London, Aug 4 - Consumer goods giant Unilever Plc/NV is seeing the first signs of resistance to higher prices in Europe and America as its focus is switching to faster-growing emerging markets, analysts said on Monday.
Cost-conscious shoppers are moving to cheaper products and away from Unilever's top brands as the world's third largest consumer goods group raised prices sharply to offset a big rise in commodity costs this year, they added.
The Dove soap and Knorr soups maker hiked prices 7.4 percent in its second-quarter which led to lower volumes in Europe and America, while there were signs some of its big price rises were not sticking, like its Bertolli sauce range in Europe.
The 7.4 percent price rise only drove second-quarter sales up 6.8 percent resulting in lower volumes and this together with lower advertising and promotional (A&P) spend sent Unilever's shares crashing 8.1 percent last Thursday, following its second-quarter results, and a further 2.1 percent on the Friday.
"An over-reaction? Not in our opinion," said industry analyst Jeff Stent at brokers Citi.
"This is not the return of Path to Growth, but we do see Q2 as a signal that life for Unilever is going to get difficult and likely more difficult than for sector peers, all of whom face far less commodity pressure," he added.
Unilever's failed Path to Growth strategy earlier this decade aimed to boost performance but ended in the Anglo-Dutch company's first ever profits warning in September 2004.
Stent says Unilever's shares are currently cheap but recommends staying clear, adding, "History and Q2 would suggest that others will fare better".
The market agrees, valuing Unilever shares at 12.9 times 2008 earnings, below the world's biggest food group Nestle on 15.3, France's Danone on 17.1, household goods group Reckitt Benckiser on 18.3 and confectioner Cadbury on 20.0. All have reported first-half figures apart from Swiss Nestle which reports on August 7.
Unilever Plc were unchanged at 13.59 pounds by 1035 GMT.
Analyst Michael Steib at Morgan Stanley agrees commodity cost pressures are likely to get worse in the second half, while Unilever will have to spend more to get volumes moving again.
"The biggest issue, however, remains the adverse volume reaction to prices increases," said Steib, adding this is unlikely to reverse soon given the need for further price hikes in the light of more sustained cost pressures.
JP Morgan's Celine Pannuti says there are worries Unilever cannot balance volumes, pricing and margins, and agrees its volumes could stay weak given further second-half price rises.
However, Unilever's Chief Executive Patrick Cescau is determined to make his price rises stick and not offer "buy one get one free" deals, but there is evidence Unilever may have overdone the price trigger compared to its closest rivals.
Unilever's second-quarter volumes fell 2.9 percent in Europe and 1.7 percent in America, and analysts say some price rises like a near 20 percent rise for Bertolli sauces were reversed due to consumer resistance and resultant brand switching.
The Sunsilk shampoo and Hellmann's mayonnaise group is the first of the big European consumer goods groups to show volume declines and analysts say the group was too eager to push through big prices rises which in hindsight were too high.
Cadbury hiked its prices 6 percent in the first-half but saw sales up 7.3 percent as it argued its products were "affordable treats", while Reckitt plans to rise prices 2.5 percent this year to meet its annual sales growth target of 10-11 percent.
Unilever's price hike comprised 5.5 percentage points for raw material rises like edible oils, dairy, and tea, with the rest for higher wages, energy and overheads.
Unilever spent an extra 100 million euros on advertising in the first-half but promotional expenditure was down, meaning that A&P as a percentage of sales fell, just as its competitors continue to increase their spending, analysts said.
Although quarterly operating margins rose, the fact it came with the help of lower A&P spend worried analysts as Unilever aims for 15-percent plus margins in 2010 after 13.1 in 2007.
Analysts point out that A&P support is being focused on fast-growing emerging markets which account for nearly half of Unilever's group sales and provide further evidence of the group's high reliance on these fast-growing markets.
"Just as 'Path to Growth' starved the tail brands of marketing support, is Unilever now starving the developed world of marketing support," said Merrill Lynch's Nicolas Sochovsky. Path to Growth trimming the group's number of brands to 400.
Meanwhile, UBS's Alan Erskine says while he does not anticipate an abrupt slowing in these markets, he says that food and fuel price inflation and tighter monetary policy must lower emerging market consumers' purchasing power.