Unilever Trails Peers with Thinning Margins Amid Rising Commodity Costs

Unilever’s mid-year results should provide a sign of how the FMCG giant is managing the increasing commodity and transportation costs. Moreover, it will show if they have managed to navigate a price hike without compromising sales volume.

Even though Unilever, in its earlier prediction, did not foresee any significant changes to its underlying profits, analysts expect the consumer goods giant to report a 1.2% drop in its margins from a year ago.

What’s the Reason for These Slimming Profit Margins?

Stocking of pantry items and an increase in at-home dining due to the Covid-19 pandemic allowed the company to cut down on its in-store promotions and certain marketing costs. This left a positive impact on its operating margins.

However, the scenario changed in 2021.

A hike in the prices of raw materials such as tea, nuts, plastics, and many others puts a question mark on Unilever’s goal to slightly lift its margins. Adding more to its current woes, the increasing transportation costs and Covid-19 lockdown in different countries also made it difficult to move goods. Consequently, a significant rise in its logistical cost cap was noted.

Unilever’s operating margin for 2021’s first half was 18.8%, down by 1% from 2020.

Martin Deboo, an analyst at Jeffries, has reflected on how the commodity cost of Unilever has increased. In the first half, it is at 9.8% from the initial forecast of 7.4%. Citing the reasons for this surge, he mentioned a global price hike for palm oil, ethylene oxide, and plastics – materials crucial for Unilever’s beauty products vertical.

Since the acquisition of raw materials and packaging costs account for about 40% of Unilever’s total sales, this increase has left a much bigger dent in its underlying profit margin.

Know the Counter-Strategy Employed by Unilever

These price hikes have been hard for the company to endure. Thus, to counter this, Unilever walked on the path of increasing its prices by 1% in various regions. This may have brought a momentary relief, but experts predict the impact will be visible later this year.

On the contrary –

According to the reports published by Morgan Stanley earlier this month, Unilever has plans to implement another price hike. However, its initial hikes have already left an adverse effect on its sales number in India, China and Brazil, countries that make up about 60% of its total sale numbers.

Even though the higher input costs are there for everyone to see, its actual impact on margins is difficult to predict. Hence, it poses an additional risk on the upcoming results, not just for this quarter but for the ones to come as well.

What’s Next for Unilever?

The pressure is mounting in Unilever; there is no doubt about that. However, the management is still confident to deliver on its annual underlying sales growth.

On the other hand, not everyone is this optimistic.

Some analysts are citing out-of-home ice cream sales as a reference point. This particular segment which carried a significant chunk of its sales in Europe, has shirked due to a cold April and wet May in northern Europe.

As investors start to panic about the results of a price hike, Unilever is shifting its attention to profitability rather than top-of-the-line growth.

There is no hiding from the fact that Unilever’s shares are not performing as well as they used to. While the management’s decision to prioritise growth is a welcoming decision, it leaves Unilever in a conundrum when it comes to managing inflation.

Parting Thoughts

The trade-off between price and volume for Unilever is more acute than its rivals. In a scenario like this, the company is treading on thin ice. Therefore, it will be interesting to see how Unilever manages this situation without upsetting its consumers and investors.

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Frequently Asked Questions

1. What is the market capitalisation of Hindustan Unilever?

The market capitalisation of Hindustan Unilever on 22 July 2021 is at Rs. 5.58 lakh crores.

2. What is the PE ratio of Hindustan Unilever Stocks?

As of 22 July 2021, the PE ratio of Hindustan Unilever stocks remains at 68.92%.

3. What is the incorporation date of Unilever in India?

Unilever’s date of incorporation in India was 17 October 1993.