x Abu Dhabi, UAEFriday 28 July 2017

Unilever questions price caps on retailers and manufacturers

The UAE Government's price controls are not sustainable in a free market economy, says Unilever, one of the world's largest consumer goods companies.

Lipton tea boxes are packed at Unilever's factory in the Jebel Ali Free Zone. The company's sales in the region hit $1.5 billion last year. Jeff Topping / The National
Lipton tea boxes are packed at Unilever's factory in the Jebel Ali Free Zone. The company's sales in the region hit $1.5 billion last year. Jeff Topping / The National

Price controls imposed on retailers and manufacturers in the Emirates are not sustainable, according to the regional chief of one of the world's biggest consumer goods companies.

Sanjiv Mehta, the chairman of the Middle East and North Africa (Mena) region for Unilever, says the combination of rising commodity prices and Government price caps have damaged the company's margins this year.

"In a free economy, these price controls have limited application for a limited amount of time," Mr Mehta said. "This is not a sustainable basis."

The Government has introduced price controls this year, including fixed charges for basic food and consumer goods, as well as caps on price increases for manufacturers and restaurants.

Unilever sells a vast range of brands in the region, including Lipton tea, the market leader, and personal care products such as Dove, Vaseline and Lux.

The company recorded total sales across the Mena region of US$1.5 billion (Dh5.5bn) last year.

"There is no question that the costs are going to go up," Mr Mehta said. "When the fuel oil price goes up, there is a cascading effect on the economy.

"Distribution costs go up, the wages go up and food commodity cost pressure is also coming up," he said.

"There is very clearly pressure on the economy from an inflation perspective."

Unilever is not the first international company trading in the UAE to question the Government's policy on price controls.

Kraft, the world's second-biggest food company, recently asked the Government to start an open dialogue with manufacturers to discuss ways to manage the rise in global commodity prices.

Subway, the world's largest food chain, has also questioned the Government's policy.

The price of palm oil, which Unilever uses in many of its products, has increased by 50 per cent in the past year, while the cost of tea, which makes up a quarter of the company's regional business, has increased by 25 per cent.

The price controls affect Unilever because the company cannot raise prices without applying to the Ministry of Economy and retailers also negotiate with suppliers when the Government asks them to fix prices.

"The way we look at it is that [rising prices] have an impact on our margins," Mr Mehta said. "We have a very aggressive programme on how we can optimise our costs, we look at it in a very holistic manner and ask how we can reduce waste significantly."

The company has cut down on the amount of packaging used in its products, which saves material costs, along with distribution and fuel costs.

Mr Mehta has also introduced a rewards scheme for employees who can help to reduce expenses in any part of the business without damaging the value of the company's brands.

"Ideally, we would not like the restrictions to be imposed, but we also understand that governments are very sensitive to inflation," he said.

Mr Mehta said Unilever had spoken with the Government about raising the retail price of tea and demonstrated to the Ministry of Economy that market prices had increased at a greater rate in recent years than the company had been charging on supermarket shelves.

"If you take one big price increase it creates a much bigger impact on consumers," he said. "Our preferred option is to take price increases in small bites."