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Reckitt and Unilever struggle with accelerating cost inflation
A 27 July first half results update from consumer goods giant Reckitt Benckiser (RKT) and the 9% slide in the share price on the day will have served as a rude awakening for investors who thought big brands could raise prices at the stroke of a wand.
Despite a ‘structural rebasing’ in demand for its hygiene brands such as Dettol and Lysol due to the pandemic, Reckitt says it is facing price rises of between 8% and 9% in raw materials so far this year.
‘Cost inflation accelerated in the second quarter and it will take time to offset this headwind with productivity and pricing actions being implemented in the back half of the year and early next year’, according to chief executive Laxman Narasimhan.
As a result of these cost pressures, operating margins are now likely to be between 0.4% and 0.9% below 2020’s level, offsetting the benefit of Narasimhan’s decision to ditch the Chinese infant formula business and the perennially underperforming Scholl footcare unit.
Reckitt isn’t alone in struggling with rampant cost inflation, however. In a presentation to US investors, rival Proctor & Gamble – which competes head-on with Reckitt across a range of household products – reported price increases for the year to April of between 100% and 200% in resins, 70% to 200% in ethylene and 75% to 125% in propylene.
The US firm also cited $200 million of higher freight costs and supply constraints as contributing to a $600 million negative swing in its profits for the period to April.
Anglo-Dutch firm Unilever (ULVR), which is focused more on food and personal care products than household goods, also flagged rising cost inflation in its half-year update and trimmed its guidance for operating profits from a small rise to flat on last year.
‘Cost volatility and the timing of landing price actions create a higher than normal range of likely year end margin outcomes. We are managing this dynamically and expect to maintain underlying operating margin for 2021 around flat’, said chief executive Alan Jope.
Where Unilever has an advantage is in food and personal care, where brands like Ben & Jerry’s and Magnum are seen as having a ‘touch of luxury’, while Dove and Lux have become highly-trusted, consumer-friendly names, and shoppers are prepared to spend that little bit extra to treat themselves or make themselves feel good.
The question for all consumer goods firms though is can they rise prices without harming volumes. Historically, the answer has been no, with volumes tailing off around six months after they have pushed through price hikes. Only time will tell whether this time they can make them stick.