Unilever alludes to shrinkflation among cost-management tools in play
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Unilever alludes to shrinkflation among cost-management tools in play

By Simon Harvey 21 Oct 2021 (Last Updated November 24th, 2021 15:57)

The company more than doubled average list prices for the group to 4.1% in the third quarter.

Consumer-goods giant Unilever has alluded to shrinkflation as one of the tools in play to counter the effects of industry-wide increases in input costs, although CEO Alan Jope says list price was the first point of call.

The Hellmann’s mayonnaise owner reported year-to-date results this morning (21 October), revealing it more than doubled average prices to 4.1% for the group in the third quarter from 1.6% in the previous three months. The inflation theme is expected to continue into 2022 with an anticipated peak in the second half of the year, accompanied by further list price increases.

Pressure from input costs was seen in many commodities, with prices “up sharply versus a year ago”, along with petrochemical-derived materials, paper and boards, transport and logistics, and energy, and was “even showing up in labour rates”, Jope informed analysts on a follow-up call.

Jope said Unilever employs five revenue-management tools to “land price”.

“The first is list price increase. The second is pack-price architecture. So the classic example of this is a smaller fill for the same price or a much bigger pack but at a higher price. The third is managing promo levels. The fourth is trade spend, and the fifth is mix, and we’re pulling all those levers,” Jope explained.

“But obviously to go from unchanged to 4.1% we’ve had to rely more on list-price increases than we would in a normal period.”

Jope added: “We really need to use a scalpel rather than a knife on pricing. We use all five levers of net revenue management. It is largely executed locally, and the picture is quite different in different parts of the world.”

Volumes fell 1.5% in the third quarter but the decline was more a consequence of “difficult trading and market conditions in south-east Asia” due to the resurgence of Covid-19 and pandemic-related restrictions. The region contributed almost 1% to the drop in volumes.

Year-to-date volumes were up 2.1%.

“We expect a net benefit to top-line from the pricing actions that we’re taking,” Jope said. “I’m pleased that on a moving annual total basis our key competitiveness measure of business winning share remains at a healthy 54%. We aim to keep this metric consistently above 50% on a 12-month moving annual total basis.”

Unilever maintained its full-year outlook for underlying sales growth (USG) “to be well within our 3-5% multi-year framework, and our full-year operating margin to be around flat”.

USG was 2.5% in the third quarter to deliver a turnover of EUR13.5bn (US$15.7bn), which was up 4%. Over the nine months, USG was 4.4%, with a 1.7% increase in turnover to EUR39.3bn.

For the food and refreshments division, USG was 3% in the quarter with a turnover of EUR5.1bn. Volumes fell 0.8% with underlying price growth (UPG) of 3.8%.

Year-to-date, the segment saw USG of 6.3% and a turnover of EUR15.3bn. Volumes were up 3.5% and pricing 2.7%.

Martin Deboo, an analyst at US-based investment bank Jefferies, wrote in a research note: “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 from its current c.2% level.”