Annual Report & Accounts 2010: Outlook and risks - Unilever
Annual Report & Accounts 2010: Outlook and risks - Unilever
Annual Report & Accounts 2010: Outlook and risks - Unilever
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
<strong>Outlook</strong> <strong>and</strong> <strong>risks</strong><br />
The following discussion about outlook <strong>and</strong> risk management<br />
activities includes ‘forward-looking’ statements that involve risk<br />
<strong>and</strong> uncertainties. The actual results could differ materially from<br />
those projected. See the ‘Cautionary statement’ on the inside<br />
back cover.<br />
<strong>Outlook</strong><br />
Market conditions for our business were challenging in <strong>2010</strong> <strong>and</strong><br />
we do not anticipate this changing significantly in 2011.<br />
Economic pressures are expected to continue to weigh heavily on<br />
consumer spending, particularly in developed markets where the<br />
combined impact of austerity measures <strong>and</strong> high unemployment<br />
is likely to constrain disposable incomes. Emerging market growth<br />
should continue to be robust, although even here we expect to<br />
see a modest slowdown. The most difficult environment is likely<br />
to be in Western Europe, where higher taxes, lower public<br />
expenditure <strong>and</strong> potentially rising interest rates mean that, for the<br />
short term at least, growth will be limited. In these conditions,<br />
consumer confidence is not expected to rise significantly in the<br />
year ahead <strong>and</strong> the search for value by the consumer will<br />
continue unabated.<br />
A further source of volatility in the year ahead is the return of<br />
inflationary pressure, particularly in respect of key commodity<br />
costs. We anticipate significant commodity cost inflation for at<br />
least the first half of 2011. If current trends continue then this<br />
inflationary pressure will extend also into the second half <strong>and</strong><br />
beyond. In this environment we expect prices to rise, albeit at a<br />
lower rate than costs as competitors seek to protect market<br />
positions <strong>and</strong> offset higher commodity costs with savings<br />
elsewhere.<br />
<strong>Report</strong> of the Directors About <strong>Unilever</strong><br />
The competitive environment for our business is likely to remain<br />
intense in 2011. Our key competitors, both global <strong>and</strong> local, will<br />
be eager to rebuild market share in many of our markets <strong>and</strong><br />
categories, <strong>and</strong> will design their activity plans accordingly. We<br />
expect continued high levels of competitive challenge to our<br />
many category leadership positions. Some of this will be<br />
price-based, as in <strong>2010</strong>, but we also expect strong<br />
innovation-based competition backed by wide-ranging br<strong>and</strong><br />
support. With the improvements we have been making to our<br />
business we are well prepared for these challenges.<br />
Faced with these challenges we will continue to focus on our long<br />
term strategic priorities of driving volume growth ahead of our<br />
markets whilst providing a steady improvement in underlying<br />
operating margin <strong>and</strong> strong cash flow. We are well placed, with<br />
an impressive presence in emerging markets, more than 75% of<br />
our business in either category leadership or number two<br />
positions, a portfolio of strong br<strong>and</strong>s, an increasingly effective<br />
innovation programme <strong>and</strong> a dynamic new performance culture.<br />
These give us confidence that <strong>Unilever</strong> is fit to compete, whatever<br />
the circumstances.<br />
Principal risk factors<br />
Risks <strong>and</strong> uncertainties could cause actual results to vary from<br />
those described in forward-looking statements made within this<br />
document, or could impact on our ability to meet our targets or<br />
be detrimental to our profitability or reputation. The <strong>risks</strong> that we<br />
regard as the most relevant to our business are identified below.<br />
We have also commented on certain mitigating actions that we<br />
believe help us manage such <strong>risks</strong>; however, we may not be<br />
successful in deploying some or all of these mitigating actions.<br />
Description of risk What we are doing to manage the risk<br />
Economic<br />
• Decline in business during an economic downturn<br />
• Avoiding customer <strong>and</strong> supplier default<br />
<strong>Unilever</strong>’s business is dependent on continuing consumer dem<strong>and</strong><br />
for our br<strong>and</strong>s. Reduced consumer wealth driven by adverse<br />
economic conditions may result in our consumers becoming<br />
unwilling or unable to purchase our products, which could adversely<br />
affect our cash flow, turnover, profits <strong>and</strong> profit margins. In addition<br />
we have a large number of global br<strong>and</strong>s, some of which have a<br />
significant carrying value as intangible assets: adverse economic<br />
conditions may reduce the value of those br<strong>and</strong>s which could require<br />
us to impair their balance sheet value.<br />
During economic downturns access to credit could be constrained.<br />
This could impact the viability of our suppliers <strong>and</strong> customers <strong>and</strong><br />
could temporarily inhibit the flow of day-to-day cash transactions<br />
with suppliers <strong>and</strong> customers via the banks.<br />
Adverse economic conditions may affect one or more countries<br />
within a region, or may extend globally. The impact on our overall<br />
portfolio will depend on the severity of the economic slowdown,<br />
the mix of countries affected <strong>and</strong> any government response to<br />
reduce the impact such as fiscal stimulus, changes to taxation<br />
<strong>and</strong> measures to minimise unemployment.<br />
The breadth of <strong>Unilever</strong>’s portfolio <strong>and</strong> our geographic reach help<br />
to mitigate local economic <strong>risks</strong>. We carefully monitor economic<br />
indicators <strong>and</strong> regularly model the impact of different economic<br />
scenarios. We monitor consumer behaviour through regular market<br />
research <strong>and</strong> adopt a flexible business model which allows us to<br />
adapt our portfolio <strong>and</strong> respond quickly to develop new offerings<br />
that suit consumers’ <strong>and</strong> customers’ changing needs during economic<br />
downturns. We regularly update our forecast of business results <strong>and</strong><br />
cash flows <strong>and</strong>, where necessary, rebalance investment priorities. We<br />
undertake impairment testing reviews in accordance with the relevant<br />
accounting st<strong>and</strong>ards.<br />
We regularly monitor <strong>and</strong> review the health of our customers<br />
<strong>and</strong> suppliers <strong>and</strong> implement credit limits <strong>and</strong> supply substitution<br />
arrangements. These reviews are undertaken more frequently<br />
during economic downturns.<br />
<strong>Unilever</strong> <strong>Annual</strong> <strong>Report</strong> <strong>and</strong> <strong>Accounts</strong> <strong>2010</strong> 33