Unilever’s slowing sales growth isn’t just down to faltering world economies. The company says price cutting by competitors is also to blame in the U.S.
Unilever, the British-Dutch maker of Dove soap and Knorr soup, came under “enormous competitive attacks” in categories like shampoos, Chief Executive Officer Paul Polman said today after reporting the weakest quarterly revenue increase in four years.
Polman said the company “did not fully respond” to the competitive onslaught, which accounted for about half of a 1.9 percent decline in North American underlying sales in the third quarter, worse than the first-half’s 0.9 percent drop. That strategy may need to change because Unilever will lean more on the U.S. in the months ahead as emerging markets slow further.
“Unilever will have to respond to a higher level of competitive intensity,” Jeff Stent, an analyst at Exane BNP Paribas, said in a note. “The competitive activity in areas like hair and deodorants has been enormous.”
Sharper pricing by competitors such as Cincinnati-based Procter & Gamble Co. is exemplified at U.S. drugstore chain CVS Caremark Corp., which is offering $2 off the purchase of two bottles of Pantene shampoo, representing a discount of about 20 percent, according to its website.
Unilever’s U.S. shampoo sales declined 3.3 percent in the third quarter, according to data tracker Nielsen, after last year’s double-digit percentage gains boosted by new products like dandruff battler Clear. P&G’s sales in the same period rose 1.3 percent, faster than the category’s 0.7 percent growth.
The falloff in shampoo crimped the performance of Unilever’s personal-care unit, the company’s biggest, which grew at the slowest pace in more than two years in the quarter.
One competitor “is determined to rebuild their shares in the U.S. at an enormous cost,” Polman told analysts. “We’ve taken a prudent approach, and as a result on personal care, our growth in the quarter has been less than we originally anticipated.”
In P&G, where Polman spent the first 26 years of his career, the CEO is facing a familiar adversary. In May, the maker of Ariel detergent brought former CEO A.G. Lafley back to run the business, replacing his hand-picked successor, Bob McDonald. Lafley has pledged to regain customers in its home market.
Unilever now faces a choice. It can match competitors price cuts to win back some share, putting profit margins at risk. Or it can stay the course and suffer the loss of sales, while protecting margins. Berenberg Bank analyst James Targett says the company will pursue the latter option.
“It’s a balancing act, but I would say they would allow themselves to lose some market share to protect their margins,” Targett said in an interview. “They want to be disciplined.”
Unilever shares rose 0.2 percent to 29 euros at 2:36 p.m. in Amsterdam, leaving them little changed this year. P&G advanced 0.7 percent to $80.91 yesterday in New York, extending the stock’s gain for 2013 to 19 percent.
Slowing demand in emerging markets, where Unilever generates more than half its revenue, contributed to so-called underlying sales rising only 3.2 percent in the third quarter compared with a year earlier. That compares with 5 percent growth in the first half.
Revenue growth in emerging markets slowed to 5.9 percent compared with 12 percent in the same period last year. It’s the first time since the end of 2010 that sales in developing regions like India and Indonesia increased less than 10 percent.
“We are not planning on any improvement in market growth - - things remain volatile,” Chief Financial Officer Jean-Marc Huet said by phone. “Emerging-market countries have slowed to 6 percent to 7 percent growth and that is good planning for the quarters to come. We want to do better than those rates.”
Unilever’s emerging-market difficulties contrast with the brighter picture painted by Nestle SA and Reckitt Benckiser Group Plc. Nestle’s emerging-market revenue rose 8.8 percent in the first nine months of the year, speeding up from the first-half’s 8.2 percent pace. Reckitt Benckiser, the maker of Durex condoms, said this week that sales in Latin America and Asia grew 10 percent in the third quarter. Both companies derive more than 40 percent of their revenue from developing regions.
“The market is understandably a little skeptical that the slowdown is purely a function of market growth and does not reflect some Unilever-specific issues, given peers generally seem to have been less impacted,” said Exane’s Stent.