Unilever’s volumes fall as prices soar

Incoming Unilever (ULVR) chief executive Hein Schumacher, who will take the reins in July, has a lot on his plate. The consumer staples giant’s growth and margins have been underwhelming for some time. Demand for its products – from Marmite to Dove – is struggling with inflation. Add to this the strategic mess that was the failed £50bn approach for GSK’s (GSK) consumer arm and pressure from activist hedge fund Trian Fund Management (its head Nelson Peltz is on the Unilever board), and there are some big issues to get to grips with. 

Wealth Club head of equities Charlie Huggins said that “the situation facing Schumacher is a bit like an experienced manager who takes over an underperforming football team flirting with the relegation zone, when it should be contending for European places”. 

These full-year results suggest that Unilever may soon be making progress up the table, if not to the Champions League spots. Underlying sales growth of 9 per cent in the fourth quarter was better than expected, and management has guided for 2023 growth in the “upper half” of a 3-5 per cent range. According to RBC Capital Markets analysts, this “bodes well” against consensus forecasts.  

Higher prices drove the revenue uplift in the year, and Unilever’s pricing power was apparent in the chunky increases it put through. Price growth hit 13.3 per cent in the fourth quarter, and 11.3 per cent for the full year. But not every customer accepted these increases – volumes contracted by over 2 per cent on an annual basis.

Management thinks volumes will fall again in the first half of 2023 and said “it is too early to say” if they will rise in the second half. The risk here is that prices may be reaching an unaffordable point. Consumers could increasingly trade down to cheaper alternatives such as supermarket own-brand ranges.

While underlying operating profits rose (just), challenging input cost inflation led the margin downwards by 230 basis points to 16.1 per cent and the profitability outlook remains volatile. While Unilever expects cost pressures to ease as this year progresses, it projects that net material inflation will come in at around €1.5bn (£1.2bn) in the first half. 

City analysts value the shares at 17 times forward earnings, according to FactSet, below the five-year average of 19 times. While there are no obvious catalysts to hit buy on the back of these results, the company still looks fairly resilient. Schumacher has a full in-tray, but there is life in Unilever yet. Hold.

Last IC view: Hold, 4,013p, 26 Jul 2022