Nestlé today followed peers including Kraft Heinz, Danone, Unilever, and Mondelēz in confirming it was implementing steep price increases to offset rocketing supply chain and commodity costs. Whilst this is driving up sales figures, firms are also facing a squeeze on margins as supermarkets push back against price hikes in their stores, worried about losing shoppers to the discounters.
Over its first-half period, the world’s largest food company saw its organic revenue grow 8.1% after it raised prices across its numerous product ranges by an average of 6.5%. However, the rising price tags appear not have deterred people from buying Nestlé products, with the group seeing a 1.7% rise in sales volumes.
This prompted Nestlé to raise its sales outlook for the year to growth of 7-8%, up from a previously indicated rate of 5%. However, it also trimmed its margin guidance after cost inflation and delays in implementing price increases took their toll.
Nestlé stated that its margins had been dented by rapid increases in input costs such as commodities, energy and freight. Despite cost control and operational efficiencies, its underlying trading operating profit margin fell half a percentage point to 16.9% over the first six months of 2022, “reflecting time delays between cost inflation and pricing actions”. The group now expects margins for the full year to come in at 17%, the lower end of a previously forecast range of 17 to 17.5%.
“Pricing is taking over this year, with inflation being so strong,” said Chief Executive Mark Schneider. “Of course we are doing everything we can to protect consumers from rising prices, but we have to protect our company too.”
The evidence so far from several major brand manufacturers suggests consumers are largely absorbing higher prices for essential supermarket products while cutting spending in other areas. However, other industry data shows cash-strapped consumers are starting to switch from brands to cheaper supermarket own-label lines.
Schneider said today: “So far, the evidence we’ve seen about consumers trading down is very limited to certain categories and geographies. But that doesn’t mean it couldn’t happen down the road, and that’s something that we need to watch in the second half.”
Sales were especially strong for Nestlé’s confectionery unit, which saw double-digit growth after suffering during the initial phase of the pandemic as shoppers bought fewer chocolate bars on the go. Coffee and water sales were also strong, supported by the recovery of out-of-home channels.
Jean-Philippe Bertschy, an analyst at Vontobel, said changes made under Schneider in the past five years, including moving a fifth of the portfolio into faster-growing categories, “will help Nestlé navigate the current, challenging environment”.
Meanwhile, Bernstein analyst Bruno Monteyne said the group’s new margin guidance was “still a very strong margin, with a much smaller year-on-year margin decline than most of its European peers”.
NAM Implications:
- And if the world’s biggest food supplier is feeling the pinch…
