Unilever Stepping Up Pricing To Offset Rising Costs While New Businesses Continue To Fuel Growth

“We are still managing in COVID times,” says CEO Alan Jope during Unilever’s 22 July call to discuss fiscal 2021 first-half results.

Unilever plc is forecasting continued like-for-like sales growth in fiscal 2021 as more markets and channels reopen for business, innovation and pricing lands, and the impacts of acquired brands kick in.

But operational challenges and a great deal of macro uncertainty persist, the firm says.

“We are still managing in COVID times,” CEO Alan Jope noted during Unilever’s 22 July call to discuss fiscal 2021 first-half results.

According to Jope, more than 70% of Unilever’s manufacturing sites are still operating in accordance with highest-level safety protocols, and some portion of its employee base is still sidelined due to COVID concerns, requiring more expensive, temporary labor.

Personal-care categories such as skin, hair and oral care saw upticks in the second quarter as social restrictions lifted and workplaces reopened. But use occasions for such products – which are higher-margin offerings compared with things like hand sanitizers and other hygiene products – still remain below pre-COVID levels, the CEO said.

Meanwhile, commodity prices are climbing fast, with crude oil, soybean oil, and US freight costs up 10%, 20% and 4%, respectively, in the second quarter alone.

Jope also pointed to palm oil, a key ingredient for the company’s skin cleansing products, which is now 70% more expensive versus long-term averages.

Packaging costs are rising as well due to online shopping demand and weather-driven supply shortages, he said.

“We came into the year expecting inflation potentially at levels last seen a decade or so ago in 2011 or, indeed, back in 2008. Now inflation has ended up being even higher than we anticipated.”

In this climate, Unilever expects underlying operating margins to be roughly flat for the year.

“Our best percentage estimate of our input cost inflation for H2 has now increased to the high teens. We have been and will continue to pull all of the levers of pricing and saving,” Jope said.

New Businesses Pace Ahead

Unilever recorded €13.5bn and €25.8bn in turnover for the second quarter and first half, respectively, representing underlying growth of 5% and 5.4%.

Underlying sales in the London-based firm’s Beauty and Personal Care division accelerated in the second quarter, advancing 4.2% to €5.4bn. For the first half, the unit’s sales reached €10.4bn, up 3.3% on the same basis.

Skin care was a big part of the story, with Vaseline and Pond’s both up double digits. Meanwhile, Unilever deodorants have returned to stalwart growth, buoyed by sustainable innovations including Dove refillable options. (Also see "Secret Derma Adds Skin Care To Sweat Protection; Dove Deodorant Adds Refillable As Option" - HBW Insight, 16 Feb, 2021.)

Jope said skin cleansing sales declined in the second quarter. “I think it’s fair to say we’re well past peak sanitizer,” he said. Still, the category continues to outdo pre-pandemic levels. (Also see "Unilever Extends Dove Into OTC Sanitizer Space And Its Hygiene Product Sales Increase 19%" - HBW Insight, 27 Oct, 2020.)

Unilever extended in the second quarter its Dove Care & Protect Antibacterial line, combining germ-killing power with the gentle touch of Dove. Now available in more than 50 countries, “that's a good example of big brand innovation we're rolling out fast and at scale,” Jope said.

The firm’s blossoming Prestige Beauty business rose 27% in the first half, fueled in large part by increased store traffic.

Paula’s Choice is on the way in through an acquisition announced in June, which is expected to close in the coming weeks. Jope called the science-backed brand the perfect addition to the firm’s Prestige Beauty portfolio.

“It’s digitally led. It’s a cruelty-free skin-care brand with a presence in key growth markets like the US and has excellent potential for further international expansion,” he said. (Also see "Unilever To Fuel Skin Care, E-Commerce Engines With Paula’s Choice Acquisition" - HBW Insight, 15 Jun, 2021.)

Functional Nutrition, another priority segment Unilever is rapidly working to build, recorded an 18% increase in sales in the first half, compared with the year-ago period. The business comprises vitamins, minerals, supplements – across brands such as OLLY and Equilibra, and Horlicks and Boost in South Asia – as well as health food drinks.

Jope noted the H1 results do not reflect recent acquisitions including electrolyte drink-mix brand Liquid I.V. and SmartyPants supplements to support the wellbeing of children and adults. (Also see "US Wellness Market Deals: Unilever Tries On SmartyPants, Kind Cooks Up Nature’s Bakery Deal" - HBW Insight, 2 Dec, 2020.)

Were those brands included, Functional Nutrition like-for-like growth would have topped 30% for the 2021 first half, the CEO said. (Also see "Unilever Gets Portfolio In Order While Riding Prestige Beauty, Functional Nutrition Growth" - HBW Insight, 30 Apr, 2021.)

Together, Prestige Beauty and Functional Nutrition contributed 50 basis points to group USG in the first half of the fiscal year.

Unilever is stepping up pricing to offset inflation impacts. The firm booked price growth of 1.6% in the second quarter, compared with 1.3% for the first six months of 2021 overall.

In June, the figure is at 2.2%, according to CFO Graeme Pitkethly.

“We came into the year expecting inflation potentially at levels last seen a decade or so ago in 2011 or, indeed, back in 2008. … Now inflation has ended up being even higher than we anticipated over the course of the last few weeks and months,” he said.

It’s a discussion Unilever expects to be having over the next three to four quarters, Pitkethly said.

Despite overlapping consumers’ flight to e-commerce last year during COVID-19 lockdowns, Unilever’s online sales increased 50% for the first six months of 2021, now accounting for 11% of total net sales, according to Jope.

“We do continue to see strong growth for Unilever ahead of the market, and we don't see this trend reversing as we exit the pandemic,” he said.