Unilever's decision to up the cost price of more than 100 SKUs has prompted raised eyebrows about the timing of the move. James Ball reports
At best it seemed counter-intuitive, at worst, plain confused.
With shoppers paying closer attention to price tags than ever before - and food price inflation supposedly having peaked - Unilever shocked wholesalers last week by pushing through cost price rises on more than 100 of its best-known branded lines.
The fmcg giant insists price hikes are necessary because of rising costs, that it is not alone in upping its prices and that it can continue to drive up its volumes. But do its arguments stack up?
Unilever's cost price rises cover at least 100 of its SKUs, including 24 products from the PG Tips range and lines from its Knorr, Colman's and Jif lemon ranges. The rises take effect in the first week of June, just a fortnight after the Office of National Statistics reported falling food prices for the second month in a row.
There's no doubt the manufacturing industry has faced unprecedented cost pressure over the past year and has yet to recover the full extent of these increases. Earlier this month Unilever revealed its gross margins had fallen by 1.9 percentage points.
However, given that many key food commodities are now cheaper than 12 months ago (see table p21), seeking cost increases may seem an odd move in the current climate.
Not so, claims Unilever UK sales director Tony Smith. "I don't know anyone who could say raw materials are falling across the board," he says. "There's real pressure on costs from the weakness of sterling. When we're buying in dollars and euros it's inevitable that currency will find its way into price."
Though sterling has recovered since February, when it virtually hit parity with the euro, the pound is still trading far below the levels of a year ago and Unilever is not alone in taking action.
According to one wholesaler, Procter & Gamble has "opted for price increase by stealth" by tweaking wholesale pack sizes of several SKUs from 12 to 10. Premier Foods also continues to report seeing inflation in the system and it is understood that price rises are on the cards there as well.
Smith is keen to dispel wholesalers' fears that Unilever would pass through price rises to them and not the multiples. He points out that such a move would be illegal and states that all channels face identical increases - although he stresses that the resulting retail price is up to the retailer, which Unilever has no control over.
Some independents have also expressed concerns that new efficiency incentives in reformed trading terms were being offered as a sweetener to bigger players - retailers and wholesalers. No such sweeteners have been offered, insists Smith. "We have harmonised Unilever's UK trading terms, but this is a completely separate initiative. If there were some empty few months when we could implement this in a vacuum, we would, but there isn't."
Brand premium
One of the reasons for a brand to increase prices is to maintain its brand premium - the average difference in retail price between brands and own label.
Unilever's latest move may well have been influenced by the fact that the average brand premium has shrunk from a typical 31% in 2008 to 25% in 2009 [IRI] - one commonly cited factor explaining brands' resilience over the past year. There's an erroneous assumption that when consumers are cash-strapped brands will inevitably suffer, Smith says. This is not necessarily the case, he argues.
"In this climate, consumers look for value, which is much wider than price. Keeping our relative position in the market is part of the reason for price increases."
The challenge for Unilever and its fellow brands is to persuade consumers that higher prices are worth paying. This has become central to the marketing message of even premium brands, says Giles Lury, brand director at The Value Engineers.
"Unilever and co have allowed the price gap to narrow, then even further closed it by allowing an unprecedented number of deals on their products," he says. "As a result, they're stuck between a rock and two hard places. They're facing a consumer squeeze, commodity prices still exert pressure and now boardrooms and shareholders are nervous about bottom lines.
"That's what's behind recent increases, even if it means taking the hit of stagnant volumes on the chin. This is being tackled by pushing value messages. Even the beer market, which has always focused on experiential advertising, is pushing value. Carling's ads mention it's made from 100% British barley - a functional, price-justifying message very different from the Dambusters ads of yesteryear."
Lury's view is that there are two groups of consumers. One is barely hit by recession and may even be enjoying extra discretionary spend thanks to lower mortgage payments. The other is looking to trade down. It is the latter type that may be harder to retain.
"Given that brands have let their price premium slip, it could be difficult to win it back," he says. "The challenge is to send a really strong value message that justifies the price. But there is real pressure on a number of brands and staples are an obvious area for consumers to trade down."
As Lury points out, promotions have been a major factor in the reduction in brand premiums.Promotions have greater impact than ever before, IRI data shows. Sales made on deal grew 1.5 percentage points, and uplift grew 0.5 points.
The effect of promotions has been central to the performance of brands in the past year, agrees Smith. "Such is the level of promotional activity that the average price consumers are paying, I suspect, has never been lower," he says. "It's a very aggressive market."
He denies, however, that Unilever has upped prices to fund promotions. "Our wholesale and retail customers would spot that a mile off, and would never agree to it," he says.
Own label
Own label is also piling on the pressure, and is particularly advancing in home baking and scratch cookery, says IRI business unit director Mark Wilkinson.
"Consumers buying into these categories are looking to trade down by cooking at home," he says. "It's not surprising they then trade down to own label, too."
Retailers are also increasing the quantity of own-label SKUs in the pizza market, for example, putting the pressure on brands, he adds.
Regardless of such threats, Unilever is determined to put its prices up and insists it can increase its volumes while doing so. And it will clearly brook no opposition as it does. Unilever has form for tough negotiating tactics - its Belgian operation had a very public row with supermarket group Delhaize when the retailer refused its price rises.
"We are very clear Unilever is about driving volume, and we're very focused on that," says Smith. "These are necessary price increases, applied uniformly with 60 days' notice and with a clear cost rationale behind them. We will not discriminate for any part of the industry and we are not entering into negotiation on these."
Striking that strident tone, Smith clearly isn't monkeying around.
At best it seemed counter-intuitive, at worst, plain confused.
With shoppers paying closer attention to price tags than ever before - and food price inflation supposedly having peaked - Unilever shocked wholesalers last week by pushing through cost price rises on more than 100 of its best-known branded lines.
The fmcg giant insists price hikes are necessary because of rising costs, that it is not alone in upping its prices and that it can continue to drive up its volumes. But do its arguments stack up?
Unilever's cost price rises cover at least 100 of its SKUs, including 24 products from the PG Tips range and lines from its Knorr, Colman's and Jif lemon ranges. The rises take effect in the first week of June, just a fortnight after the Office of National Statistics reported falling food prices for the second month in a row.
There's no doubt the manufacturing industry has faced unprecedented cost pressure over the past year and has yet to recover the full extent of these increases. Earlier this month Unilever revealed its gross margins had fallen by 1.9 percentage points.
However, given that many key food commodities are now cheaper than 12 months ago (see table p21), seeking cost increases may seem an odd move in the current climate.
Not so, claims Unilever UK sales director Tony Smith. "I don't know anyone who could say raw materials are falling across the board," he says. "There's real pressure on costs from the weakness of sterling. When we're buying in dollars and euros it's inevitable that currency will find its way into price."
Though sterling has recovered since February, when it virtually hit parity with the euro, the pound is still trading far below the levels of a year ago and Unilever is not alone in taking action.
According to one wholesaler, Procter & Gamble has "opted for price increase by stealth" by tweaking wholesale pack sizes of several SKUs from 12 to 10. Premier Foods also continues to report seeing inflation in the system and it is understood that price rises are on the cards there as well.
Smith is keen to dispel wholesalers' fears that Unilever would pass through price rises to them and not the multiples. He points out that such a move would be illegal and states that all channels face identical increases - although he stresses that the resulting retail price is up to the retailer, which Unilever has no control over.
Some independents have also expressed concerns that new efficiency incentives in reformed trading terms were being offered as a sweetener to bigger players - retailers and wholesalers. No such sweeteners have been offered, insists Smith. "We have harmonised Unilever's UK trading terms, but this is a completely separate initiative. If there were some empty few months when we could implement this in a vacuum, we would, but there isn't."
Brand premium
One of the reasons for a brand to increase prices is to maintain its brand premium - the average difference in retail price between brands and own label.
Unilever's latest move may well have been influenced by the fact that the average brand premium has shrunk from a typical 31% in 2008 to 25% in 2009 [IRI] - one commonly cited factor explaining brands' resilience over the past year. There's an erroneous assumption that when consumers are cash-strapped brands will inevitably suffer, Smith says. This is not necessarily the case, he argues.
"In this climate, consumers look for value, which is much wider than price. Keeping our relative position in the market is part of the reason for price increases."
The challenge for Unilever and its fellow brands is to persuade consumers that higher prices are worth paying. This has become central to the marketing message of even premium brands, says Giles Lury, brand director at The Value Engineers.
"Unilever and co have allowed the price gap to narrow, then even further closed it by allowing an unprecedented number of deals on their products," he says. "As a result, they're stuck between a rock and two hard places. They're facing a consumer squeeze, commodity prices still exert pressure and now boardrooms and shareholders are nervous about bottom lines.
"That's what's behind recent increases, even if it means taking the hit of stagnant volumes on the chin. This is being tackled by pushing value messages. Even the beer market, which has always focused on experiential advertising, is pushing value. Carling's ads mention it's made from 100% British barley - a functional, price-justifying message very different from the Dambusters ads of yesteryear."
Lury's view is that there are two groups of consumers. One is barely hit by recession and may even be enjoying extra discretionary spend thanks to lower mortgage payments. The other is looking to trade down. It is the latter type that may be harder to retain.
"Given that brands have let their price premium slip, it could be difficult to win it back," he says. "The challenge is to send a really strong value message that justifies the price. But there is real pressure on a number of brands and staples are an obvious area for consumers to trade down."
As Lury points out, promotions have been a major factor in the reduction in brand premiums.Promotions have greater impact than ever before, IRI data shows. Sales made on deal grew 1.5 percentage points, and uplift grew 0.5 points.
The effect of promotions has been central to the performance of brands in the past year, agrees Smith. "Such is the level of promotional activity that the average price consumers are paying, I suspect, has never been lower," he says. "It's a very aggressive market."
He denies, however, that Unilever has upped prices to fund promotions. "Our wholesale and retail customers would spot that a mile off, and would never agree to it," he says.
Own label
Own label is also piling on the pressure, and is particularly advancing in home baking and scratch cookery, says IRI business unit director Mark Wilkinson.
"Consumers buying into these categories are looking to trade down by cooking at home," he says. "It's not surprising they then trade down to own label, too."
Retailers are also increasing the quantity of own-label SKUs in the pizza market, for example, putting the pressure on brands, he adds.
Regardless of such threats, Unilever is determined to put its prices up and insists it can increase its volumes while doing so. And it will clearly brook no opposition as it does. Unilever has form for tough negotiating tactics - its Belgian operation had a very public row with supermarket group Delhaize when the retailer refused its price rises.
"We are very clear Unilever is about driving volume, and we're very focused on that," says Smith. "These are necessary price increases, applied uniformly with 60 days' notice and with a clear cost rationale behind them. We will not discriminate for any part of the industry and we are not entering into negotiation on these."
Striking that strident tone, Smith clearly isn't monkeying around.
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