From Coke to Hellmann's, consumer goods giants warn inflation may dent profits

Prices in the US rose by 7.5% last month — the largest surge in inflation for four decades

Thu, 10 Feb, 2022 - 17:57

Geoff Percival

Some of the world’s biggest popular consumer goods companies — from PepsiCo and Coca-Cola to Magnum ice cream and Hellmann’s mayonnaise maker Unilever — have warned that runaway inflation may soon start to dent their profits.

Unilever — which also makes such grocery staples as Domestos, Knorr, and Dove soap — reported better than expected underlying sales growth of 4.9% for its fourth quarter and said it expects underlying sales growth of between 4.5% and 6.5% this year.

However, it said it expects to see lower operating margins amid strong inflationary pressures.

US inflation up 7.5% last month

Latest US data shows inflation in that country grew by 7.5% in January, representing the largest jump in prices for 40 years.

Unilever is particularly exposed because of its reliance on emerging markets and food — where inflation is especially high.

Unilever raised underlying prices by 2.9% in 2021, including a 4.9% jump in the fourth quarter. That helped ease the pressure on margins, with sales volumes staying flat in the final quarter.

However, the company warned that, despite planning more price increases, it expected underlying operating margins to drop by 140-240 basis points this year, following just a 10 basis point fall in 2021.

Finance chief Graeme Pitkethly said it faced a €2bn-plus hit from inflation in the first half of 2022, falling to about €1.5bn in the second half.

Coke and Pepsi warn of pressure on profit

Soft drink giants Coca-Cola and PepsiCo have also both warned of a pressure on profit levels due to the surge in costs for everything from aluminium cans to staff and shipping. The companies have responded with price hikes.

However, with costs still high and supply bottlenecks showing no signs of easing, analysts have cautioned that the price hikes will not likely be enough to fully cushion packaged food makers' profit margins.

Both cola makers saw revenues surge in the final quarter of 2021. PepsiCo’s net revenue rose 12.4% to $25.25bn (€22bn), which beat market estimates, while Coca-Cola saw a 10.1% rise in adjusted revenue to $9.47bn, also beating estimates.

However, PepsiCo expects fiscal 2022 core earnings of $6.67 per share, below analysts' expectations of $6.73, while Coca-Cola forecast full-year adjusted earnings per share to increase 5% to 6% from the $2.32 posted in 2021, compared with estimates of a 6% rise.

price rises on the horizon

PepsiCo's chief financial officer Hugh Johnston said the company could potentially raise prices further later in the year if costs climb more than its expectations, and did not rule out some product shortages.

Meanwhile, UK housebuilder Redrow has said house price inflation in Britain is outpacing the rising cost of the materials, equipment and labour used to build them.

Delivering its half-year report, Redrow said it expects costs to rise about 6% in the current financial year.