Unilever raises prices due to commodity pressure

Posted by Josette Dunn on 4th February 2011

Unilever will increase its prices at a more “rapid rate” in 2011 as it continues to look to offset rising commodity costs, concerns over which hit the company’s share price yesterday (3 February).

Business Growth

The UK group’s stock closed down 1.1% in London this afternoon despite a 26% increase in annual profits and accelerating underlying sales growth in the fourth quarter of 2010.

However, rising commodity costs hit Unilever’s margins in the last three months of the year, which led some analysts to express concern about the company’s ability to protect margins this year.

Investec analyst Martin Deboo said Unilever was “struggling” for margin in what he described as the “foothills” of input cost inflation. “With input cost inflation only just getting into its stride in the fourth quarter, we view this margin result as a troubling portent of what is to come in 2011,” Deboo wrote in a note to clients.

Speaking to just-food, Michael Polk, president of Unilever’s food, home and personal care operations, pointed to the progress the company had made on pricing in the fourth quarter of 2010.

“We had 5% underlying sales growth in the fourth quarter – all of it was volume driven but, in-quarter, we did have positive pricing and that will pick up as more and more price increases are landed in the market place – and they will increase at a rapid rate into 2011,” Polk said. “The fact that we don’t have negative pricing is a step in the right direction.”

Unilever has estimated that its input costs will increase by around 400 basis points in 2011. Polk described the “headwind” as “sizeable” but pointed to 2008, a year when food manufacturers faced the last spike in commodity prices, and said the company’s input costs rose by around 650 basis points.

“While we don’t exactly love the profile of our growth in 2008 – we were able to cover that inflation and not have volumes decline,” Polk said. “We had flat volumes the last time we had to deal with this. Now, a lot has changed since 2008. We’ve added EUR700m (US$954.8m) more to our advertising and promotions budget since 2008. We’ve got a stronger innovation funnel. We’ve also got the experience of having priced up and down effectively,” Polk said. “So we’ve built a real capability in handling commodity volatility and landing pricing.”

The Unilever executive noted that the company would also look to cost savings and the mix of its portfolio to “deal with commodity inflation”.

Unilever, which generates over half its sales from what its characterises as “developing and emerging markets”, is also facing stronger markets in the non-developed world compared to 2008, Polk argued.

“The economic conditions in the developing and emerging markets are actually more robust today than they were in 2008,” Polk said. “The volatility, the uncertainty that happened in concert with that commodity spike was far broader and radical than what we are dealing with at this point. You see robust economies with a capacity probably to land that pricing in a better way than we were able to in 2008. Even in the developed markets, you begin to see economies starting to pick up despite the the challenges of unemployment and the other issues that are out there.”

However, he added: “We are not going to price anything unless we can maintain our principle of building our volume share. The key variable that will influence will be what the competition does. We will not compromise on our core belief that we have to deliver competitive levels of price versus the right reference point for each brand in each market.”

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