Higher costs of raw materials is likely to bring down its margins this year, warned Reckitt Benckiser Group, just like a number of other top consumer goods companies, which sent its shares down by 9 per cent on Tuesday.
The company also reported a slowdown in growth in demand for its products such as Lysol disinfectants and Finish dishwashing detergents which resulted in the FTSE-listed company also missing its sales growth estimates for the second quarter of the current year.
During the latest quarter, the company experienced strong inflation across “most of its commodity groups” as costs of materials for the company increased by between 8 to 9 per cent for the year, Reckitt’s Chief Financial Officer Jeff Carr told journalists on a call.
The company now forecast a drop in its adjusted operating margins for the entire year of 2021 and be between 22.7 per cent and 23.2 per cent compared to 23.6 per cent that it reported for 2020, Reckitt said.
More time will be required by the company to see its productivity and pricing strategy changes, that it is implementing in the second half of the year and during early 20202, being able to offset the inflationary headwinds, the company said.
The comments and forecasts made by Reckitt us almost similar to what had been commented by its larger peer Unilever which last week blamed the higher raw material costs on everything from crude to palm and soybean oil for it cutting down its margins for the entire years.
“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,” said Danni Hewson, financial analyst at AJ Bell.
“Unilever recently showed that wasn’t quite the case, and now Reckitt has also poured cold water on that theory. Its margins have taken a hit from higher raw material costs.”
Consumers demand for everything from restaurant meals to cars, is being boosted by the global rollout of Covid-19 vaccines, the re-opening of developed economies and the almost $6 trillion in US government relief announced since the pandemic’s outbreak, that has put a strain on global supply chains and resulted in shortages of labour while also driving up commodity prices.
It posted a 1.82 billion pound first-half operating loss, due to a 3 billion pound charge it incurred on the sale of its infant nutrition business in China announced last month.
Last year, sale revenues of Reckitt touched record levels because of the pandemic. However, the current performance of the company indicates a slowdown in the momentum with the rollout of Covid-19 vaccines being sped up in many countries and the lifting of pandemic related restrictions in the developed economies.
Growth was reported by Reckitt for its brands including Finish, Airwick, Harpic and Veet, which make up about 70 per cent of its totals sales albeit at a slower pace compared to last year. The company said its other brands including Durex, Vanish and Nurofen are now registering growth from last year’s slump.
(Adapted from Reuters.com)