Rising costs a headache for firms

Nestle, Unilever and Danone all report 2010 results next month and will show the effects of higher costs such as for grain, cocoa, sugar and milk, and how they coped by raising prices to consumers and cutting their own internal cost structures.

"While soft commodities ran up at the end of 2010, we will likely see the peak impact on companies' cost bases only by mid-2011," said Morgan Stanley's Michael Steib who expects outlooks to be cautious and optimism weighed to the second half.

Anglo-Dutch Unilever reports on February 3 and is expected to show fourth-quarter underlying sales growth of 4.2 per cent, up from the third-quarter's 3.6 per cent, with quarterly operating margins seen flat at 13.0 per cent, according to a company-compiled poll.

The Lipton tea and Rexona deodorant group has been cutting prices to sharpen its competitiveness, but the fourth quarter should see its prices start to rise in a reaction to increased commodity costs such as vegetable oil, tea, milk and crude oil.

"With input costs rising again, allied to a shock result from India, we now predict an inflationary monsoon of similar proportions to 2008," said analyst Martin Deboo of brokers Investec Securities.

Chief executive Paul Polman's outlook is likely to be cautious after its 51 per cent owned Hindustan Unilever reported lower quarterly profit, and US rivals Procter & Gamble and Colgate-Palmolive posted dips in quarterly income hurt by sluggish sales.

Despite milk prices rising 10 per cent in 2010, French group Danone's largely dairy-based business has offset the inflation by productivity gains and some price rises.