Branded and packaged consumer goods colossus Unilever's (ULVR) third quarter update shows underlying sales growth across all product categories. Yet shares in the Domestos-to-Ben & Jerry's brands-owning behemoth are off 1.6% at £36.64 in early dealings.

While currency movements negatively impacted performance, resulting in flat turnover, the real reason for the fall is a spat with Tesco (TSCO), down 2.2% to 196.85p, over attempts to push up the price of Marmite and PG Tips. Also weighing on sentiment is CEO Paul Polman's comment that Unilever's markets remain 'soft and volatile'.


Pricing power is a sign of a great business and Unilever’s latest figures show 3.2% underlying sales growth for its past quarter, a forecast-busting performance driven entirely by pricing, not volume; resilient emerging markets growth offset flat developed markets with continued price deflation in Western Europe.

As Shares has previously outlined, Unilever’s enviable portfolio of brands spans everything from Hellmann’s and Ben & Jerry’s to Persil, Domestos, Marmite, Lipton and Lynx. Ownership of these brands confers inflation-proofing pricing power upon the business, whose earnings are reasonably predictable and compound over time.

As such, the home care, personal care and refreshments products giant is a cash-generative, dependable dividend payer that doesn’t need to shift more goods to drive sales; it simply charges more for them because it knows a) the public likes the products and b) the public won’t suddenly stop buying them if they become a little bit more expensive.

Accordingly, Unilever is reportedly demanding that Tesco pays 10% more for its products following the devaluation of the pound. In the Tesco case, Unilever wants to push up prices because weaker sterling is pushing up costs – so Unilever naturally seeks to pass on this cost to the consumer.

Unilever - OCT 16As ETX Capital Markets Analyst Neil Wilson explains: 'Against the backdrop of its spat with Tesco, the statement has particular resonance and highlights how cost pressures are creeping into UK retail, potentially knocking dividends and share prices for a number of well-known stocks. Compounding this, cotton prices are surging on a drawdown on US supplies, which could make clothing costlier.'

'Supermarkets are afraid to raise prices and the Tesco-Unilever tussle is a symptom of a bitter sector price war that is crimping margins. It’s no wonder Tesco doesn’t want to absorb further inflation when margins are being squeezed. As the UK’s biggest retailer by some margin, it’s got a strong bargaining position. A deal will be struck but there is unlikely to any winners from this affair.'

Issue Date: 13 Oct 2016