UN Unilever NV

By Saabira Chaudhuri 

LONDON-- Unilever PLC on Thursday defended its stance in a pricing dispute with Tesco PLC as it reported a slowdown in third-quarter revenue growth amid fierce competition and currency devaluation.

The consumer goods giant said it had to raise prices in the U.K. following a slump in the pound after the vote to leave the European Union.

"The price increases have landed with most of our customers," Chief Financial Officer Graeme Pitkethly said on a call with analysts.

The maker of Ben & Jerry's ice cream and Dove shampoo halted supplies to Tesco, leaving Britain's largest grocer without many of Unilever's flagship products available online on Wednesday. Unilever demanded Tesco raise prices by an average of 10% but the grocer refused, leading to the halt, according to a person familiar with the standoff.

Unilever's shares were down 2.5% in recent trading in London while Tesco's shares dropped 1.9%.

Mr. Pitkethly said he is "confident" the standoff with Tesco "will be resolved very quickly."

His comments come as the Anglo-Dutch consumer goods giant posted third-quarter sales growth on an underlying basis--which strips out the impact of acquisitions, disposals and exchange-rate changes--of 3.2%, down from 5.7% growth in the same period a year earlier.

Mr. Pitkethly in a Thursday interview with the Journal said pricing decisions are delegated to local markets, and that the U.K. makes up about 5% of Unilever sales.

Unilever's approach to price rises considers the affordability for customers and the likelihood that they will down trade to cheaper products, said Mr. Pitkethly. The price rises the company has pushed through so far "are substantially less than we would need to cover the impact on our own profitability," he added.

Unilever has seen a EUR600 million ($662 million) rise so far this year in costs tied to currency devaluation, according to Mr. Pitkethly. He said many of Unilever's products contain ingredients that are internationally traded, such as plastics, flavors, fragrances and tea.

Bernstein analyst Bruno Monteyne said the dispute between Tesco and Unilever is "inevitable Brexit-induced price inflation," since "a shampoo produced on the continent is now 17% more expensive."

Unilever's negotiations with Tesco--Britain's largest retailer--will no doubt set the tone for how prices rises are passed along across the rest of the industry. Retailers are unlikely to absorb the price increases, according to Mr. Monteyne, meaning any cost increases passed along by Unilever will hit consumers' pockets.

The world's second-largest consumer goods company after Procter & Gamble has also approached J Sainsbury PLC--Britain's second-largest supermarket chain--about raising prices by around 10% on average, according to a person familiar with those conversations. Sainsbury is still in talks with Unilever.

Unilever's hedging arrangements typically protect the company between four and six months ahead, meaning the company should start to see the impact of cost increases later this month.

Unilever regularly both raises and cuts prices around the world, according to Mr. Pitkethly.

"It's always a combination of underlying commodity movements and currency impacts," he said.

For the third quarter, Unilever reported revenue climbed 3.4% at constant currency as the company offset volume declines with higher prices. But including a negative currency impact of 3.4%, revenue was flat at EUR13.4 billion. Profit figures weren't disclosed.

On an underlying basis, third-quarter sales growth in emerging markets weakened to 5.6% from 8.4% a year earlier. Consumer demand in India was dampened by price increases on skin cleaners while in China sales were down due to price competition in laundry, according to the company.

Chief Executive Paul Polman described global markets as "soft and volatile," in particular calling out currency devaluation in Latin America as having squeezed disposable income.

Unilever has adopted so-called zero-base budgeting or justifying each year's expenses from scratch to rein in costs as it works to mitigate the impact of the turbulent macroeconomic environment.

Mr. Pitkethly said the company has identified opportunities to slash costs in areas such as consultancy and the cost of repackaging products for promotions, putting in on track to save EUR1 billion a year in overheads and marketing by 2018.

In developed markets, underlying sales growth was flat compared with 2.1% rise a year earlier.

Unilever has also been pushing deeper into personal-care products such as shampoos and deodorants that appeal globally, and away from slower-growing food brands.

But on Thursday the company said "intense competition" in many of its markets had squeezed growth in its personal care arm. Revenue climbed 3.1% on an underlying basis, which is half the growth level in reported a year earlier.

The home-care and refreshments divisions performed better, logging underlying sales growth of 3.9% and 4.5% respectively.

The food arm reported 1.7% growth, helped by cooking products in emerging markets and organic dressings. But Unilever's spreads business--which mainly consists of margarine--continued to decline in both North America and Europe. The company has faced pressure from analysts and investors to sell the declining business but has so far refused, saying it hasn't received an acceptable offer.

"There's many options for the future of the business and we won't speculate on that," said Mr. Pitkethly.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

October 13, 2016 05:00 ET (09:00 GMT)

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