But Profit Margins Under Pressure
Two of the leading global food and beverage companies reported their 2010 financial results in the first two weeks of February.
Both Unilever and Kraft Foods reported strong growth in their net sales, but profit margins remained largely flat, impacted by a number of factors.
The increase in input costs, the still weak economies in core developed markets and tough competition in terms of pricing, particularly from private label products, were the main issues impacting most industry players.
For example, Unilever increased its promotional spend and slashed prices on selected products in an effort to build sales volume, which was largely the reason behind the 20 basis point decline in its fourth quarter underlying operating margin.
Integration of Cadbury adversely impacts Kraft's 2010 profit
Kraft Foods' net revenues increased by 27% in its full 2010 financial year. Sales were largely driven by the Cadbury acquisition, but the costly integration process also impacted the company's profitability towards the end of the year, with fourth quarter net earnings decreasing by over 23%.
Despite variances driven by the Cadbury acquisition, on a like-for-like basis operating margins in the fourth quarter were essentially flat. Although the company's 2010 financial performance was also driven by the higher pricing capabilities of its improved portfolio, the still weak consumer environment is limiting strong price rises in many markets.
The company has announced strong revenue growth across all geographical markets. Although the Cadbury acquisition increased the company's exposure to emerging regions, it should further focus on markets in Asia Pacific. The outlook for Asia Pacific is positive, expected to grow by a 3% CAGR over 2010-2015, and given the size of the market further expansion is worth pursuing. The joint Kraft/Cadbury still ranks outside the top five packaged food companies in the region.
The company announced that it expects the global operating environment to remain challenging in 2011 with still low consumer confidence in core markets and rising input costs. It has restated its operating earnings per share forecast to 11-13%, down from a forecast made in November of "mid-teen" growth in 2011.
In 2011, further expansion in emerging markets and pricing will remain at the centre of Kraft's growth strategy. It has been investing heavily in building a strong brand stable, both through acquisitions (Cadbury or Trident) and product development so as to be able to compete on higher price platforms, although in 2011 it still expects a weak consumer environment, thus limiting its pricing potential in the short term.
Unilever's strong volume growth offset by pricing in 2010
Unilever's financial results for the full 2010 financial year are positive in comparison with the challenging period of the previous year, when both turnover and net profit declined. The group reported 11% growth in turnover and 4.1% underlying sales growth. Unilever's net profit rose by 26%.
Despite the strong growth in net profit, largely driven by a reduction in a number of expenses, such as net finance costs, the group's operating margins remained largely unchanged, posting a 20 basis point increase for the full year but a 20 basis point decline in the fourth quarter.
In 2010, Unilever focused on volume growth, while across all categories, with the exception of ice cream and beverages, pricing negatively impacted its value growth. The results highlight the group's post-recessionary strategy to focus on maintaining and growing its volume share at the expense of profit margin.
The operating environment in most core markets remained challenging, with a still largely price-sensitive consumer base. Unilever's Home Care and Other reporting division was particularly impacted by hard discounting. The category posted over 8% volume growth in 2010, but pricing eroded near 5% of this growth.
In geographic terms, emerging markets drove growth in 2010. The company's underlying sales growth was only negative in Western Europe (-0.4%), while the Asia, Africa and Central and Eastern Europe reporting division posted 7.7% growth.
Unilever's strategy to focus on volume growth and establish strong market positions across all its categories depends on the recovery of prices as consumer spending power is expected to strengthen in line with global economic stability.
Future growth prospects
Most fmcg companies are reporting rising turnovers for 2010, but their profit margins are under pressure from macroeconomic circumstances, such as fluctuating commodity prices and weak consumer confidence in developed markets. As the global economy recovers from the recessionary period of 2008-2009, consumer demand seems to be picking up, although at a slow pace.
Kraft Foods' and Unilever's common strategy is to invest now to build strong positions for their portfolios via development, acquisition or pricing. To date, Kraft has managed to maintain price levels, whilst Unilever has had to heavily discount to maintain or grow its market share. It will hope that when consumer confidence returns it will be able to build on its increased presence with higher prices.
Analyst Insight by Ildikó Szalai.
22 February 2011