Consumer goods group Reckitt Benckiser, which owns brands including Dettol, Nurofen and Durex, has warned it will be forced to increase its prices later this year to deal with rising raw material costs.
Sounding the alarm in a downbeat stock market update, the Slough-based company said the price rises will come through in the second half of the year when it will also work to improve its productivity.
It comes as the firm faces mounting inflationary pressure in its supply chain alongside a squeeze on profit margins, amid concern over the impact from Covid and Brexit disruption to international supply chains and shortages of key raw materials.
Against a backdrop of supply chain bottlenecks and rising demand for goods and services as Britain emerges from lockdown, consumer prices have jumped in recent months. Although the Bank of England expects the recent inflationary burst will prove temporary as Covid disruption recedes, some economists warn that the cost of living has further to rise as manufacturers and retailers battle a squeeze on their profits margins.
Shares in Reckitt fell by 8% on Tuesday, making them the biggest faller on London’s FTSE 100, after the company said rising costs had pushed its operating profit for the first six months of the year down by 5% to £1.4bn.
Laxman Narasimhan, the firm’s chief executive, said it was facing between 8% and 9% rises in the cost of commodities, which he described as “historically, some of the highest inflation we have seen in a short period of time”.
“It’s coming pretty much across the board, but in particular oils, surfactants, logistics, freight, for example, are clear areas that we have highlighted,” Narasimhan said.
He said the company would work out how the rising costs would feed through to price increases for its products on a country-by-country basis.
“This is a local market-by-market decision. You can look at where you stand versus competitors, look at what we can afford, we don’t want to lose competitiveness and so you’ll end up making that call literally market-by-market.
“We expect that we won’t be able to offset all commodity inflation by the end of this year, but we hope to do so by next year,” he said.
The warning comes just days after rival consumer goods group Unilever said a rise in the price of toiletries, cleaning products and salad dressings was on the way, after the biggest surge in raw material costs in a decade.
The maker of brands including Dove shampoo, Domestos bleach and Hellmann’s mayonnaise said a big jump in the price of commodities such as crude, palm and soya bean oil, coupled with higher transport and packaging costs, was hitting its profitability.
“For years, the market has assumed that big consumer goods companies had such strong brands that it was easy to pass on any extra costs to the customer in the form of higher prices. Unilever recently showed that wasn’t quite the case, and now Reckitt has also poured cold water on that theory,” said Danni Hewson, a financial analyst at the City stockbroker AJ Bell.
“With consumers increasingly flocking to cheaper supermarket own-label products, the idea that the big brand owners are guaranteed sales success is no longer a given,” she said.
Reckitt expects consumers’ urge to clean to outlast Covid-19. Its disinfectant brands Dettol and Lysol are selling 80% more than they were in the first half of 2019, accounting for about a quarter of the company’s net revenue, compared with 16% before the pandemic.
Excluding its Chinese baby formula business, which is currently for sale, Reckitt’s like-for-like net revenue for the first half of the year reached £6.3bn, an annual rise of 3.7%.