Unilever, Kellogg and Hershey kicked off results season for the world’s major food manufacturers last week.
2011 was a tough year for suppliers, battling both a spike in commodity costs as well as the demands of retail customers that were faced with consumers watching every penny and cent they spent. In some markets, notably the UK and Germany, food sales volumes fell as households grappled with higher food and energy prices. “We used to think growth was the norm,” Joanne Denney-Finch, chief executive of UK grocery analysts IGD, remarked at an industry conference last autumn. “But since the credit crunch, sales volume for our sector is down by 2%. People are calling this the Great Correction and no-one knows how long it’ll last.”
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A month in to 2012, uncertainty remains about the prospects for many economies and for consumer confidence in the West. “The outlook for the consumer economy remains gloomy in North America and especially in Europe where growth is low,” Unilever CEO Paul Polman said last week. “We need to become accustomed to that for the years to come.”
Unilever reported its 2011 financial results on Thursday (2 February). Polman described the year as “probably one of the most challenging in my career”. Unilever’s sales and profits increased last year but the consumer goods group had to battle sluggish markets on both sides of the Atlantic and rising raw material prices. The company’s performance was again largely driven by its non-food business and its operations in emerging markets, where it sells more of its home and personal care products than it does food.
Price increases boosted revenue from Unilever’s food operations but the company found underlying growth hard to come by and volumes fell in 2011. The results led to questions about the future of its food business resurfacing. Analysts continue to speculate whether the company, which sold off some food brands last year, will offload more in the year ahead. Unilever’s spreads business could be a candidate for sale, although Polman said the cash from the unit helped finance the group’s expansion elsewhere. Some analysts argue Unilever could instead look to sell its condiments brands.
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Kellogg is one major food manufacturer going through a period of change. In November, the cereal maker warned its underlying profits in 2011 would fall by 2-4%; last week, it filed a drop of 2.9%. The company is restructuring its supply chain and the costs weighed on earnings over the year as a whole, although they jumped in the last three months of 2011.
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By GlobalDataHowever, 2011 and 2012, Kellogg president and CEO John Bryant said last week, would be “transition years” for the business, given the supply chain revamp and the “incremental support” the company plans to give to its brands this year.
Bryant admitted Kellogg expects the cereal category, one of the most competitive across a number of markets to be “more challenging” this year. Kellogg has NPD lined up in the US and Europe but the company remains cautious about its prospects, particularly on this side of the Atlantic. Profits from Kellogg’s European business fell last year and could do so again in 2012, Bryant admitted. “Europe is our most difficult region as a company,” he said.
And Kellogg’s gross margins, which fell in 2011 as it revamped its supply chain, could drop again in 2012 amid further investments in that programme and another year of pressure on costs. “We anticipate around 7% cost of goods inflation, most of which will be driven by commodity and packaging inflation,” Kellogg CFO Ron Dissinger said.
After a year in which commodity costs spiked, many in the industry are expecting prices to ease this year. However, raw material costs will continue to be a concern. Hershey expects its underlying margins to rise this year and last week said 2012 sales and profit growth would be above its long-term targets. Nevertheless, Hershey CFO Bert Alfonso said the company expects its input costs to rise again this year. While cocoa and sugar prices have eased, peanut and dairy prices remain “quite elevated”, he said.
And pressure from retailers to price keenly is likely to remain high. Consumer confidence remains low and competition among grocers is set to remain intense, not least because some of the world’s largest retailers – Carrefour, Tesco and Metro Group – will be likely to revitalise their businesses after a challenging year.
This week, US bakery group Flowers Foods, snack maker Synder’s-Lance and food and beverage giant PepsiCo will be next to report their annual results and provide their outlook on the year ahead.
PepsiCo, in particular, will be under the microscope after recent investor concern that the company’s moves into healthier categories has distracted it from its core snacks and beverage businesses. There has also been speculation about the future of chairman and CEO Indra Nooyi. Will she and PepsiCo look to placate critical investors and analysts?
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