Price rises and spending cuts help Unilever deliver on margins

Analysts voiced concern after the conglomerate said it reduced its marketing spend

Unilever is sharpening its focus on profitability by lifting prices and cutting spending on everything from employee flights to product ingredients as activist investors take aim at consumer-goods giants wrestling with slow growth.

The maker of Hellmann's mayonnaise and Dove soap said Thursday it is stepping up an efficiency drive as it responds to a failed takeover bid from Kraft Heinz and rivals Nestlé and Procter & Gamble come under pressure from activists Dan Loeb and Nelson Peltz.

“If it really benefits the long-term shareholders and there is constructive change to the benefit of the company, then at times it might be good to have actively involved investors,” chief executive Paul Polman said in an interview with Bloomberg TV, after the company reported first-half earnings that exceeded estimates.

The Anglo-Dutch company increased prices by 3 per cent in the second quarter, offsetting stagnant volumes, it said in a statement Thursday. That helped underlying sales rise by the same percentage.

Unilever said it achieved savings of more than €1 billion in the first half, putting it on track for a target of €6 billion and a 20 per cent underlying operating margin by 2020. It cut €500 million through supply-chain initiatives, including reducing the cost of ingredients in laundry brands. Spending on advertising agencies was down 17 per cent.

“The good people of Unilever took 30 per cent less flights in the first six months of the year,” chief financial officer Graeme Pitkethly said in an interview. The cost per seat of every flight taken was down about 24 per cent, he said.

As the company steps up efficiencies in the second half, profit margins could rise by more than 1 percentage point for the full year, Mrt Polman said on a call with analysts.

Analysts welcomed the margin improvement, but voiced concern that it was largely driven by reduced marketing spending, which can hit sales.

“Quantity good ... quality less so,” RBC Capital Markets analysts wrote. – Bloomberg / Reuters