Unilever warns of more price hikes as inflation worsens

Keeps full-year operating margin guidance of about flat

  
The logo of the Unilever group is seen at the Miko factory in Saint-Dizier, France, May 4, 2016.

The logo of the Unilever group is seen at the Miko factory in Saint-Dizier, France, May 4, 2016.

REUTERS/Philippe Wojazer/File Photo

Oct 21 (Reuters) - Unilever warned inflation was likely to accelerate next year and its prices would have to rise further as consumer goods companies battle to offset surging energy and other costs.

The maker of Dove soap and Knorr soup beat third-quarter sales growth forecasts on Thursday and kept its full-year profit margin guidance, defying some analysts' fears of a cut.

However, finance chief Graeme Pitkethly saw little let up in inflationary pressures, in a potential blow to central bankers who are hoping the current spike in prices will be transitory.

"We expect inflation could be higher next year than this year," he said on a media call, adding it was likely to peak in the first half of 2022 and moderate thereafter.

The maker of Ben & Jerry's ice cream said underlying sales rose 2.5% in the three months ended Sept. 30, above the 2.2% forecast by analysts in a company supplied consensus.

Growth was helped by demand in the United States, India, China and Turkey, while a 4.1% increase in prices more than offset a 1.5% decline in volumes.

The price hike was up sharply from the 1.6% increase in the second quarter and Pitkethly warned there would be another step up in the fourth quarter that would continue into the first half of next year.

Rivals Procter & Gamble and Nestle said this week they too would raise prices further. 

But analysts say Unilever faces a particularly tough task due to its greater exposure to emerging markets, where inflation is the fiercest and there are signs of consumers shifting towards cheaper local brands.

In the three months to Sept. 30, Unilever said sales of deodorants, skin care products and take-away ice-creams increased as improved vaccination rates in developed markets encouraged more people to venture out.

More than two-thirds of the overall volume declines came from South East Asia, where a rise in cases of the Delta variant of the coronavirus forced governments to implement stringent lockdowns that curbed consumption.

At 1203 GMT, Unilever shares were up 1.5% in a FTSE 100 index down 0.5%. 

"Relative to low expectations this feels like a 'good enough' quarter to us, with decisive progress on pricing a positive for us in the current climate. But the underlying challenge remains the one of accelerating volume growth," said Jefferies analyst Martin Deboo.

PRICE RISES

Consumer goods companies face soaring prices of raw materials such as energy, edible oils and packaging, as well as higher transport costs as economies recover from the pandemic.

Inflation in the consumer goods industry has been running in the high-teens, though Unilever said it was seeing a lower impact because of its negotiating power and hedging.

Markets including Mexico, the Middle East and Russia faced some of the highest prices hikes in the quarter, but volumes were barely impacted there, CEO Alan Jope said on an investor call.

Helped by the price rises, Unilever said it was sticking with its latest full-year operating margin forecast. In July, it had cut the forecast to "about flat" from "slightly up."

Palm and soybean oil and crude oil derivatives such as resin were some of key areas of cost pressures, while ocean freight costs were 10-15 times higher than late 2019, it added.

Amid logistics challenges such as port logjams, Unilever is keeping buffer stocks in some categories to maintain on-shelf availability at retailers which has been over 96% for core brands in its top 10 markets, up 70 basis points from last year and "above average" compared to its peers, the group said.

Volumes fell by a high single-digit percentage in South East Asia, despite "negligible" price rises in the region, which contributes to about 14% of Unilever's turnover.

The company also saw consumers there shift towards cheaper brands, which has stepped up competition in markets such as Indonesia.

($1 = 0.8590 euros)

(Reporting by Siddharth Cavale in Bengaluru Editing by Mark Potter) ((siddharth.cavale@thomsonreuters.com; Cell: +91 74064 47228; Reuters Messaging: siddharth.cavale.thomsonreuters.com@reuters.net))


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