Inflation is becoming as much a headache for CEOs of household-staples companies like
as for shoppers. Their ability to pass on price increases hinges on where and what they sell.
The U.K.-based maker of Hellman’s mayonnaise and Ben & Jerry’s ice-cream said Thursday that sales increased at a healthy 5% clip in the three months through June, compared with the same period of 2020. Some products that saw demand slump during lockdowns, such as deodorant, have returned to growth now that social restrictions are being lifted in certain countries.
However, Unilever’s shares fell 5% in early London trading because of new profit guidance. Operating margins are expected to be flat in 2021, down from the slight increase that Chief Executive Officer
was targeting just three months ago.
Inflation is the clear culprit. For Unilever and its main European peer Nestlé, costs of goods sold amount to around half of revenue. Bernstein recently estimated that over the next 12 months these two companies face roughly 14% increases in bills for everything from plastic packaging to food commodities. On a call with analysts, Unilever’s finance director said that costs spiked again in the latest quarter. Soybean oil prices, an important ingredient for the company’s salad dressing, jumped 20% compared with the first quarter.
Predicting who has the best ability to pass on these higher prices to consumers isn’t easy, but investors can look for clues in market-share data, as well as companies’ mix of products and countries.
Even though consumers have less disposable income on average, it is easier to increase prices in emerging markets than in mature economies. This is because supermarkets in developing countries often have less bargaining power than in Europe and the U.S., where grocers are more consolidated. Unilever’s high exposure to emerging markets, which contribute roughly 60% of group sales, is positive. However, it can only push so far before pinched shoppers trade down to cheaper brands. This is already happening in Indonesia.
The company and its main rivals will have to fight harder in Europe, where price negotiations between consumer-staples companies and supermarkets are notoriously fraught. In certain markets like France, the prices of some goods are in deflation.
This week’s controversy over Ben & Jerry’s decision to stop selling ice cream in Israeli settlements may not help the task. The move taken by the brand’s independent board could cause problems for Unilever in the U.S., where it has spent years trying to improve its competitive position. Any slip in consumer demand will make it harder to increase prices.
Lastly, the split of luxury and mass-market brands in consumer companies’ portfolios will determine how much they can shield margins. It is easier to raise prices for premium products, such as Unilever’s posh cleaning brand The Laundress, than for mundane brands where shopper loyalty is weaker.
Consumer bosses face a delicate balancing act to get through this year with both their margins and market share still intact.
Write to Carol Ryan at firstname.lastname@example.org
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