Unilever takes 3.4% currency hit in third quarter as Tesco Marmite row erupts

As supermarkets pulled Marmite and several of its other brands from their shelves over a pricing dispute, Unilever posted forecast-beating underlying sales and a 28.9p dividend amid tough third-quarter conditions.

With sterling's collapse post-Brexit, the price of imported commodities has climbed even more steeply and it was reported overnight that Unilever has demanded steep price increases from UK grocers, including Tesco, to offset this.

As a result, Tesco, whose chief executive Dave Lewis is an ex Unilever director, has withdrawn many of its fellow FTSE 100 constituent's products from sale, including Ben & Jerry’s ice cream, Hellman's mayonnaise, Pot Noodle, Persil washing powder and PG Tips tea bags as the spat rumbles on.

Evidence of the impact on Unilever's finances was apparent on Thursday, with a negative currency impact in the quarter of 3.4% in the three months to 30 September, meaning turnover fell 0.1% to €13.4bn.

Turnover in the nine months of the year to date has slipped 1.8% on last year, while constant currency sales rose 3.4% in the quarter and are up 4.7% over nine months.

On top of continuing weak consumer demand remaining weak in many markets, the company faced a deterioration of trading conditions in a number of countries and volumes slowed to flat.

While Tesco is playing hardball, emerging markets have proved a more fertile playground, as after Unilever faced a similar currency devaluation in Latin America during the quarter it hiked prices 15.5% but saw volumes decline just 5%.

Underlying sales grew 5.6% in emerging markets to offset flat sales in developed markets to produce group growth of 3.2% in the quarter, down from 4.7% in the first half but beating consensus forecasts of 2.9% even in the face of a strong third quarter comparative from last year.

"Our business continues to demonstrate its resilience by growing competitively and consistently in tough market conditions," said chief executive Paul Polman.

He said the growth in underlying sales was driven by innovation, while further progress was made in reshaping the portfolio, adding businesses in fast-growing segments with the acquisitions of Dollar Shave Club, Blueair and Seventh Generation.

"With markets remaining soft and volatile, we have continued to transform our business at an accelerated pace."

While Polman did not reveal much detail on profits, he pointed to rapid progress on implementation of 'change programmes' and said: "These actions keep us on track for another year of volume growth ahead of our markets, steady improvement in core operating margin and strong cash flow."

Nevertheless, Marmite dominated the headlines and shares in the company fell around 2% to 3,650p on Thursday morning, while Tesco's were down almost 2% to below 198p.

Analysts' views

Bernstein analyst Bruno Monteyne, himself an ex Tesco supply chain executive, pointed to the wider implications for both sectors: "While politicians can deny reality, a shampoo produced on the continent is now 17% more expensive," he said.

"This isn't about Tesco or Unilever but about all UK retailers and suppliers."

Broker Whitman Howard pointed out that 'Marmitegate' aside, Unilever's sales had beaten the market's expectations in the face of an unusually strong 5.7% in the same quarter in 2015.

"Clearly, sterling weakness and its impact on UK pricing policy grabbed significant financial press headlines due to an apparent 'Marmitegate' trade dispute with the leading UK multiple retailer over buying prices. However, the UK is only around 5% of overall group profits. While Unilever’s reported earnings (in euros) are not a beneficiary from sterling’s current weakness, the translation impact on the company’s London listed stock price is clearly positive," analysts wrote.

Darren Shirley at Shore Capital said while underlying sales growth beat forecasts, turnover being broadly flat at €13.38bn was a little weaker than it had expected and the consensus 0.8% increase.

Shirley said he did not anticipate changing profit forecasts post the update, expecting EPS up 3.1% to €1.88, adding: "We continue expect Unilever to be a medium term winner in global FMCG... albeit the positive stance is one of a medium to long-term nature."

Observing the success of its pricing hike in Latin America, Nicholas Hyett at Hargreaves Lansdown said the strength of Unilever's brand portfolio "gives it the power to increase prices with only minimal impact on demand for its products. Furthermore, its global footprint means that it is not overly dependent on the fortunes of a single country, or beholden to the demands of a single supplier."

"Tesco may choose to stand its ground on pricing, but history suggests that if other retailers can stomach the increase, consumers will be willing to stump up to get their Unilever fix.”