Nestlé consumers were subjected to another round of price hikes during the first half of the year as a result of excessive inflation. Prices increased by 6.5% in the first half overall.
The corporation already surprised consumers in late April with the steepest hike in first-quarter pricing in more than a decade, raising product prices by 5.2%.
Nestlé’s Chief Executive Officer Mark Schneider said the company was implementing price hikes in a “responsible manner” to help it manage “significant and unprecedented cost inflation.”
Pricing is taking over this year with inflation being so strong. Of course we are doing everything we can to protect consumers from rising prices, but we have to protect our company too.Mark Schneider, Chief Executive Officer, Nestlé
The food manufacturer now expects organic sales growth of 7% to 8% this fiscal year, bolstered by price inflation, up from earlier estimates of 5%, the company said in a statement.
Nestlé said that its growth was extensive across geographies and product categories. Confectionery sales had double-digit increases, aided by the demand for KitKat, while coffee sales increased in the high single digits, as people have started to return to cafés and restaurants.
In Nestlé’s half-year report for the period that ended 30 June 2022, the results highlighted a solid recovery in its out-of-home channels amid the pandemic, alongside growth across Nescafé, Starbucks and Nespresso brands.
Nestlé Professional and Starbucks out-of-home product sales increased by double digits in Europe and North America. The Swiss company also reported that Nescafé beverages in Southeast Asia, as well as Nescafé Dolce Gusto and an expanding selection of Starbucks products in South America, performed strongly.
Because food and beverages are considered basic necessities, the food industry is navigating inflation better than businesses selling big-ticket items. However, with inflation yet to peak in many markets, there is a possibility customers may begin to shift to cheaper brands.
Companies like Nestlé are becoming masters of ‘shrinkflation’, in which they reduce the size of the product, while often maintaining the size of the packaging, but keeping the price the same to allow the company to maintain margins even as costs increase.
There is some indication of consumers “trading down,” according to Schneider, but it is limited to select categories and locations and “it’s quite modest.” However, he stated that this does not indicate that it would not rise as the year progresses if customers’ finances are further stretched.
The Swiss food and beverage company joins Unilever Plc, Danone, and Reckitt Benckiser Group Plc in raising sales projections as demand for higher-priced items remains strong.
Despite that, Nestlé suggested that its profitability could fall for a second year, with an underlying operating profit margin of roughly 17%. It was 17.4% in 2021. Following the announcement, Nestlé stock slid roughly 1.5%.
Schneider stated that the reduction in margin is only temporary. In April, he said that the company’s margin forecast has become more difficult to meet since Russia invaded Ukraine and inflationary pressures climbed. On 23 March, Nestle pulled KitKat and Nesquik out of the Russian market, although it continues to sell what it classifies as essential goods.
North American shoppers were hit with the biggest price increase at 9.8% during the first half, while prices in Europe rose by roughly 5%. Despite increased prices, Nestlé said volumes remained “resilient.”
In 2021, coffee generated more than $25 billion, or nearly 27% of Nestlé’s sales.
Photo by Stefan Wermuth/Bloomberg