Inflation Brews More Problems for Unilever

Written by: Susannah Streeter | Hargreaves Lansdown

The promise of share buy backs and a softly-softly approach to acquisitions won’t give Alan Jope much of a break from the mounting criticism over the way the business has been run. Inflation is flashing as a big warning light in these results and the worst may be yet to come. Despite the fastest underlying sales growth in nine years, coming in at 4.5%, the fall in the underlying operating margin is already painful. Input costs are rising dramatically and prices are being pushed up as result by 4.9% in the fourth quarter. With belts being tightened as the cost of living squeeze intensifies some customers won’t put up with increased prices indefinitely and may switch to cheaper alternatives. However the strength of brands like Dove and Ben and Jerry’s should provide some resilience.

It’s not going to be easy to wriggle out of the tight spot the company has found itself in, with input cost inflation set to soar to over €2 billion in the first half. Costs savings due to reorganisation will only offset a fraction of that and marketing and R&D spend, seen as crucial to power significant growth, will be stagnant.

The sell-off of the tea business is still underway to private equity, an indication of the direction to come, with a focus more on personal care and home, and away from the lower growth food division.  But after the bruising criticism received about the failed bid for GSK’s consumer arm Unilever needed to lay out a big bold new strategy to deal with increasingly sluggish margins and investors are likely to feel very short changed. Management want patience to be the game to play here, with an expectation that inflationary pressures will ease in the second half of the year, but investors have already shown they now have a short fuse, and any deterioration in performance is likely to add to clamour for a change at the top.

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