Unilever and Arla UK brace for commodity cost hit

Both companies warned of the direction of the market as they reported full-year results.

Unilever

Speaking to shareholders after Unilever's figures were revealed, chief executive officer Alan Jope said: "We're seeing doubling of costs on a variety of agricultural raw materials, petrochemical-derived raw materials, energy. You know the data on freight and distribution - it's up by multiples - packaging components ... We're looking at €3.6bn of cost increases on those input costs."

Jope said Unilever had managed to partly offset cost increases in 2021 by increasing prices of products on retail shelves. Looking forward to the coming year, he added: "We're actually in the middle of the cycle of retailer negotiations at the moment and the exact pricing that we land in Europe will be a consequence of the outcome of those negotiations, although I think there's an awakening reality in European retail that it is going to be necessary for prices to go up ..."

Listing some key commodities Unilever purchased, chief financial officer Graeme Pitkethly said crude oil had risen by 60% in price and palm oil cost had increased by 130%. Soy bean oil, which Unilever uses in its dressings, had doubled in price. Shanghai freight costs were five times higher than the previous year and US transport costs had doubled.

The company was only able to hedge 40% of the commodities it bought. Prices had been hedged for 90% of those in the first financial quarter of the coming year, 70% of them in the second financial quarter and 30% for the remaining quarters.

Pitkethly said there would be a lag between tackling commodity cost increases and clawing back the impact on profit margins. "We do not expect to offset inflation in 2022 alone, but we do expect that margin will be restored after 2022, with a majority coming back in 2023."

Jope moved to quash rumours that Unilever's restructure into five divisions, including nutrition and food and refreshment, was a precursor to divesting its entire food portfolio. "Both nutrition and ice cream are great businesses with strong brands that can thrive within Unilever. Both have benefitted from our focus on operational excellence and have performed particularly strongly during the pandemic.

"We have already stepped up their growth profile through the divestment of spreads and the Ekaterra tea business. The new operating model will give them even more power to drive performance by responding to the consumer and channel dynamics that are unique to each of those business groups ... We see a bright future ahead for both nutrition and ice cream inside Unilever."

Magnum and Ben & Jerry's brands each nailed high single-digit global sales growth. Food solutions - Unilever's foodservice segment - delivered double-digit growth. In-home food saw low single-digit price-led growth, following elevated demand and double-digit growth in 2020. The company's largest food brand Knorr achieved high single-digit percentage growth across in-home and out-of-home channels through innovations such as zero-salt stock cubes. Dressings brand Hellmann's recorded double digit growth for the second year in succession. The retained tea business reported double-digit percentage growth.

Having emerged from an abandoned attempt to acquire GSK's consumer healthcare arm, Jope said Unilever was shelving 'transformational acquisitions' for 'the foreseeable future', although it would continue to consider bolt-on acquisitions.

Arla 

Arla reported its performance had been dampened by cost inflation and predicted more of the same for the coming year.

Addressing Arla UK's progress, UK managing director Ash Amirahmadi said: “2021 was a tough year where we had to navigate through several external challenges to deliver much-needed returns for farmer owners. Like many others in the industry we faced disruption from covid and from labour shortages, but the biggest disruption has come from the unprecedented inflation, which is driving up the cost of operations across the supply chain.

“The value of producing milk here in the UK is increasing like never before, due to the rising costs on farm and across the supply chain combined with global demand for dairy causing European commodity prices to continue their strong development," continued Amirahmadi. "This will be welcomed by our farmer owners who are also having to invest more to stay at the forefront of sustainable farming as they continue to be among the most climate efficient dairy farmers in the world."

However, Arla UK had shrugged off cost pressures to deliver sales growth, led by brands such as Arla Cravendale (reporting strong single digit growth), Arla Skyr (recording double digit growth), and yogurt brand Arla Protein (up 38%).

Arla UK also grew its licensed sales of the Starbucks brand by more than 30%, however the growth of renowned brands like Lurpak and Anchor was affected by the butter and spreads category readjusting itself after a massive sales spike in 2020. While both brands improved their overall market share positions, strategic branded revenue sales of Lurpak and Anchor decreased.

The latter half of 2021 welcomed the full reopening of the foodservice sector in the UK, leading to strong double digit branded volume growth in its foodservice business, driven especially by its Arla Pro brand.

Commenting on prospects for the group, including the UK, in the coming year, Arla Foods chief executive officer Peder Tuborgh said: “The impact on consumer behavior of on-going market volatility and high inflation will be multifaceted and difficult to predict. It is likely that we will see a slowdown in our branded growth as the market resettles at a new level. Our cooperative stands on a solid foundation and as we have demonstrated in 2020 and 2021, we will continue our strong operational execution throughout our supply chain to meet any new demands and requirements in this uncertain environment."