By Adedayo Ayeni and Olaloye Oyawoye.
MON, JULY 10 2017-In June, we found that consumer prices in the packaged branded food, beverage and HPC segments were broadly flat MoM. However, we noticed that Unilever implemented sharp price cuts on its Knorr seasoning cube brands (chicken and beef flavours). The shelf prices of Knorr Chicken and Knorr Beef were down sharply by 28% and 25% MoM, respectively. This implies a YtD price cut of 6% on both products. Seeing as Unilever had implemented faster price increases in the year-to-May vs Nestle due to higher FX exposure in its total operating costs, we believe this recent cut may have been driven by a need to clear out inventory. Unilever’s food unit continues to underperform Nestle’s in YoY sales growth despite the significant price increases taken on the latter’s key brands.
Unilever beating a mid-year pricing retreat?
In May, we observed that Unilever’s YtD price increases for most of its brands were ahead of the competition in the major categories. We were surprised at YtD price increases ranging from 26-30% for the Knorr cube vs an 11% increase for Nestle’s Maggi cubes. We expressed concerns that this could materially affect volumes, given that Unilever brands are not segment leaders and our view that downtrading was still rife among consumers. However, our June price checks indicate that Unilever implemented cuts of 28% and 25%, respectively, for Knorr Chicken and Knorr Beef seasoning cubes. This indicates a YtD cut of 6% for the brands vs an 11% increase for Nestle’s brands. We think it is likely that the price cut was driven by sluggish sales growth in the quarter and a need for Unilever to stem market share losses. Selling prices were flat in the HPC segments.
Tighter pricing range in food than in beverages
Following Unilever’s price cut, the most expensive brand in the seasoning cubes segment is now Gino Chicken, priced at NGN1.43/gramme, which is 13% above the average. Gino, which has a more recognised brand in the tomato paste segment, is imported. During our previous check in May, there was a stock-out of the Gino brand, which supports our view that the supply of some imported food and beverage brands may begin to improve from 2H17 as FX liquidity improves. Nestle’s Maggi price was maintained in June with a YtD increase of 11%. The largest observed YtD price increase is for Royco Goat, which was considered an affordable brand until recently as its selling price is now 10% above the average.
Nestle preferred, Unilever facing downside risk
We continue to favour Nestle over Unilever, given what we see as an unfavourable risk/reward for the latter. We have a TP for Nestle of NGN868.4/share and a HOLD rating, while our TP for Unilever is NGN25.9/share with a SELL rating. We see currency convergence at a rate above our forecast of NGN380/$ as a potential negative catalyst for the stock in the short term. Our major concern with Unilever is that it is becoming less competitive in the food space, while its high FX exposure (direct FX exposure is ~60%) is an additional worry. Overall exposure could be as high as ~80% if we consider other locally-sourced imported raw materials.
Adedayo Ayeni and Olaloye Oyawoye are analysts at Renaissance Capital