UN Unilever NV

Unilever PLC (UN, UL), the world's second-largest maker of consumer products after U.S.-based Procter & Gamble Co. (PG), Thursday warned that the recovery in Western Europe continues to be beset by ailing economies, rampant inflation and subdued consumer sentiment.

The company said the region remains challenging, and Chief Financial Officer Jean-Marc Huet cautioned the market is "stable at best but it's not a very positive environment at all."

At the end of last month, EU governments agreed a new EUR109 billion bailout package for Greece and an increase in the powers of the euro zone bailout fund to prevent contagion spreading to other weak economies in the 17-nation bloc. Concerns of a debt default are now focused on other southern European economies, including Italy and Spain.

Huet said inflationary pressure, amid volatile commodity markets, is also being keenly felt by cash-strapped shoppers and has yet to be fully assessed against the backdrop of unemployment, cuts and tax hikes.

"Not only are we going through a difficult time, but austerity measures are still yet to be implemented. The consumer faces inflation which is going at a higher pace than earnings which means [on a net basis] you have less money in your pocket," he said.

His comments echo those of Bart Becht, outgoing chief executive of rival Reckitt Benckiser Group PLC (RB.LN) who last week warned Europe has been tough for more than a year, with "market growth rates relatively anaemic."

However, Unilever's strategy of passing on higher raw material costs to consumers in the region through price rises despite weak consumer sentiment largely sets it apart from its rivals, although it remains to be seen whether it will be able to successfully implement further increases without jeopardising volumes.

Reckitt said that while it was raising prices in other geographical markets, it would not introduce price hikes in Europe due to the continued challenging economic environment.

But Unilever raised prices by 1.8% in Western Europe in the second quarter, albeit below a group average of 5.1%, to drive underlying sales up 4.8%.

Western European underlying sales rose 1.3% in the first half on a 1.1% price increase with volumes broadly stable, compared with a 1.7% rise in volumes but a 1.1% and 2.7% fall in sales and prices respectively a year earlier.

"Volume growth is basically in line with markets. Volume is so important to us and has accelerated in savory, ice cream and oral care. It's just testimony to the strength of our brands that we are able to take this type of pricing, and yet that volume growth continues," said Huet.

Huet also stressed that the sharp price rises of the first half will not continue for the rest of the year. "Most of our new pricing actions are now in the market place. You will see stable levels in the second half of the year," he said.

By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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