By Saabira Chaudhuri
LONDON-- Unilever PLC on Thursday defended its stance in a
pricing dispute with Tesco PLC as it reported a slowdown in
third-quarter revenue growth amid fierce competition and currency
devaluation.
The consumer goods giant said it had to raise prices in the U.K.
following a slump in the pound after the vote to leave the European
Union.
"The price increases have landed with most of our customers,"
Chief Financial Officer Graeme Pitkethly said on a call with
analysts.
The maker of Ben & Jerry's ice cream and Dove shampoo halted
supplies to Tesco, leaving Britain's largest grocer without many of
Unilever's flagship products available online on Wednesday.
Unilever demanded Tesco raise prices by an average of 10% but the
grocer refused, leading to the halt, according to a person familiar
with the standoff.
Unilever's shares were down 2.5% in recent trading in London
while Tesco's shares dropped 1.9%.
Mr. Pitkethly said he is "confident" the standoff with Tesco
"will be resolved very quickly."
His comments come as the Anglo-Dutch consumer goods giant posted
third-quarter sales growth on an underlying basis--which strips out
the impact of acquisitions, disposals and exchange-rate changes--of
3.2%, down from 5.7% growth in the same period a year earlier.
Mr. Pitkethly in a Thursday interview with the Journal said
pricing decisions are delegated to local markets, and that the U.K.
makes up about 5% of Unilever sales.
Unilever's approach to price rises considers the affordability
for customers and the likelihood that they will down trade to
cheaper products, said Mr. Pitkethly. The price rises the company
has pushed through so far "are substantially less than we would
need to cover the impact on our own profitability," he added.
Unilever has seen a EUR600 million ($662 million) rise so far
this year in costs tied to currency devaluation, according to Mr.
Pitkethly. He said many of Unilever's products contain ingredients
that are internationally traded, such as plastics, flavors,
fragrances and tea.
Bernstein analyst Bruno Monteyne said the dispute between Tesco
and Unilever is "inevitable Brexit-induced price inflation," since
"a shampoo produced on the continent is now 17% more
expensive."
Unilever's negotiations with Tesco--Britain's largest
retailer--will no doubt set the tone for how prices rises are
passed along across the rest of the industry. Retailers are
unlikely to absorb the price increases, according to Mr. Monteyne,
meaning any cost increases passed along by Unilever will hit
consumers' pockets.
The world's second-largest consumer goods company after Procter
& Gamble has also approached J Sainsbury PLC--Britain's
second-largest supermarket chain--about raising prices by around
10% on average, according to a person familiar with those
conversations. Sainsbury is still in talks with Unilever.
Unilever's hedging arrangements typically protect the company
between four and six months ahead, meaning the company should start
to see the impact of cost increases later this month.
Unilever regularly both raises and cuts prices around the world,
according to Mr. Pitkethly.
"It's always a combination of underlying commodity movements and
currency impacts," he said.
For the third quarter, Unilever reported revenue climbed 3.4% at
constant currency as the company offset volume declines with higher
prices. But including a negative currency impact of 3.4%, revenue
was flat at EUR13.4 billion. Profit figures weren't disclosed.
On an underlying basis, third-quarter sales growth in emerging
markets weakened to 5.6% from 8.4% a year earlier. Consumer demand
in India was dampened by price increases on skin cleaners while in
China sales were down due to price competition in laundry,
according to the company.
Chief Executive Paul Polman described global markets as "soft
and volatile," in particular calling out currency devaluation in
Latin America as having squeezed disposable income.
Unilever has adopted so-called zero-base budgeting or justifying
each year's expenses from scratch to rein in costs as it works to
mitigate the impact of the turbulent macroeconomic environment.
Mr. Pitkethly said the company has identified opportunities to
slash costs in areas such as consultancy and the cost of
repackaging products for promotions, putting in on track to save
EUR1 billion a year in overheads and marketing by 2018.
In developed markets, underlying sales growth was flat compared
with 2.1% rise a year earlier.
Unilever has also been pushing deeper into personal-care
products such as shampoos and deodorants that appeal globally, and
away from slower-growing food brands.
But on Thursday the company said "intense competition" in many
of its markets had squeezed growth in its personal care arm.
Revenue climbed 3.1% on an underlying basis, which is half the
growth level in reported a year earlier.
The home-care and refreshments divisions performed better,
logging underlying sales growth of 3.9% and 4.5% respectively.
The food arm reported 1.7% growth, helped by cooking products in
emerging markets and organic dressings. But Unilever's spreads
business--which mainly consists of margarine--continued to decline
in both North America and Europe. The company has faced pressure
from analysts and investors to sell the declining business but has
so far refused, saying it hasn't received an acceptable offer.
"There's many options for the future of the business and we
won't speculate on that," said Mr. Pitkethly.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
October 13, 2016 05:00 ET (09:00 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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