Unilever cuts profit growth forecasts as clouds gather over sector

Unilever, the consumer goods giant, slashed its profit growth forecasts yesterday in the face of poor sales, weakening consumer spending and tough competition.

Unilever, the consumer goods giant, slashed its profit growth forecasts yesterday in the face of poor sales, weakening consumer spending and tough competition.

Sales of ice cream and iced tea, which were boosted by the heatwave last year, were badly hit this summer and the company said trading over July and August had been much worse than expected. As well as poor weather, a slide in consumer confidence had spread from Germany, France and the Netherlands to Italy and the UK, hitting its household goods and toiletries products.

Rudi Markham, Unilever's finance director, said: "We are seeing retailers coming under pressure, and are fighting for market share between themselves, and we are facing pressure from our competitors.".

Sales of its top brands in the third quarter are now expected to slip further from its second-quarter figures. This has led the company to predict "low single-digit" growth for 2004, compared with its previous targets of double-digit earnings growth.

The move to lower its earnings guidance comes only two months after Unilever announced a drop in second-quarter sales figures. It steadfastly refused to change its forecasts at the time, sparking fears it would cut back on brand advertising to maintain profitability.

Unilever said yesterday that to stem the tide of falling sales, it would beef up its advertising and promotional spending to regain sales growth. Although this in turn is expected to affect profitability, the company believes improving sales is more important.

"We are clearly making choices to support the longer-term health in what we believe is a much more competitive environment. In doing that, we sacrifice the short-term target of low double-digit earnings growth," Patrick Cescau, the chairman-elect, said yesterday.

David Hallam, an analyst at Williams de Broe, said Unilever was left with little choice but to take on its competitors through marketing, despite the additional costs. "Unilever has to respond to maintain its position in the market," he said.

Shares in Unilever closed down 4.7 per cent at 459.5p. While the company was tight-lipped on how long the tough trading conditions would continue, the City is growing more pessimistic as the consumer goods sector struggles.

The company's predicament was mirrored by Colgate-Palmolive, a rival consumer products group. Shares in the US company plunged yesterday after it warned that its second-half results would be lower than expected because of an increased marketing spend.

Top line sales are growing, but only as a result of a bumper advertising budget, which is now hitting the bottom line. Coca-Cola issued a profits warning last week and Nestlé also reported weak results last month.

The profits warning and news that sales of its leading brands are sliding backwards comes only 10 days before Niall FitzGerald, the joint chairman of Unilever was due to leave after 37 years at the company.

He oversaw what should have been a five-year "Path to Growth" programme, a restructuring of the group to focus on its biggest brands that began in 1999 and is due to complete this year. He described the performance of the group yesterday as "unacceptable".