Unilever Encounters New Pressure over Margins

With Unilever struggling to pass off the higher costs to consumers, the company has warned of a major hit to profit margins. The company has also ruled out major acquisitions after the criticism it received from investors over its failed pursuit of the consumer health business of GlaxoSmithKline. Transport, energy, labor and raw material costs have gone up and this has resulted in problems for consumer goods companies. Since Unilever relies on food and emerging markets, it has been quite exposed because inflation has been quite high in these sectors. There has been a lag in profitability and sales recently for the maker of Ben and Jerry’s ice cream and Dove soap, as it has lost to rivals like Nestle and Proctor & Gamble. 

Investors have also raised their eyebrows because of the bid it made for the consumer health arm business of GlaxoSmithKline worth $68 billion last month. On Thursday, Unilever said that it had paid heed to those concerns and decided to rule out major deals. However, it still sparked fresh anxiety when it announced that its profitability would see a significant fall this year. Even though the company has predicted a strong increase in sales despite raising prices, it said that its underlying profit margin would fall by 140-240 basis points, after experiencing a fall of 10 basis points back in 2021. 

Graeme Pitkethly, the Finance chief, said that the company had suffered a blow of $2.3 million in the first half of 2022 because of inflation, which was more than 2 billion euros. According to Unilever, it expects its margins to go back on track after 2022, as the bulk would come back in 2023 and remaining in 2024. Market analysts were quite surprised at the scale of the decline that has been forecasted. Morning trading saw Unilever’s shares decline by almost 3%. The company also added that margins had declined because of investments in R&D, advertising and operational capital expenditure. 

Alan Jope, the company’s chief executive said that they had engaged with their shareholders extensively in recent weeks and had gotten a strong message that they need to measure their portfolio’s evolution. The Sunsilk shampoo to Hellmann’s mayonnaise firm said that it had ruled out making any major deals and in the next two years, it would buy back shares of about 3 billion euros. Analysts said that these buyback measures showed that the company was committed to their shareholder returns, but the investment opportunities are fewer for the business itself.

They said that there was already high pressure on the chief executive and the board. Not long after Unilever had backed down from GSK, it was reported that Trian Partners of activist investor Nelson Peltz had actually built a stake in the company. Unilever had made an announcement of a business revamp in late January that involved 1,500 job cuts and increased focus on five product areas. Jope added that the company was resolved in moving its portfolio towards the well-being, health and beauty product categories.