When Unilever updated the market on its first half performance yesterday, the company beat even top-of-the-range forecasts by reported healthy organic sales growth of 8.8%.
Margin for the first six months of this year – which have been marked by significant input price inflation in commodities like palm oil – dipped, but not as much as many were expecting. The company’s margin fell 180 basis points to 17%, ahead of consensus market forecast of 16.4%.
How has this been achieved? Unilever has led on pricing in many of its geographies and categories.
If we dig down into that organic revenue growth number, pricing contributed 9.8% to the top line – but volumes dipped -1.6%. This is a level that it would seem the market and Unilever management are content with for the time being.
“Elasticities continue to surprise on the upside,” Jeffries analyst Martin Deboo wrote in a note to investors. “As important as the price-led beat was that volume elasticities remained low and in line with our modelling expectations.”
Higher prices support brand investment
Commenting on the trade-off between pricing and volumes, Unilever CEO Alan Jope elaborated: “We have a playbook, which has been fine-tuned in high-inflation markets over the years. It starts with precision pricing taken quickly and single-mindedly to protect the shape of the P&L and retain our ability to invest behind our brands. This is the correct strategy even if it results in low single-digit volume declines in the short term.”
Discussing pricing dynamics on a conference call, Jope revealed Unilever has maintained the ‘pricing momentum’ established in the second half of 2021. “We've landed increases across all geographies and divisions.”
Unilever is willing to sacrifice some volume in favour of pricing in order to protect its margin and support brand investment, the chief executive explained.
“Our growth is being underpinned by bigger, better innovation and our relentless focus on functional product superiority. And our brand investment was up in absolute euro [terms] in the first half, as planned.”
Unilever brands ‘winning’ market share in retreat
However, higher pricing does come at a cost for the consumer goods giant.
As recent Vypr research demonstrates, the brand loyalty of consumers facing the cost of living squeeze is being tested.
Rising prices have prompted shoppers to reassess their food and beverage purchases, with a renewed focus on pricing and value coming to the fore. Vypr consumer research shows 50% of us are already now spending less. This number increases to 60% when adjusted for low income households with earnings of up to £25,000 p/a. Looking specifically at food and drink, 30% of people reported spending less on groceries. And when people look to reign in their supermarket bill, they will often trade down from brands to private label or value propositions.
This pressure could go some way to explaining why fewer of Unilever’s brands are ‘winning share’. In the first quarter of this year 25% of Unilever businesses were expanding share. For the first half, this number fell to 52%, signalling a steeper Q2 slowdown. Share trends were also patchy. Latin America was up 67%, while food brands in Europe were identified as a weakness.
“Business winning for us is a very harsh and strict measure, which is we only count when we are gaining market share. Flat shares for us does not count as winning,” Jope emphasised.
“There are a number of cells across Europe where we've moved ahead on price and are watching carefully to make sure that we don't have sustained losses of shares. A lot in foods actually, Foods Europe. We've had a few cells where we've gone from winning to losing share.”
Alarm bells aren’t ringing at Unilever HQ just yet, however. The company aims to keep the proportion of brains gaining share above 50%, Jope said, but the ‘priority’ is ‘the ability to continue to invest in our brands’.
“We are careful not to push pricing levels to a point where we compromise the long-term health of the business. But as we said before, we are prepared to accept a short-term hit to competitiveness in some places as we lead on pricing.”