Tesco PLC (LON:TSCO) may have won the war against Unilever over the consumer goods giant’s decision to increase the price of leading brands, including Marmite, according to an analyst at AJ Bell.
The supermarket chain had resisted Unilever’s move to hike wholesale prices to compensate for the steep fall in the value of the pound in 2016.
The two companies resolved the issue later the same year but neither commented on how much more Tesco had agreed to pay for Unilever products or how much of the price rise would be passed on to customers.
In Unilever’s first quarter trading update on Thursday, the company revealed it raised prices by just 0.1%. That compares to a 3.6% price hike in the third quarter of 2016 during Unilever’s spat with Tesco.
READ: Unilever shares drop as investors shrug off €6bn share buyback and sales growth
“This is a marked reversal of the trend seen until Q3 2016, when Unilever was driving sales growth through price,” said AJ Bell investment director Russ Mould.
“But it was at this point that Tesco rebelled over the price of Marmite and threatened to stop stocking the consumer staple and it is noticeable that since then Unilever has throttled back on price increases to drive volumes.”
Emerging markets lead first quarter sales growth
Unilever relied on volumes to boost sales in the first quarter. Underlying sales, excluding the spreads and margarine business it is selling to private equity firm KKR, rose 3.7% in the period with volumes rising 3.4%.
Including the spreads unit, underlying sales rose 3.4%, marking a slowdown from the 4.0% reported in the fourth quarter. However, growth was still better than all three-month periods since the second quarter of 2016.
Growth in emerging markets and in the beauty, personal care and home care divisions led the increase in volumes and sales.
Underlying performance strong, says Hargreaves Lansdown
Unilever lifted its quarterly dividend by 8% and announced a €6bn share buyback to return the expected proceeds of its €6.83bn deal to sell its spreads division, which includes the Becel, Flora, Country Crock and Blue Band brands.
“The underlying performance was strong, and the board have announced an 8% hike in the quarterly dividend, highlighting Unilever’s long-term track record of rewarding shareholders,” said Steve Clayton, manager of Hargreaves Lansdown’s Select UK Shares funds.
“This was textbook stuff from Unilever, with the group’s diversity of brands and markets serving it well.”
UBS questions whether volume growth is sustainable
UBS left its rating on the stock at ‘buy’, saying the underlying sales growth was in line with consensus forecasts.
The bank said volume growth beat market estimates of 2.5% but pricing was lower than the 0.8% increase expected.
“We expect investors to welcome Unilever's volume growth and the buyback announcement,” UBS said.
“However, the notable deceleration in pricing leaves little room for upside to consensus EBIT margin forecast in 2018, in our view (consensus +70 basis points to 18.2% vs UBS estimate of 18.0%).
“We will also be looking for management commentary on whether Q1’s volume growth is sustainable for the rest of the year.”