Unilever is adding a new ingredient to its ice cream (and other products, too): inflation
Inflation has come for Unilever—and it will now be coming for you.
In the face of rising input costs, the Anglo-Dutch consumer goods giant—the makers of Ben & Jerry’s ice cream, Hellman’s mayonnaise, Dove shampoo and Sunlight detergent—has slashed its forecasted profits for the rest of the year, sending shares plummeting around 5.6% by midday in Europe on Thursday.
In Unilever’s half year results, released this morning, the company noted the prices of raw materials such as palm oil, packaging, freight and global distribution costs were rising at the fastest pace seen since 2008, and that the company was decreasing its operating margin expectations, a much-watched metric, from 19.8% to 18.8%. The new forecasted operating margins are near last year’s pandemic levels as the company goes another year without reaching its 20% target.
Inflation is rising due to a combination of pent-up demand, global supply chain shortages and soaring commodities prices forcing companies to make a tough decision: either pass on the costs to consumers or absorb them, and watch profits erode. Unilever boasts 2.5 billion people across 190 countries use its brands every day.
Going forward, Unilever will be raising prices on their goods more quickly in markets such as Brazil and South Asia, while remaining more cautious in Europe not to slow consumption.
Unilever CEO Alan Jope noted that the cost volatility and timing of the price increases made it more difficult to predict what the company’s operating profit would be, but reassured investors noting, “we are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat.”
Still, the move caught markets observers off guard. In Bank of America Securities investor note on Thursday, analysts expressed surprised by the cut guidance for operating margins, noting “management had come across as very confident on managing input cost pressures at the 1Q21 stage and even in mid-June.”
They still hold a “buy” rating on the stock, and added that Unilever’s share price drop—which is trading at a 20% discount to its peers—was not justified.
Grocery prices going up
Unilever isn’t the only one bumping up prices. Rival Proctor & Gamble are pushing up prices on diapers and feminine-care products by percentages in the mid-to-high single digits. David Taylor, chief executive of Procter & Gamble, said at the Fortune Global Forum last month, inflation was “very real.”
“It’s pulp, it’s paper, it’s anything involving oil. Plastic packaging is going up. Trucking costs have gone up significantly. Ocean freight has gone up significantly. You are seeing it in a wide range of cost areas…It’s inevitable we will see an increase in inflation. How much? I don’t know.”
And according to research by S&P Global, this phenomenon is likely to stick around. The market research firm notes that while some big pressure points will ease, inflation will not drop back toward the Fed’s target level any time soon. The central bank’s current target stands at 2%, well below the core personal consumer expenditure metric which was recorded at 3.4% in May. According to the report, the retail and manufacturing sectors are leading the way with price rises.
And let’s not forget, “inflation remains politically polarizing in the U.S.,” notes Paul Donovan, UBS chief economist. Donovan fact-checked recent statements by President Biden—that car prices would return to pre-pandemic levels soon—and Republican Senate Minority Leader McConnell—that inflation was driving “the cost of everything through the roof.”
They’re both wrong, Donovan said.
But McConnell’s probably right when it comes to ice cream.
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