Unilever Price Increases Weigh on Demand in Third Quarter

  • Co. expects to resolve U.K. pricing issue after Tesco destocks
  • Shares fall as much as 3.7% in London, most since January

Unilever, the maker of Hellmann’s mayonnaise, reported an unexpected decline in shipments as it raised prices by the most in four years, setting the stage for what’s expected to be a difficult reporting season for consumer-goods makers.

The volume of goods sold in the third quarter declined 0.4 percent, London- and Rotterdam-based Unilever said Thursday, the second-weakest quarterly performance since 2008. Underlying revenue growth slowed to 3.2 percent. The shares fell as much as 3.7 percent in London, the biggest intraday drop since Jan. 20, as the company said it doesn’t expect market conditions to improve in the fourth quarter.

Unilever, which is reportedly embroiled in a dispute with British grocer Tesco Plc over Brexit-related price increases, aims to resolve the issue quickly, Chief Financial Officer Graeme Pitkethly said Thursday. The overall volume decline raises concerns about ebbing demand across the consumer-goods industry as the third-quarter reporting season gets under way. Nestle SA, the world’s biggest food maker, told analysts last month that its sales growth may be lower than earlier anticipated.

“Spending power is strained,” Simon Hales, an analyst at Barclays, said by phone. “You’re undoubtedly going to see some volume pressures in the industry.”

Unilever’s volume growth had slowed in the first two quarters of the year before this drop, in contrast with the company’s forecast for improvement over the course of the year.

The 3.6 percent increase in pricing was more than analysts had expected. Pitkethly said the price growth was “reasonable” and the company boosted charges for goods in Latin America and Asia to cope with higher raw material costs due to currency fluctuations.

“Unilever called out poor end-market growth across many markets,” wrote Robert Waldschmidt, an analyst at Liberum Capital. The Brazilian market is shrinking, Argentina has severe inflation and Chinese demand is soft, he said.

Unilever shares were down 3.6 percent to 3,589 pence at 1:35 p.m. in London.

The U.K.’s Guardian newspaper reported Wednesday that Unilever sought to raise the price of products like Marmite spreads and Persil detergent by about 10 percent because of the pound’s drop. The U.K. accounts for about 5 percent of revenue, according to Pitkethly.

“This is such a large event that it may simply be that the two gorillas on both sides have decided to go through the motions of the negotiation on behalf of the industry, so the rest of the industry can then fall into line,” Bruno Monteyne, an analyst at Sanford C. Bernstein, said of the reported dispute between Unilever and Tesco.

Food companies such as KitKat maker Nestle and Swiss dairy concern Emmi AG have both said they will look to raise prices in the U.K. to respond to the plunge in sterling following the U.K.’s Brexit referendum, which has raised their sourcing costs.

Unilever said it expects full-year underlying sales growth will be at the middle of its 3 percent to 5 percent target range. The company also said that restructuring costs will be near the higher end of its annual range of 0.8 to 1.2 percentage points of sales in both 2016 and 2017.

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