Unilever 2010 Annual Report Download - page 36

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