Rising Food Costs Could Strain Unilever's Grocery Share

By Trefis Team,

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Unilever's ( UL ) market share in the grocery market globally has reduced to around 49% from a high of 57% in 2008. Unilever is the second largest consumer goods company in the world after Procter & Gamble ( PG ) and sells everything from soap to salad dressing and ice cream pitting it against other consumer companies like Kimberly Clark ( KMB ) and Colgate-Palmolive ( CP ).

The decline in the firm's market share can be attributed to a 12% decline in dollar sales of dressing and spread products in 2009 in light of the suppressed economy as well as a weakening euro against dollar. We expect Unilever's share in the grocery market, which includes products like soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarine, spreads and frozen foods, will stabilize at around 50% over our forecast period. Trefis members are however optimistic that Unilever's grocery share will cross 54% by the end of our forecast period, implying upside of 3% to UL stock.

We currently have a Trefis price estimate of $35.14 for Unilever Group's stock , about 19% above the current market price of $29.49.

Strong Market Position, Excellent Products

Unilever is the world's leading manufacturer of dressing and spreads with several brands generating over a billion dollar in annual sales. Unilever's top selling brands like Knorr, Blue Band/Rama, Becel/Flora, Hellmann's/Amora and Bertolli commands strong brand loyalty and recall among consumers. This helps Unilever capture more shelf space at stores. The strong brand image offers Unilever greater scope for cross-promotions (selling different products together to the end consumer at attractive prices) along with negotiating better terms of trade (higher volumes to the retailer at better prices).

Rising Foods Costs Could Drag Down Margins, Market Share

The UN Food & Agriculture Organization's (FAO) food price index has recorded the highest level of food prices since the organization started maintaining records in 1990. The price index, which is up 3.4% since December 2010, is rising constantly and this uptrend is expected to continue in the coming months. Poor harvests resulting from adverse weather conditions such as: drought in Russia, excessive rains in Canada and Pakistan and cyclone in Australia are adding to supply constraints. Unilever recently issued a warning they may increase their food costs due to rising food commodity prices. The company's margins are already pressure due to rising raw material costs. If Unilever shoots up its food prices, it could lose out on sales leading to a loss in market share (see Unilever's Agflation Challenge: To preserve margins or market share?)

Trefis Community Forecast

Trefis members forecast Unilever's market share in the grocery market will increase to 51.25% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from 48.25% to 49.75% during the same period. The member estimates imply an upside of just about 5% to the Trefis price estimate for Unilever Group's stock.

Our complete analysis for Unilever Group's stock is here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: CP , KFT , KMB , PG , UL

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