Cutting prices and spending more on marketing seems to be doing the trick for consumer goods group Unilever.
The company - whose brands encompass everything from Persil to Ben & Jerry's ice cream and Knorr soup and which serves 2bn consumers a day - said full year sales grew 3.5%, with advertising and promotional (A&P) spend up by 80 basis points and a 3% fall in prices in the fourth quarter.
But Unilever's shares slipped 86p to £18.48 on concerns about weakness in Europe, and comments about increased competition, which could keep prices low for some while. Chief executive Paul Polman said:
We expect continued pressure on consumer spending power and heightened levels of competitive activity in 2010. We will continue to focus on volume growth as the main driver of long term value creation.
Analysts pointed to Procter & Gamble as one source of "heightened competitive activity." Warren Ackerman of Evolution Securities - who has a neutral recommendation and £18 price target on the company - said:
Unilever's continued volume momentum is positive - however some may suggest this is only due to a huge level of re-investment. Pricing was weaker than expected especially in the Americas (-4.1%). Pricing will continue to be negative for the next two quarters as per previous guidance but should pick up in the second half of 2010. The market might be worried about the comment about increased competition (P&G) in 2010.
Panmure Gordon was more positive, with analyst Graham Jones raising his price target from £18.70 to £20. He said:
Volume group of 5% in the fourth quarter was ahead of the most bullish forecast, and although this was assisted by deeper than expected price cuts and higher than expected A&P spend, the fact that Unilever could deliver margins in-line with expectations suggests Unilever's efforts to become more competitive are affordable. The cash performance was also better than we had expected. The most important, and difficult, piece of the jigsaw remains a better flow of innovation...which was always going to take time.
Over at Investec, Martin Deboo said:
Unilever have posted what we view as strong fourth quarter figures, beating median consensus on top line and matching it on the bottom, despite significant incremental A&P. Further good progress has also been made on working capital reduction, which was well ahead of our forecasts. We anticipate a modest upgrade to our 2010 numbers, but will look at the soft guidance in more detail. We are happy to remain buyers this morning with a target price of £22.
Viewed in the round, we see this as a further strong quarter for Unilever, consistent with the evolving story of a volume-led turnaround. We are inclined to upgrade our 2010 forecasts modestly, but think that our new forecasts are capturing directionally the soft 2010 guidance of 'volume growth plus steady and sustainable year on year improvement in operating margin and strong cashflow.'
