Is Inflation Eating away Unilever’s Progress?

Unilever is a multinational consumer goods corporation headquartered in the UK. Through its subsidiaries, the company has made a name for itself by manufacturing and selling beauty products, foods, refreshments, and a range of home care products. The multinational company has grown because it acquired well-known brands such as Ben & Jerry’s, Dove, Vaseline and Lipton. On the 10th of February 2022, Unilever announced full-year financial results for 2021. The company saw underlying sales grow by 4.5% which was their fastest underlying sales growth in nine years. Moreover, turnover increased by 3.4% and underlying operating profit increased by 2.9% while underlying operating margin costs decreased by 10 basis points (bps). The company also experienced an increase in underlying earnings per share by 5.5% and diluted earnings per share by 9.2%. All this prompted the dividend per share to grow by 3% in 2021, such that many investors kept their shares in the company.

Despite this, following its failure to acquire GlaxoSmithKline’s consumer health unit in a 50-billion GBP bid that sparked a backlash from its shareholders, the company is said to expect its strongest cost inflation to hit profitability for two years. In its annual performance report released on Thursday 17th February, the company announced that it expects inflation to slash its underlying operating margin by 140 to 240 bps in 2022. This is all due to rising input costs that cannot be hedged. According to the Financial Times, key ingredients like soybean and palm oil, together with rising shipping costs, will add 3.6 billion EUR to the 23 billion existing costs. This is assuming that no increases in prices will occur. Moreover, this expected hit comes despite price rises that accounted for sales growth of 2.9% in 2021. According to Bruno Monteyne, an analyst at Alliance Bernstein, an investment bank, the margin drop represented a total change of direction following the company’s cut in advertisement and promotions funding to help deal with the results of inflation in 2021. Additionally, an article by the Financial Times pointed out that Unilever’s spending on research and development had flatlined at 1.8% of sales below that of its US rival Proctor & Gamble’s 2.4% in 2021. This figure was caused by the firm outsourcing its manufacturing to third parties which account for a fifth of their supply. 

The result of its forecasted figures caused the consumer goods company’s shares to fall by 2.23% to 37.84 GBP in the morning trading Thursday 10th of February 2022. Despite the pressure from inflation, the company director added that they were not going to dial back any investment to boost margins. However, the company will stay away from the pursuit of large-scale acquisitions in the foreseeable future. Instead, the firm is said to buy back 3 billion EUR worth of shares over the next two years according to an article by the Financial Times. 

The company also announced a reorganisation plan in January that will entail 1,500 management job cuts and result in a 600 million EUR of cost-saving over two years. In the new organisational plan, about 15% of senior jobs and 5% of junior management roles will be cut. In the broader plan, the company will be divided into five business groups including beauty and well-being, personal care, home care, nutrition, and ice cream. This split is seen by some analysts as an attempt for the company to boost growth. 

According to James Edwards Jones, an analyst at RBC Capital, the new business model will make divestments easier. He further inferred that “The fact ‘nutrition’ includes fast-growing food segments such as plant-based and healthy snacks perhaps move the divestment focus on to the slower-moving ice cream category.” According to the company’s chief executive, this new structure will enable the company to be more responsive to consumer and channel trends. 

Despite all these initiatives to cut costs and the effects of inflation on the company and its customers, leading UK fund manager, the founder of Fundsmith Equity Fund and also a Unilever shareholder, Terry Smith has been critical of the company’s fixation on sustainability rather than improving its fundamentals. However, one could argue that by focusing on sustainability in this period where ESG investing is on the rise, the company can attract new and different types of customers and investors. 

In summary, Unilever’s restructuring and cost-saving plans make the company’s prospects good for investors. Despite supply chain shortages and inflation effects on key ingredients and transpiration costs, the company has proven that its focus is on creating value for its shareholders by producing profitable solutions to the problems of the people and planet through sustainability. They also aim to create a simple and more category-focused organisation designed to improve future performance. All of this demonstrates that the company is willing to engage with its shareholders.

By Jenny Enow-Akpa

Sector Head: Robert Armstrong-Jones

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