October 18, 2018 / 11:47 AM / a year ago

Breakingviews - Unilever and Nestlé’s growth tests pricing power

Jars of Nescafe Gold coffee are pictured at Nestle Research Center in Orbe Switzerland May 31, 2018. Picture taken May 31, 2018. REUTERS/Denis Balibouse

LONDON (Reuters Breakingviews) - Giant consumer goods companies are testing their pricing power. Charging more for products helped Unilever and Nestlé boost underlying revenue by 3.8 percent and 2.8 percent, respectively, in the third quarter. Both need the hikes to offset rising costs. The risk is that price-conscious customers go elsewhere.

Rising commodity prices can hit consumers’ pockets in multiple ways. The prospect of a barrel of oil once again rising above $80 is pushing up the cost of myriad products including water bottles and containers for Dove shampoo. Unilever and Nestlé had previously swallowed these extra expenses, but now they are passing them on. The Swiss giant has raised the price of sparkling water brands including Perrier and S.Pellegrino by 2.3 percent this year. Anglo-Dutch Unilever increased overall prices by 1.4 percent in the third quarter.

With wages on the rise in the United States, China and even Europe, consumers should be able to pay a bit more.  And it’s not just about charging more for ice cream. Unilever and Nestlé are also deploying their hefty marketing budgets to persuade customers to trade up to more expensive brands. In India, Unilever is pushing customers to try Surf Excel laundry detergent, which is nearly double the price of its cheaper Wheel brand. Nestlé’s “premiumisation” strategy involves flogging organic and flavoured coffee.

The question is how much customers will put up with. Smaller and nimbler private companies are attempting to undercut larger global brands. Economic turmoil in developing markets like Turkey also hurts revenue growth.

For now, the approach is working. Despite higher prices, Unilever boosted sales volumes by 2.4 percent in the three months to September. That’s necessary if the company is to hit its operating margin target of 20 percent. The strategy is effectively a test of whether, after a long period of subdued inflation, developed economies can cope with rising prices. It’s not just shareholders in large consumer goods companies who will be watching.


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