Tuesday 18 October 2016

Unilever winning in the battlefield of branding


A pricing dispute with Tesco brings another level of positive outcome for Unilever last week.

Unilever owns household brands ranging from Dove to Domestos. Unilever asked Tesco to stump up around 10 per cent more for its branded goods, saying the weaker pound had pushed up costs. Tesco dug its heels in.

A deal was eventually struck, ending something of a flash panic over a nationwide shortage of Marmite, another Unilever brand. Unilever may not have secured the 10 per cent rise it originally asked for, but it is safe to assume a chunky increase.

With retailers potentially forced to pass on some of the price rises to consumers, the British Retail Consortium recently warned the weaker pound could lead to higher inflation.

While this is not good news for UK consumers or retailers, it is unlikely to have an impact on Unilever.

The group's third-quarter results showed underlying sales growth of 3.2 per cent, with rises across all categories.

The Q3 dividend was up, too, rising to 28.9p. While Unilever shares did drop as news of the dispute with Tesco broke, it's worth remembering that the vast majority of Unilever's business interests are outside of the UK.

Its global footprint means it isn't dependent on the fortunes of a single country or demands of a single buyer. Unilever has a high degree of pricing power – meaning it can choose the price it charges its customers.

It spends heavily on brand advertising to persuade customers it is worth paying a premium compared to non-branded alternatives. Last week's results showed that when faced with adverse currency movements in Latin America earlier this year, Unilever responded by raising prices by 15.5 per cent to protect margins.

Consumers kept buying, with volumes declining by just five per cent.

This pricing power is at the root of Unilever's success.

The lesson from Latin America is that consumers will stomach price increases rather than trade down to unbranded products. Rising sales and a focus on cost control has ensured profits and dividends have risen in the face of challenging conditions.

It remains likely that defensive investments like Unilever will stay in vogue.

"This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest."



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