Unilever’s CEO said the consumer goods maker is experiencing the worst inflationary pressures in a decade as costs of raw materials, packaging and transportation rise.
Alan Jope’s warning came when the maker of Domestos bleach, Hellmann’s mayonnaise and Magnum ice cream reported that underlying operating margin fell 100 basis points in the six months to June to 18.8 percent after cost inflation accelerated in the second quarter.
“We are facing very material cost increases,” said Jope. “Our first reflex is to look for savings in our own business to offset these costs, but they are of a magnitude that will force us to push through some price increases.”
The company, which said investments in advertising also weighed on margins, is the latest in the industry to report pressure from rising transportation and commodity prices, which have impacted materials from palm oil to plastics.
The British mixer maker fever boom said Tuesday it expects a blow to margins for the year as a result of rising costs. Jon Moeller, chief financial officer at Procter & Gamble, said last month that higher commodity and freight prices had added $600 million to the company’s costs this year.
Jope said the price of palm oil, which is used in many of Unilever’s personal care products, is up 70 percent from the first half of last year, with soybean oil now costing 80 percent more, crude oil 60 percent more and ocean freight. 40 to 50 percent more.
“They’re running at inflation rates we haven’t seen since 2011,” he said.
“It’s hard to avoid price increases across the portfolio when it’s such a wide range of commodity price increases.”
As the coronavirus also impacts costs, Unilever expects the underlying operating margin to remain flat for the whole of 2021. Shares of the Anglo-Dutch group fell by just over 5 percent on Thursday afternoon.
Pressure on margins came as Unilever grappled with the fallout from a decision by the Ben & Jerry’s brand to stop selling his ice cream in the occupied Palestinian territories, a move that sparked an angry phone call from the Israeli Prime Minister to Jope this week.
Jope said the decision to withdraw from the West Bank and East Jerusalem was made “by Ben & Jerry’s and its independent board,” a body whose role was enshrined when Unilever acquired the dessert brand in 2000.
The decision was made “in line with the acquisition agreement we signed 20 years ago and Unilever has always recognized the importance of that agreement to the continued health of the Ben & Jerry’s business,” said Jope.
“I want to underline Unilever’s continued commitment to Israel,” where the multinational has four factories and 2,000 employees, he said.
After the chairman of the board criticized Unilever’s approach to the announcement, in part over whether Ben & Jerry’s would continue to sell its products in Israel as a whole, Jope said there was “healthy dialogue with Ben & Jerry’s and the rest of Unilever”.
In addition to the cost warning, Unilever reported underlying revenue growth was 5.4 percent, slightly ahead of expectations, bringing revenue to €25.8 billion, up slightly from the previous year. Net profit fell to €3.4 billion, from €3.5 billion a year earlier.
Price increases accounted for 1.3 percent sales growth, the company said, with the rest due to higher sales volumes for its products, which range from laundry detergent and hand sanitizer to tea.
Jefferies analyst Martin Deboo said margin pressure was “the likely flavor of the season.”