effects of ULSA operations on government tax revenues, for example, total some R4 billion (US$ 633 million), equivalent to almost 0.9% of all government revenue.
The input-output analysis shows that ULSA’s contribution to value added throughout the economy amounted to R12.5 billion in 2005 (US$ 2 billion), or around 0.9% of the country’s gross domestic product (GDP). The GDP multiplier indicates that for every R100 of ULSA sales revenue, R145 is added to the country’s GDP.
Social and environmental impacts of Unilever South Africa
In addition to the economic analysis, the report provides an overview of some of the broader social and environmental impacts of ULSA, both in its operations and along its value chain.
As an employer, ULSA pays wages and provides comprehensive benefits that include medical care (including for HIV/AIDS) and a private pension scheme.
The company also offers extensive amounts of training for its own workers, and for non-workers including the unemployed, who participate in South Africa’s learnership schemes, which is a key component of the government’s skill-building initiatives. The cost of this training was equal to 2.7% of corporate payroll in 2005. The quality of the training that ULSA provides is demonstrated in part by the fact that its employees are often lured away by its competitors.
While this presents retention challenges for ULSA, it could be viewed as positive for the South African economy as a whole, since local firms -that may not have the capacity to provide extensive training programs- essentially benefit from the investment that ULSA makes in its workers.
As a producer of fast-moving consumer goods, ULSA contributes to consumer welfare through its products and brands. South African consumers have been using products like Sunlight Soap and Rama margarine for more than 100 years.
Today, ULSA’s market share of most of its products indicates that it is continuing to meet consumer needs in a rapidly changing marketplace. With growing affluence among the emerging black middle class, however, ULSA faces increasing competitive pressure as new entrants appear on the scene. This pressure will require ULSA to continue building trust in the quality of its brands with a new generation of consumers.
ULSA further influences South Africa’s economy and its social well-being through its broad range of Corporate Social Investments and its efforts to promote Black Economic Empowerment. ULSA’s social investment programs have had a particular emphasis on healthcare, and specifically meeting the challenges of HIV/AIDS; the improvement of education and of educational opportunities for the least advantaged citizens; and capacity building both within and outside government.
Many of these activities have been carried out in close cooperation with the government of South Africa, including the “Brand South Africa” initiative, in which ULSA used its marketing expertise to help the country position itself in global markets.
With respect to Black Economic Empowerment, ULSA has been seeking to achieve best practice. It is now recruiting heavily among under-represented groups for its next generation of management executives; it is sourcing its inputs increasingly from black-owned firms; and its high levels of social investment spending should enable it to score maximum recognition for this element of the economic empowerment “scorecard”.
Another area in which ULSA contributes to South Africa is through its environmental policies and programs. The report shows that the company adopts global environmental standards that meet and often exceed those found domestically. Additionally, various ULSA factories in South Africa have pursued community-specific environmental programs that meet local needs.
The road ahead
The report also suggests a number of ways in which ULSA and its parent company, Unilever, could be even more supportive of the South African economy.
First, ULSA should seek to ensure that its local suppliers, who are under increasing competitive pressure from the global economy, receive the ongoing support needed to maintain and improve their productivity levels so they remain competitive.
Second, it should continue to provide the top-notch training that workers (and “learners”) require to improve their skills.
Third, it might wish to consider a more targeted social investment program that focuses on those areas in which the firm possesses a sustainable competitive advantage.
Fourth, it should continue to reduce its environmental footprint, particularly with respect to packaging.
Fifth, Unilever and ULSA should continue to promote research and development in South Africa.
Finally, ULSA should maintain an ongoing dialogue with the South African government to ensure a policy environment that promotes private sector investment, without which the country will not be able to generate economic growth and reduce poverty, inequality and unemployment.