Unilever flags price hikes as Iran war costs stack up

By Yadarisa Shabong and Richa Naidu

LONDON, Oct 28 (Reuters) - Unilever expects price rises to increase in the fourth quarter and next year, it said on Wednesday as it aligns with other consumer goods makers that have said they will pass on to customers a surge in costs linked to the war with Iran.

Major companies, including Coca-Cola, Procter & Gamble, Nestle and Reckitt, have flagged the risk of further price hikes next year to offset the impact of the US-Israeli war with Iran, which began at the end of February.

Each of these companies sharply raised prices during the COVID-19 pandemic and in the initial months of Russia's full-scale invasion of Ukraine. They have since spent years trying to win back alienated shoppers who turned to cheaper private label goods. Now they face the reality of having to hike prices again to protect shareholder margins.

"We definitely expect pricing in 2027 to be higher than the one of the average 2026," CEO Fernando Fernandez said. "Now that we have more clarity about it (the cost environment), we are accelerating pricing."

"We will ensure that we have a good balance between volume and pricing in whatever we do in the short and in the medium term," he added.

Unilever, whose innovations and focus on marketing helped it recover demand post-pandemic, has this year managed to pass some of its increased commodities costs onto shoppers without hurting sales volumes.

"Given the mix we saw between pricing and volumes, increases in pricing do not concern me," Jack Martin, a portfolio manager at Unilever shareholder Oberon Investments, said.

"The ability to pass inflationary costs through to customers without unduly affecting volumes is what you hope to see from a well-run consumer company selling staple goods."

Shares fell 3.4% on Wednesday as Unilever also reported slower third-quarter sales volume growth than in the second quarter, weighed down by its food business.

The maker of Dove soap, Cif cleaning products and Hellmann's mayonnaise has been simplifying its portfolio under Fernandez to focus on beauty and personal care instead of its slow-growing food portfolio. Fernandez agreed earlier this year to spin off Unilever's food business and merge it with US spice maker McCormick.

"The reality is that Unilever (and by extension its shareholders) still own a food business that is dragging down group performance," RBC analyst James Edwardes Jones said. "That said, this was another good quarter for Unilever, with volume growth continuing to drive performance."

Unilever joined a growing list of consumer goods companies that beat quarterly sales expectations on stronger-than-expected volume growth.

Procter & Gamble and Swiss food group Nestle last week both reported quarterly sales ahead of estimates, helped by higher volumes. French cosmetics group L'Oreal also reported sales that comfortably exceeded expectations.

Procter & Gamble, however, warned that rising raw material, energy and freight costs would weigh on annual profit.

Unilever reported underlying sales growth of 5.2% for the quarter, ahead of the 4.8% expected by analysts in a company-compiled consensus.

It also maintained its 2026 sales and profit margin guidance and said it expected underlying sales growth of around 5% in the second half of 2026. It anticipates full-year underlying volume growth of at least 3%, up from previous guidance of around 3%, after posting volume growth of 2.9% in the third quarter and price growth of 2.3%.

(Reporting by Yadarisa Shabong in Bengaluru and Richa Naidu in London Editing by Harikrishnan Nair, Mark Potter, Adam Jourdan and Barbara Lewis)