That is exactly what Unilever has done in the past six months and investors in
its rivals will be jealous at how easily the strategy has worked.
On Thursday, the Anglo-Dutch consumer goods group reported that it raised
prices in its second quarter by an average of 5 per cent. The risk paid off.
Customers took the hit and organic sales grew 7 per cent.
In turn earnings per share jumped 10 per cent and investors added 3 per cent
to the company’s share price.
Like a violin
Paul Polman, chief executive, has played the commodity cycle like a violin. As
prices of raw materials fell coming out of the recession, Unilever cut
prices and pushed hard to sell as many units as possible. The result, in the
first quarter last year, was 7.6 per cent volume growth on the back of a 3.3
per cent average price decline.
Now input prices have risen alongside most commodities, Mr Polman has done the
opposite, hoping to take advantage of last year’s gains in market share.
Slow volume growth in the first half of the year – just 2.2 per cent,
one-third of that last year – appears a reasonable trade-off.
Inventories
This in-and-out approach to the commodity cycle can strain inventory
management, particularly for a company that sells its products in places as
remote as the Amazon jungle.
Higher inventories meant Unilever’s working capital requirements more than
doubled during the first half of 2011 compared with last year, which pushed
operating cash flow down 16 per cent.
Stick with it
But that downside is more than compensated for by the way its customers have
stuck around despite price rises. Given that the company’s stock trades at
about the same multiple of expected 2011 earnings as rivals Procter & Gamble
and Reckitt Benckiser, investors may wish to stick with it too.
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