Emerging market woes ease for Unilever, but deepen for Diageo

After heady growth, emerging markets turned into a headache for consumer goods companies. But on Thursday, that headache showed signs of dissipating for Unilever, the Dove soap to Flora margarine group, that has been cutting costs and increasing advertising spend to cope with the downturn.

"The difficult year of 2014 is behind us," declared Jean-Marc Huet, Unilever's finance director. "There is improved momentum in the business."

But there was no such relief for Diageo, the Johnnie Walker scotch and Smirnoff vodka group, where North American demand grew less strongly than expected, adding to emerging market woes intensified this time by a 10 per cent drop in quarterly sales in Latin America.

The two FTSE 100 companies were reporting sales figures for the first three months of the year.

Ivan Menezes, who became Diageo's chief executive in 2013 just as the developing markets downturn took hold, said the 0.7 per cent fall in the group's third-quarter organic sales "reflects tough conditions in the emerging markets and subdued consumer demand in some developed markets".

But Unilever said sales in the first three months of the year rose 2.8 per cent, excluding currency effects. This was higher than analysts' consensus expectations of 2.1 per cent and indicated a bounce back from last year's weak second half.

Paul Polman, chief executive, who cautioned in January that he did not expect much improvement this year, said the trading environment was still "tough", but nevertheless struck a relatively upbeat note, describing the first quarter as a "good start".

"Despite high levels of currency and commodity volatility, we are now starting to see more tailwinds than headwinds in our markets, " he said.

Unilever's food unit - stock cubes and mayonnaise - was boosted by an early Easter. The home-care business was the strongest performer, with sales up 3.1 per cent, helped by the launch of new products.

Emerging markets, which account for 59 per cent of sales, grew 5.4 per cent, driven mainly by price rises. There was improvement in India, more stable conditions in China, but a deterioration in Brazil and Russia.

Nicla Di Palma, analyst at Brewer Dolphin, said: "The company has undertaken initiatives to increase growth, namely it strengthened its innovation pipeline, increasing brand investment as well as expanding into premium segments and new markets."

Diageo, however, suffered from falling sales in all its markets, apart from North America and Africa. In Indonesia, its Guinness beer sales were hampered by a new tax that led to retailers ordering fewer supplies in advance of the measure, which took effect on Thursday.

But even in its biggest single market - North America, where the group makes one-third of its sales - the 0.9 per cent sales rise fell well below expectations of a 2 per cent increase.

However, this mainly reflected one of Mr Menezes' initiatives, to reduce stockbuilding by shipping fewer bottles to wholesalers and retailers until they are actually demanded by consumers. This is leading to a painful readjustment.

As Mr Menezes put it: "Of key importance is that depletions continue to outpace shipments as we embed our sellout culture." This, he said, would "improve our ability to track consumer and customer trends and reduce future volatility."

Martin Deboo, analyst at Jefferies, commenting on Diageo's 3.6 per cent share price fall on Thursday, said: "Diageo remains as unloved as we can remember. But in a demand-led recovery, management's determination to stamp out the sins of the past keeps us believers."

Diageo and Unilever, along with fellow FTSE 100 company SABMiller, reported differing currency fortunes in their sales updates.

The three report in different currencies - sterling for Diageo, euros for Anglo-Dutch Unilever and dollars for SABMiller, which makes 75 per cent of its sales in emerging markets.

Unilever's sales were given a 10 per cent boost from the weak euro, but both Diageo and SABMiller suffered from dollar strength.

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