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Unilever Honors Chinese Request

UL PG

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Unilever Plc. (UL - Analyst Report) has acceded to the National Development and Reform Commission's (NDRC) request and postponed the intended hike in prices of shampoos and laundry detergents to combat higher input costs. NDRC is China's top economic planner.

The decision came after a meeting with NDRC last week in which the Anglo-Dutch company was requested to defer the price rise in the back drop of growing unease among Chinese consumers following recent price inflation in many essential commodities.

Unilever along with Procter and Gamble Co. (PG - Analyst Report) had announced it will raise prices of soaps and detergents that are sold to China. Management cited that the price of petroleum, which is the raw material for most of the commodities, of the retail giant, has climbed to more than $100 per barrel.

The shelves of the shops were almost ransacked after the news of the anticipated price increase spread across the country.  People went in for hoarding detergents and soaps before the price increase could become effective.

Inflationary pressure has almost become a constant irritant for China in last one year. The consumer price index rose 4.9% y-o-y in February. While the economy is booming in China, food inflation is shrinking household income as spending on food makes up for more than one-third of household spending.

The government has been taking several steps to control the hyperinflation through several monetary policies like raising the lending rates of banks.

Additionally, the government is also increasing the statutory reserve to be held by the banks before lending. This is to decrease liquidity in the hands of financial institutions. On April 6, 2010 the government raised interest rates for the fourth time since October last year, to tackle inflation. Besides monetary tools, the government has organized subsidies, state food reserves to counter inflation.

The Chinese government is known for enjoying great powers over the corporate sector, and  it has pursued several foreign and domestic companies in the past to help and re-align with its economic priorities. Last year it had ordered the country's largest edible-oil producers to cap prices until March, in anticipation of a price rise of edible oil. Unilever’s confirmation of the government’s request reflects that large foreign multinationals are also not outside the ring of bureaucratic control.

Unilever's history in China is almost 80 years old, when Lever Brothers established its first operation in Shanghai in 1923 and became the largest soap maker in the Far East. Unilever's business in China covers two main areas; one includes major home and personal care brands like Omo, Comfort, Zhonghua, Lux, Pond's, Clear, Dove, Hazeline and Rexona; and second covers major food brands like Lipton, Knorr, and Wall's.

Unilever Plc. currently hold a Zacks #3 Rank with a short-term Hold rating.

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