Unilever hit by rising costs

Here is a good example of a global giant in consumer products whose profitability has been affected by external headwinds over which it has little control.

The Anglo-Dutch business Unilever - the world’s second-biggest consumer-goods company – has announced that profitability might fall in 2011 even after it increased prices to offset soaring costs for the commodities used to make its products.

Unilever is the manufacturer of numerous household-name brands including Dove soap, Bertolli sauces, Coleman’s mustard, Vaseline, Lynx deodorant, Knorr soup, Lipton tea, Magnum ice cream and Domestos bleach has been affected by a sharp rise in the prices of ingredients, oil and packaging and it has chosen to pass on some of the rise in costs to its customers: supermarkets and grocery stores around the world. Input costs have risen by 15% this year.

In response the CEO of Unilever has attempt to streamlining packaging, paring logistics, sourcing and purchasing costs. A cut in overheads will also help to maintain profitability.

All food companies are grappling with higher costs, Unilever is in direct competition with Proctor and Gamble, Danone and Nestle. They all have significant buying power (monopsony power) - for example, Unilever each year buys up to 12% of the world’s black tea crop and 6% of its tomatoes. It is one of the world’s largest buyers of palm oil, which it uses in margarine and skincare products. The world price of palm oil has risen as much as 40 percent in the last year.

How might you use a cost and revenue diagram to illustrate the forces operating on Unilever’s profitability during 2011?

Suggestions for further reading:

Daily Telegraph: Unilever dented by rising costs

Guardian Blog: Unilever margin woes knock shares

Supply Management: Commodity price rises hit Unilever