Nestlé is planning further price increases as part of moves by the world’s biggest food maker to offset cost pressure.
Chief Financial Officer Francois-Xavier Roger said the Swiss giant intended to “go even a little further” in raising prices to mitigate rising costs in areas such as raw materials, energy and the workforce.
The company, which is home to brands ranging from Maggi noodles to Nescafé coffee, raised prices by 6.5% in the first half of 2022, which contributed to a 9.2% increase in reported sales and growth of 8.1% on an organic basis. The group said its “real internal growth,” or RIG, which excludes the impact of mergers and acquisitions and pricing actions, was 1.7%.
Nestlé’s first-half sales led the Swiss giant to raise its forecast for annual organic growth, which it now expects to rise by 7 to 8%, against an April forecast of “around 5%”.
However, the KitKat maker has cut its forecast for a key profitability metric amid what it calls “unprecedented cost inflation”. Nestlé sees its “underlying trading operating profit margin” at “around 17%” in 2022. When the company reported first-quarter sales in April, it forecast growth against that metric of between 17% and 17.5%.
In the first half of the year, Nestlé’s price increases hit markets around the world. However, in regions such as North America, Latin America and Europe, the company said the increases were not enough to offset “significant inflation”.
Speaking to analysts after Nestlé released its first-half results, the company said it had started to see pressure on input costs easing in some areas, but stressed it was of a uniform image.
Roger said Nestlé’s cost inflation in the first six months of the year was 14% of the company’s cost of goods sold and added: “For the second half, we expect a relatively similar increase in terms of input cost inflation as a percentage of our cost of goods. It may be slightly higher but quite similar, especially as we’ve seen things stabilize and normalize. We’re starting to see prices of some agricultural raw materials to fall but, on the other hand, energy prices are rising. [However]it’s starting to level off to some extent unless there are changes in the weeks and months ahead.
Mark Schneider, CEO of Nestlé, was coy about where and what products the company would seek to raise prices on, but said the group was ready to move again.
“It’s not in our interest to determine exactly which category and which geography will see the price increases, but it is clear that repairs need to be made,” he said. “Gross margin is still a bit down from what it was in the half of last year.”
Nestlé on how consumers react to price hikes
FMCG companies will closely monitor the impact of their price increase measures on consumer demand. Schneider told analysts that “demand elasticity is still quite limited and moderate given the pricing action we’ve had to take.” Roger sought to explain how the elasticity of Nestlé products could differ by category and price level.
“Whenever we’re clearly leaders like in pet care, coffee, etc., we don’t really see any elasticity,” he insisted. “Anytimes we have a less leading position, or whenever we’re in categories – because it’s more a function of categories, categories where price sensitivity is higher like dairy – we may see – to be in the future, a little more elasticity. But, again, less of a channel function more of a category function and a leadership position.
He added: “On more premium, it’s traditionally a category where you have limited elasticity, which you should. Even if we look historically at previous crises, there is little elasticity. The same goes to some extent for affordability as these are essential products. Where we can see a bit more elasticity is probably in the mainstream segment.
Looking ahead to 2023, Schneider – who said Nestlé had acted “responsibly” with its price increases – said the group expected cost increases in another area. “The workforce component, at least as it relates to key economies in Western Europe and North America, I think it’s a pretty sure thing that we have to prepare for levels of higher labor costs there,” he said.
“And you do that, obviously, with automation wherever you can and reducing the efficiency of the system but, ultimately, that can also lead to pricing at that time, but we’ll get to that as we go along. which we’ll be looking at in ’23.
Nestlé management was asked if they think the food inflation facing consumers around the world will affect disposable incomes. Roger said that was a possibility, but said the food industry would likely be more protected than other sectors.
“Could global food inflation affect disposable income? It could, potentially, but I think if we go into a recession with new economic and financial constraints for the consumer, we are probably in an industry, food, which will be affected last, “he said .
“And even if we look at the latest example, which is the crisis of 2008, I mean we have continued to grow. We continued to have a positive RIG. Where we suffered a little more was in the mix because there is always a risk of down trading, which we are monitoring very closely. And so far we haven’t seen clear evidence of this, but again, something we’re watching very closely.