Shine Comes Off Big Consumer-Product Companies
October 19 2016 - 10:16AM
Dow Jones News
By Saabira Chaudhuri
LONDON--It isn't as easy as it used to be to deliver the steady
sales growth investors have come to expect from the world's biggest
consumer-product makers.
Consumer-goods stocks have long been a haven in times of
macroeconomic uncertainty--demand for everyday items such as
bottled water and laundry detergent tends to stay consistent in
good times and bad. But a slew of recent sales reports from global
consumer-product companies suggest many are grappling with an
unusual confluence of big challenges, from choppy emerging markets
and local competition to rising commodity prices and currency
swings.
On Wednesday, Reckitt Benckiser Group PLC reported its slowest
like-for-like sales growth since mid-2011 and lowered its sales
outlook for the year. The U.K.-based maker of Durex condoms and
Lysol disinfectants blamed tough markets in Russia--and a stumble
trying to innovate a popular Scholl foot file--for a meager 2% rise
in third-quarter like-for-like sales, which missed analyst
estimates. Reckitt shares were down almost 3% in midday London
trading.
Last week, Unilever PLC--the world's second-largest
consumer-goods company, behind Procter & Gamble Co.--flagged
rising prices for commodities including palm oil, crude oil and
aluminum. It reported a 3.4% rise in underlying third-quarter
revenue. Troubling for investors, the higher sales were driven
entirely by price increases, not volume growth.
Since 2013, Unilever has leaned heavily on volume to drive
growth, a strategy investors typically like because it signals
strong underlying demand. In the third quarter, though, Unilever's
volumes declined 0.4% from a year earlier in a marked deceleration
from the 1.8% growth it reported in the second quarter.
"Economic fundamentals remain weak and volatile," said Unilever
Chief Financial Officer Graeme Pitkethly on a Thursday conference
call, also citing currency devaluation in Latin America as having
squeezed disposable income. The industry's third-quarter volumes
fell by 10% in Brazil and by 7% in Argentina.
"When currencies weaken, the cost of living goes up faster than
incomes, and people either cut back on purchases or they
down-trade," Mr. Pitkethly said.
Unilever signaled it was pushing the cost of those currency
swings to consumers--or at least to the middlemen, like
grocers--that buy Unilever products, from Dove soap to Ben &
Jerry's ice cream. Last week, Britain's largest grocer, Tesco PLC,
temporarily pulled Unilever products off its online shopping site
amid a pricing dispute. Unilever said last week it was raising
prices for all of its U.K. customers to offset the sharply falling
pound after Brexit.
Apart from a downturn in Russia, Reckitt's growth is also
slowing in Europe. Political turmoil in Turkey and challenges in
Africa and the Middle East have hurt sales, as well.
Executives expect the bumpy sales environment to get tougher
still through the rest of the year, as companies that were
protected by hedges start to feel the full impact of higher
commodity prices.
"You should expect things to remain, in aggregate, choppy,"
Reckitt Benckiser Chief Executive Rakesh Kapoor told investors.
Across the pond, P&G in August offered a sluggish sales
outlook for fiscal 2017 and said its adjusted per-share earnings
for the fourth quarter dropped 8% on a constant-currency basis. The
Cincinnati-based company reports first-quarter earnings next week.
Analysts have criticized P&G for relying on cost cuts rather
than improved sales to drive profitability.
On Tuesday, French yogurt and bottled-water company Danone SA
reported its lowest quarterly like-for-like sales growth since
2009, at just 2.1% for the third quarter. The company said
regulatory changes in China had slowed sales of baby food and noted
that Russia and Brazil have remained tough places to do
business.
More broadly, Danone--which owns yogurt brands including Dannon,
Activia and YoCrunch--flagged that milk prices are rising and said
it plans to boost efficiency and productivity to protect
margins.
Danone was also hit by volatile currencies, saying the Argentine
peso, the British pound, the Mexican peso and the Chinese yuan had
combined to reduce sales growth by 4.1%.
China has also created problems for Nestlé SA, which on Thursday
will report third-quarter results. There is a lot riding on that
report after the world's biggest packaged-food company in recent
quarters delivered organic sales growth that fell short of its
long-term target of 5% to 6%.
Nestlé's sales have been hurt by slowdowns in major markets,
including China and Europe, and deflationary forces that have made
it hard to raise prices.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
October 19, 2016 10:01 ET (14:01 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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