Unilever CEO: ‘Peak cost inflation’ set to hit in second half of 2022

Yesterday, the European consumer goods giant reported net sales of €29.6bn for the first half (H1) of 2022, up 14.9% on the previous year. Unilever generated €15.8bn of this in the second quarter (Q2), up 17.5% on Q2 2021.

Unilever’s largest division beauty and personal care generated net sales of €12.2bn in H1 and €6.4bn in Q2, with prestige beauty and health & wellbeing both growing double-digit to represent 4% of total net global sales in H1. The company’s home care business pulled in €6bn in H1 and €3.1bn in Q2; foods and refreshment generated net sales of €11.4bn in H1 and €6.3bn for Q2.

Regionally, Europe’s H1 net sales grew 2.9% to €6bn in H1 and were up 4.6% in Q2 at €3.3bn for Q2 – an improvement to flat net sales in the region for the full-year 2021​. Asia, Africa, Middle East, Turkey, Russia, Ukraine and Balarus remained the region holding the lion’s share of net sales for H1 and Q2, though the highest growth came from the Americas.

‘The external environment remains very challenging’​

Alan Jope, CEO of Unilever, said the company had built on the momentum of 2021 “despite the challenges of high inflation and slower global growth”,​ making progress and continuing to invest in its brands.

“The challenges of inflation persist, and the global macroeconomic outlook is uncertain, but we remain intensely focused on operational excellence and delivery in 2022 and beyond,”​ Jope said.

Speaking to analysts on the company’s H1/Q2 financial earnings call, he added: “The external environment remains very challenging. Input cost inflation continues to run at record levels (…) And even though a few commodity spot prices have eased in recent weeks, we’re likely to see peak cost inflation sometime in the second half of the year.”​

Graeme Pitkethly, CFO of Unilever, agreed, noting that net material inflation – the absolute impact expected after savings, buying efficiencies and product changes – sat at an estimated €4.6bn for 2022, and €2.6bn of that was still to come in H2 2022.

“We are expecting to hit peak year-on-year inflation in the second half, and therefore, we will continue to price responsibly while managing consumer demand elasticity and competitive dynamics,”​ Pitkethly said.

The CFO said Unilever had already covered around 80% of this second-half inflation but the company could continue to “navigate the inflationary pressure”​ with further price increases and competitive investments in advertising, R&D and capital expenditure.

Jope said whilst the threat of recession had certainly started to impact consumer confidence and alter spending patterns and behaviours, Unilever remained “well positioned”​ despite this “difficult backdrop”.​

Price increases and high-growth spaces​

The CEO said Unilever had been “quick to price in response to significant commodity inflation” ​during H1 which had enabled brand investments to continue. The company had increased product prices across the entire global portfolio, with most notable price hikes in its home care business – a division particularly exposed to rising input costs. However, he said the company wanted to be careful not to push pricing levels to a point where the “long-term health of the business”​ was compromised.

“…How we apply that pricing strategy varies by category and by geography, but we are leveraging our longstanding experience of how to price in high inflationary environments.”​

Responding to an analyst’s question about retailer negotiations on price increases, given some pushback from certain majors, Jope said Unilever was focused on “very constructive”​ and “fact-based discussions”​ with its retail partners. “Our US retail partners similarly have a strong growth mindset despite pushing back on price increases, but there’s a rationality in the discussions at the moment where everyone recognises the external environment. And in Europe, we’ve been through now the intense period of price negotiation. We think we’ve come out in a balanced position.”​

“…Ensuring that brand support is at competitive levels remains a priority as we navigate the second half and into 2023,” ​he said.

Alongside this, he said Unilever was also focused on driving its portfolio into “higher growth spaces”.​ The company had, for example, this month completed the acquisition of US hair growth brand Nutrafol​, tapping into the  high growth category of functional nutrition,.

Pitkethly added that Unilever was also tapping into new growth channels, with the InterContinental Hotels Group partnership one strong example – supplying larger personal care products into its guest bathrooms across the UK.

New business model – ‘I’m already impressed by the difference’​

As of July 1, 2022, Unilever was now running global operations under a new business model – carved up into five distinct business units​ – and from September for its Q3 results, the company would also start reporting according to these divisions.

“It is still early days for the new model, but I’m already impressed by the difference in the focus, the energy, the urgency that this change is creating,” ​Jope said.​

The carve-up had been done to create a more category-focused global business and aimed to help business tap into more specific growth opportunities.

“Our task for the coming months is to bed in the structure, refine it, help our people adjust to the new ways of working. And we are being cautious to avoid declaring victory too early in what is a substantial change for the company,” ​the CEO said.