Unilever’s profit margins hit by rising costs

Soaring costs for raw materials, packaging and transport have hit profitability at Unilever despite price rises from the consumer goods giant.

The maker of Domestos bleach, Hellmann’s mayonnaise and Magnum and Ben & Jerry’s ice-cream brands said its underlying operating margin in the six months to June dropped 100 basis points from a year earlier to 18.8 per cent after cost inflation sped up in the second quarter.

Graeme Pitkethly, chief financial officer, said: “We came into the year expecting inflation obviously. We thought it was going to be at levels we had last seen in 2011 or even 2018, and we’re really focused on our pricing actions, which we think are landing well. But inflation has been even higher than we anticipated.”

The company, which said investment in its brands had also weighed on margins, is the latest in the sector to report a squeeze from surging transport and commodity prices, which have affected materials from palm oil to plastics.

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The UK mixers maker Fever-Tree said on Tuesday it expected a hit to full-year margins from rising costs.

Jon Moeller, chief financial officer at Procter & Gamble, said last month that higher commodity and freight prices had added $600 million to the company’s costs this year.

With coronavirus also affecting costs, Unilever said it expected its underlying operating margin to be flat across the whole of 2021. Underlying sales growth at the group was 5.4 per cent, slightly ahead of expectations, bringing turnover to €25.8 billion, up slightly from the previous year. Net profits fell to €3.4 billion, from €3.5 billion a year earlier.

Price rises accounted for sales growth of 1.3 per cent, the company said, with the remainder down to higher sales volumes for its products, which range from detergent and hand sanitiser to tea.

Unilever had previously targeted an operating margin of 20 per cent, but Mr Pitkethly said it was no longer aiming for this figure after coming close to it last year, instead simply aiming to increase profits faster than sales.

Unilever’s shares were down 4.3 per cent to £41.18 in early trading on Thursday.

Pushed up prices

Mr Pitkethly said the group had pushed up prices quickly in countries such as Brazil and Argentina, while increases in Europe were being implemented more gradually under its contracts with retailers.

Martin Deboo, analyst at Jefferies, said the margin pressure was “the likely flavour of the season”. However, James Edwardes Jones, analyst at RBC Capital Markets, said the inflation impact was less severe than feared.

“We had been concerned, following Fever-Tree’s warning on Tuesday, that full-year margin expectations would be significantly reduced. That has not happened, with Unilever guiding to ‘around flat’,” he said.

The group had earlier signalled a slight increase in margins for the year but said on Thursday that the outlook was more uncertain than usual because of cost volatility. – Copyright The Financial Times Limited 2021