The firm’s strategy of raising prices in response to cost of goods increases resulted in lower volumes but sales gains in ice cream for the half ending June 30, results Unilever will attempt to maintain as consumers begin to “show signs of caution.”
“I think we've managed this inflation price/volume competitiveness dynamic reasonably well so far,” CFO Graeme Pitkethly said during the call. “I think that we need to be patient and we need to stay the course and we need to be careful.”
In the US specifically, the potential for a mild recession is on the horizon and consumers are starting to trade down and pull back, with management cautioning that private label growth has increased, especially in ice cream and dressings categories.
Europe also remains challenging, with consumers adjusting shopping habits in the face of high inflation and private label share increasing above pre-pandemic levels, he explained, adding that it’s harder to increase prices in the region to cover cost inflation.
But Unilever does not expect the headwinds to have an adverse effect on the bottom line. The firm projects underlying sales growth ahead of 5% for the year, and anticipates inflation will have a €2 billion total impact in 2023. For the second half, the firm estimates inflation at €0.4 billion.
Overall for Unilever, turnover advanced 2.7% to €30.4 billion during the first half. Underlying sales growth of 9.1% was offset by acquisitions and disposals.
“Strong fundamentals” leading the way
The call was the first for new CEO Hein Schumacher, who took over at Unilever’s helm July 1 and replaced Alan Jope.
“My early immersion in the business has confirmed my belief in Unilever’s strong fundamentals,” he said in a release. “The task ahead is to leverage these core strengths - supported by our simplified operating model - to drive improved performance and competitiveness.”
During the call with analysts, Schumacher suggested that while inflation is moderating, the firm’s fundamentals will help it through potential uncertainties.
“If you think about a drought in Southern Europe, if you think about geopolitical events, for example, pressure on grain and the related volatility that, that might likely bring, there might still be certain pockets and primarily in food, where we would see continued inflation and, hence, a need for us over time to [adjust pricing,]” he said.
Banking on resiliency
Pitkethly suggested that the firm is “getting through the hump of the inflationary dynamics and consumer pressures now,” with consumers focusing on balancing the household budget.
However, Unilever plans to continue investing heavily to remind consumers of its brands.
“All evidence we have shows that as soon as the consumer has a little bit more money to spend, they come back into the branded space,” the CFO explained.
He said the firm has a well-positioned portfolio for a recession, though it must be careful in the ice cream and dressings segments as consumers trade down and shift to private label.
Thanks to price increases, overall ice cream sales rose 5.7% in the first half, making up for a 5.2% drop in volume as consumers purchased less. In-home ice cream sales were hit hard by inflation, but out-of-home ice cream sales were up double digits.
Meanwhile, new Magnum variants Star Chaser and Sun Lover “are helping us premiumize and drive growth,” Pitkethly said.
In the nutrition category, sales were up 10.4% on the strength of dressings, though volumes dipped nearly 2%, attributed to a challenging environment in Europe. Hellman’s propelled sales, and in the US introduced innovations such as spicy mayonnaise.
Market share wins down
Also during the call, Unilever execs noted that the percentage of its businesses winning market share dropped to 41% over the last 12-month period, impacted by a 17% reduction in SKUs, as well as pricing dynamics and consumer shifts in certain markets.
Pitkethly characterized the share dip as “frankly disappointing,” while Schumacher said that he wants to see more Unilever products ahead of competitors and for the firm to have more brands on top.
“Our brands should be winning superiority tests week in, week out. And when they are not, we should be taking decisive action,” the CEO said. “In this industry, the consumer always has the final say, and that means it's paramount to invest behind holistic product quality.”
The SKU adjustment resulted in a 30% cut of Knorr SKUs in the US, with a focus on those products with low growth margins.
Unilever is also working toward reshaping its portfolio through strategic acquisitions, such as its June 14 acquisition of Yasso Holdings Inc., a premium frozen Greek yogurt brand in the US.